Wednesday, 1 November 2017

Valuable upzoning

Allowing greater density can bring down housing costs while increasing the value of existing property. It isn't magic. A piece of land that can be turned into townhouses is more valuable than one that cannot be. Each of the townhouses would be more affordable than the prior house, but the property becomes more valuable even before the townhouses are built.

Auckland Council's economist has run some of the numbers since the unitary plan. 
Our results show that in the most densely upzoned areas of the Auckland isthmus (Glen Innes, Mt. Wellington, Onehunga, Mt. Roskill, and Pt. Chevalier – areas B, C, D, and E on the map), upzoned properties sold on average for a premium of more than $90,000 when compared to neighbouring properties that were not upzoned, controlling for all of the observable attributes of the property as well as the strong overall price changes Auckland experienced over this period.
Across the city as a whole, upzoning added $34,000 on average to the value of a property. 

Council economist Shane Martin makes the case for taxing those windfall gains to help fund the infrastructure needed to enable development, and notes one difficulty: since markets are pricing in the value of upzoning very quickly, Council might want to hasten any announcements of how it would fund the infrastructure so that that could also be priced in. 
The timing of the land value increases also has policy implications. We now have evidence that markets in Auckland react to announcements of policy changes rather than waiting until policies are enacted. That is, when council signals that a policy change is being considered, and the market believes that signal to be credible, prices react. This means that council must consider how it plans to fund new policies (through various mechanisms, including targeted rates), not only before the policies are enacted, but before they are announced. 
It would be difficult for Council to use that kind of infrastructure financing policy if the property turned over between the upzoning announcement and the infrastructure financing announcement. It is easier to announce a policy bundle that provides a net small windfall for current owners than to do it in two parts, the first part of which provides a windfall gain and the second part of which imposes costs on potentially different owners. 

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