Advocates of removing urban growth boundaries have hailed a research paper on the effect of zoning on house prices, issued by the Reserve Bank of Australia last week.
The research paper, by Ross Kendall & Peter Tulip, was published in the bank’s discussion paper series “intended to make the results of the current economic research within the Reserve Bank available to other economists”.
The bank noted: “Its aim is to present preliminary results of research so as to encourage discussion & comment. Views expressed in this paper are those of the authors and not necessarily those of the Reserve Bank. Use of any results from this paper should clearly attribute the work to the authors and not to the Reserve Bank of Australia.”
The authors wrote in their abstract: “Zoning regulations provide benefits, but they also restrict housing supply and hence raise prices. This paper quantifies their importance by comparing prices to the marginal costs of supply at different points in time. For detached houses, marginal costs comprise the dwelling structure & the land that other home owners need to forego.
“Relative to our estimates of these costs, we find that, as of 2016, zoning raised detached house prices 73% above marginal costs in Sydney, 69% in Melbourne, 42% in Brisbane & 54% in Perth.
“Zoning has also raised the price of apartments well above the marginal cost of supply, especially in Sydney. We emphasise that this is not the amount that housing prices would fall in the absence of zoning. The effect of zoning has increased dramatically over the past 2 decades, likely due to existing restrictions binding more tightly as demand has risen.”
In their introduction, the Australian researchers wrote: “Some government policies, which we will refer to as zoning, restrict the supply of housing. Examples include minimum lot sizes, maximum building heights & planning approval processes. Although these restrictions may confer benefits, they also raise the price of housing. This paper attempts to quantify the effect of zoning on housing prices in Australia’s 4 largest cities.
“Anecdotal evidence suggests that zoning can have a huge effect on land values. For example, a 363ha site in Wyndam Vale (40km west of Melbourne) increased in value from $A120 million to $A400 million following its rezoning from rural to residential.
“Examples like this are common. Such large increases in values as a result of zoning changes are inconsistent with the view that a physical shortage of land itself is the main cause of high land values & housing prices – and instead point towards a high ‘shadow price’ of government permission to build dwellings as a likely explanation. It is difficult, however, to gauge how representative these anecdotes are, or to analyse how they change over time or place.”
3 issues – urban footprint, zoning & construction rules
3 planning issues are involved, and appear confused here. One is the allowance (& support) for expansion of the urban footprint; the second is the zoning confining property activities to specified areas. Third are the many rules on construction, such as height:boundary.
In the New Zealand context, Auckland has had an issue with the urban growth boundaries instituted by the region’s local bodies in the late 1990s, which made it nigh on impossible to expand the urban footprint.
The Auckland Regional Council was most opposed to expansion, while the Manukau & Waitemata territorial councils pressed the case for enabling development to expand.
The Auckland City Council saw the boundary constraint as an aid to intensification, which suited the council for the region’s central isthmus.
With inadequate boundary expansion & inadequate forethought given to intensification, the immigration spike of 2003-04 under the Labour government was met by an inadequate supply of new homes.
But the net inflow during that spike peaked at 35,000/year. This time round, the inflow began to surge in 2013, reached 60,000/year in August 2015 – compared to a total net inflow of 65,000 over the previous 7 years – and reached 70,000/year in October 2016.
It’s easy to see that housing supply could have caught up during that 7-year immigration slump, but that’s asking a sector which traditionally expands when the sun’s out to do so during a downpour.
The supply of money increased when the US introduced its quantitative easing programme (and other countries adopted similar measures) as a means of exiting the global financial crisis of a decade ago, but it also slashed interest rates.
This meant people could borrow more; it also meant prices would rise.
Attributing a rise in house prices to “zoning” (or, I think in the Australian examples as well as in New Zealand, inadequate expansion of the urban footprint) is irrational if these other causes are ignored, and it’s difficult to see in this Australian research what value is placed on the positives of regulation or on other economic factors such as the contribution of low interest rates.
Auckland’s unitary plan
As for zoning in the New Zealand context, Auckland’s unitary plan – the combination of both regional & district plans that preceded it, and updated – has provided a far greater capacity for intensification throughout suburbia, as well as providing for greenfield expansion. But that plan is new, and it will take time for the effects to be felt.
The next question concerns the orderly & efficient provision of infrastructure to enable intensification & expansion – one of the 2 reasons for creating the urban boundary. The other reason was to curtail urban encroachment into Auckland’s countryside, and that still hasn’t been dealt with sensibly.
Reserve Bank of Australia, March 2018: The effect of zoning on housing prices
19 January 2017: Building consent highs still don’t match migrant demand
23 December 2016: 48% of net migrant inflow stops in Auckland
22 November 2016: Migrant inflow tops 70,000/year
31 January 2014: Migrant inflow strongest since 2003
Attribution: Reserve Bank of Australia research paper.