Tuesday, 25 January 2011

Planning rents

Demographia finds house prices remain severely unaffordable in many major metropolitan centers. Relative to median household income, Atlanta is most affordable and Hong Kong the least.

When we were on the housing market in 2005, it was really clear really quickly that a pretty big component of Christchurch house prices was regulatory rents. As you can see from the map below, there's no shortage of physical land to the north, west, and southwest where Christchurch could expand. But a 1000 square meter residential section on the outskirts of Christchurch costs $200K - $200 per square meter; a 10.1 hectare (10,100 square meter) agricultural section a half hour from Christchurch has an asking price of $159,000: $15 per square meter. That difference isn't just commuting costs and in-town amenity value. Rather, it's land use restrictions that prevent Christchurch from expanding outwards. And so land prices in town get bid up.

View Larger Map

Demographia ranks Christchurch as 288th most affordable city in the world, with median house price of six times median household income. They note a September Quarter house price of $333,800 and median household income of $55,600. I wonder if they might have Christchurch income a bit on the low side: Stats NZ has Canterbury's median household income in 2010 at $65,000. That will include some higher income dairy farmers but also some poorer households in small towns; our median multiple would only drop to a shade over 5 (on par with Toronto) with that adjustment.

Says Demographia:
House prices have skyrocketed principally because of more restrictive land use regulations that have virtually prohibited new house construction on or beyond the urban fringe. This is particularly evident where there are "urban containment" measures, such as urban growth boundaries. Land value differentials of ten or more times, have been documented immediately across urban growth boundaries (such as in Portland and Auckland). These adjacent properties have values (referred to as "urban echo values") that are substantially higher than true rural values.
There's little chance that this changes. A city council that eases zoning to make housing more affordable will also impose capital losses on the city's homeowners. Homeowners are more likely to vote than renters. And cue Olson on the Logic of Collective Action.

Land use restrictions let richer homeowners feel good about themselves while promoting policies that protect their wealth and kinda screw over poor folks.

I'd be curious to hear from folks involved in Christchurch property development: what are the binding constraints? Are land prices here bid up more by restrictions on outgrowth on the fringes or by prohibitions on building more than two or three stories in most parts of town?

Full disclosure: We own a home in South Brighton and hope that, should Council ever decide to stop screwing over poor folks and ease back on zoning, we'll be somewhat protected from falls in land prices because the beach has actual scarcity value rather than just regulatory scarcity value.


  1. I find the regulation argument hard to swallow. That would not explain the increase of prices from, say, 2000 to 2008. I'd suggest that Kiwis tend to invest on housing, because there is not a lot more where to invest domestically, pushing prices up and hoping to reap capital gains.

    Where there are clear differences on prices is with School zoning.

  2. @Luis: Agreed that school zoning induces differences within the city. But the city as a whole is overpriced. It's pretty easy for a set level of regulation to correlate with an increased price path if a non-binding constraint starts becoming binding - we had reasonable population increase in CHC from 2000 to 2008.

    If there weren't the regulatory barriers to building, housing couldn't be such a good investment. If a section of land were worth $20K near the city border and it cost $200K to build a nice house, what do you think would happen if housing prices pushed much past $250K?

  3. I agree that the city as a whole is overpriced; however, when you have a look at the population changes in the last ten years with the change of prices, they seem to be out of whack. I doubt that that level of population change would turn the constraints to binding, particularly if there are still areas of town being developed.

  4. @Luis: You'd really need to compare population growth with some measure of housing supply. If demand rises faster than supply, prices ramp up.

  5. One of the things that has driven land prices up... and thus house prices has been desire by local councils to increase population density within existing city boundaries... but at a certain point the city has to expand because the density gets above what people are generally willing to live with...

    Motu and Arthur Grimes has done a lot of work in the problems in Auckland with the arbitrary and much despised Metropolitan Urban Limit, and how a relaxation of this will ease land price inflation...

    The thing is in New Zealand we don't want to live in high density housing, despite what the urban planners at local councils want us to do... there are always some who will accept it, but over the past 40 odd years the % of building consents for high density housing has remained pretty stable at around 30%...

    We like detached housing, and if you restrict the supply of land to build detached housing guess what will happen... price of land rises and you get scarcity problems as Eric has noted...

  6. @Horace: But they've also done a lot to restrict density.

    When we first moved here, we wanted to rent an apartment downtown or at the beach for a year while figuring out where we'd want to buy if we wanted to stay. The apartment market here was too thin - condos for sale, mostly to retired folks. No thick rental market in apartments. Why? Most of the city is zoned such that you can't build above 2-3 stories.

    New Brighton's been a disaster because of zoning: everyone's expected the Council to ease up the regs there, so folks bought properties that they've let fall into complete disrepair while waiting for the zoning changes. By the time the zoning changed, the recession hit. The rubbish houses near the pier attracted low end tenants and so the New Brighton Mall is a mess. Council has killed the New Brighton Mall by zoning uncertainty.

    Fan of Arthur's work on Auckland....

  7. We could think of building consents as a measure of marginal housing supply. Your initial point was that zoning creates the high prices; my point was that zoning was unlikely to explain the price hike of the past decade.

  8. "The thing is in New Zealand we don't want to live in high density housing, despite what the urban planners at local councils want us to do... there are always some who will accept it, but over the past 40 odd years the % of building consents for high density housing has remained pretty stable at around 30%... "

    Urban planners and local councils do not want us to live in high density housing. The restrictions against density are surely far more pervasive than the effects of the MUL. Yes the MUL's are pushing up prices at the moment but density restrictions have profoundly affected the built environment of most of the land area in our cities.

    Surveying the suburbs here in Auckland one struggles to find any areas that have lower density development than is legally allowed. Surely this is not coincidental - the restrictions are binding.

  9. It is very heartening to me to see the Demographia Survey penetrate the walls of Canterbury University!

    Lets hope we see in coming years the development of structural urban economics, with the Median Multiple as the foundation, so the economics profession can assist with policy solutions to these unnecessary housing bubble problems.

    Normal open markets dont bubble - they simply produce more to meet demand. Where there is lax lending (as in the case of Atlanta, Georgia) there can be an over production problem. This is why in last years Demographia Survey, the Median Multiple for Atlanta was an extraordinarily low 2.1. This year 2.3.

    Overproduction of market stock is far less of a problem than bubbles and bubble stock.

    Texas (open markets again) however with its Mortgage Consumer Protection Laws not allowing LVRs to exceed 80% and homeowners to use their homes as ATM's, Median Multiples hovered generally in the mid to high 2.0's.

    So lax lending in open markets only hoisted the Multiples by about 0.5. I covered this within a recent article "Amercicans slow learners about housing bubbles".

    In contrast to the two examples above, the restricted or strangled markets "bubbled". And of course there is a world of difference between new "market stock" and "bubble stock".

    Scarcity or percieved scarcity is the trigger - finance is simply the fuel.

    Do read the Media Release to this years Demographia Survety, where we provide a link through to a 1950 Time magazine article on the great construction industry entrepreneur Bill Levitt - who figured out how to supply new housing for $US8,000 after WW11 to SINGLE EARNER households on $US3,800 gross a year - 2.1 times household earnings.

    Ah - after all my advocacy work these past years, where as part of it I had to beat up on the economics profession (read "Housing Bubbles & Market Sense" as just one examople) . I am very heartened in how diplomatic relations (ha ha) are being restored, as increasing numbers of economists now see these housing markets in structural terms - as developers (such as the writer) do. I have a definition of an affordable housing market up on my website. There is a need to develop structural urban economics further though.

    Keep up the great work Eric!

    With best regards,
    Hugh Pavletich
    Initiator & Co author - Annual Demographia International Housing Affordability Survey
    New Zealand

  10. @Luis: There's only two ways that you get a massive ramp up in in-town land prices relative to those a bit out of town. The first is zoning that makes it hard to subdivide out of town. The second is folks developing a much stronger preference for living really close into town combined with restrictions on making land use more dense or combined with strong aversion for living in dense areas. Otherwise you either have folks build up in town or build out until lot prices have a normal amenity-based gradation with distance from city center.

    @Matthew: That's useful. Thanks

    @Hugh: Thanks for the data! Best I'm aware, economists haven't been fans of restrictive zoning - or at least not the ones I hang out with.

    We are skeptical of bubbles in general though, or, rather, of our ability ex ante to pick a bubble. To say that an asset price is a bubble rather than a reflection of some changed parameter of which we're unaware requires us to say we're smarter than the market. Not a call I'm generally willing to make. Housing's been different from normal asset markets in that it's been hard to go short if you think it's generally overpriced. The guy who figured out who to do it through complex derivate instruments did pretty well during the crash. It would be nice for NZX to run something like the Case-Shiller index for NZ metro areas.

  11. If you have time Eric and others go across to the various left wing blog sites and read the rants against Hugh's Demographia. I ask them why they want their poorer people to live in high rise 3 story concrete blocks with no sun, falling over rubbish bins and parking lots .
    And they do, its imposed dogma, development is bad, even though the kulaks suffer.
    Its almost unbelievable that a web site devoted to rational housing and the achievement of lower housing costs should be so mindlessly dismissed.
    Watch Christchurch build new concrete slums, cars and rubbish bins and junk, in the centre at the behest of our idiot Mayor.

  12. Our wonderful Mayor lives in an apartment and thinks the rest of ChCh wants to as well, he is mistaken. Where I live in Tumara Park I drive past 100s of acres of prime land where they grow cabbages and feed Llamas and I paid 192k for my 700sqm section further away from the city, 2 years earlier I bought a similar sized section 100 meters away for 135k but the building costs remained constant. There is more value in growing cabbages than building houses or... more votes in keeping house prices constant.Voters wont re-elect in a falling market and the council dont have to put in roads, water, sewarage and bus routes. Ratepayers and Councils continue to live in their mutually destructive bliss. Politics not economics.

  13. @Peterquixote: That doesn't sound like fun though. Note that I've nothing against three-story concrete buildings IF that's where people choose to live. I lived on the ground floor of one of those while a grad student - in the "slums" of Reston, Virginia.

    @David: I wish that development didn't depend on where the mayor thought people might want to live. Let developers build apartment buildings or build single family homes and let folks sort out themselves where they want to live! If Council set development charges equal to the cost of putting in the facilitating infrastructure (or allowed the developers to contract themselves with Fulton to do it)....