Turning Crisis into Opportunity: Rebuilding Without Repeating Costly Planning Mistakes.

It is still not too late to rescue our cities from the “planners,” says Guest Poster Phil Hayward—not even in Christchurch.

THE URBAN PLANNING PROFESSION today is completely unmoored from reality, and at loggerheads with the economics profession, in so far as expert economists have been critiquing the outcomes of popular planning policies.

There are some economists ideologically allied with the “planners.” And most local body politicians blindly follow the “planners’” shallow assumptions despite them being demonstrably invalid, as demonstrated by both international experience and academic research, some of which was identified by last year’s NZ Productivity Commission Inquiry into Housing Affordability.

There is actually a strong case to be made, economically and environmentally, for a city with low densities, low cost land’ mixed land-use with localised employment / residential “balance,” and  good road connections between multiple “nodes.” (Refer for instance to the papers in the afore-mentioned database, authored by Prof. Alex Anas of the State University of New York at Buffalo.)

Having a strong “centre” in itself is nowhere near as important as having “nodes” biased towards the centre of the “greater city” with good connections across the centre between those nodes, as well as "ring" connections between them. 

Bad “sprawl” on the other hand has higher density “nodes” at the fringe (unintended consequences of planning fads: refer the papers of Alain Bertaud, World Bank Chief Urban Planner), a CBD that is a “choke” to cross-region mobility, and congestion resulting from "everybody trying to go the same way at the same time."

Dispersed employment and urban form is a reality in the evolved city, in developed nations anyway. The main "Ring" roads and "Radial" roads should have fly-overs where they intersect, so that cross-town travellers can always select a route where they will conflict minimally with "cross traffic."

The road network that carries inter-nodal traffic has much higher utilisation rates than a radial highway network because traffic travels on it in both directions at both ends of the day, and expansion of capacity is less prone to the return of congestion because traffic loads are dispersed. “Stop-start” congestion lowers road throughput to well below the throughput that was the norm when traffic demand was lower and traffic was free-flowing. No wonder “decentralisation” is such a strong force in urban land markets where road capacity has been neglected and misdirected.*

CHRISTCHURCH HAS THE ENVIABLE feature of having abundant flat land around it, so that obviously beneficial ideas like these can be put into practice without pleading geographic obstacles (as planners do in Wellington especially). Land that is geologically unsafe can be utilised as Green space.

Christchurch's airport, currently on one edge of the city with abundant rural land beyond, is still an obvious "fulcrum" for strategically placed new "nodes."

Land inside the planners’ artificial city boundaries are jacked up well above lands’ market rate in the absence of the planners’ “urban fence.” Even the best agricultural land outside the urban boundary costs only a fraction of urban land inside under conditions of zoning restrictions and growth boundaries.  Also, there is so many times as much agricultural land than urban in NZ that our cities could be doubled in size with only a minimal impact on agricultural production.

Christchurch home-buyers, Christchurch businesses and their workforces would be greatly assisted right now if inexpensive land for “Greenfields” development were thrown open to them. It is unconscionable to have denied them this opportunity for so long.  The cost and delays involved in “maintaining existing urban form” etc. are unreasonable to insist on in the crisis that still confronts us, and inhuman to impose on those still being made to suffer from 2011’s disaster.

Christchurch businesses and their workforces cannot even be easily absorbed into other NZ cities, because all those cities are all pursuing urban containment strategies as well. Inflated urban land prices are already a serious drag on NZ international competitiveness, and businesses and workforces relocating from Christchurch will only drive these prices up further—unless, of course, other cities like Invercargill and Hamilton and Palmerston North were to adopt “no growth restraint” policies to encourage cost-effective relocation, something no council has demonstrated any sort of willingness to even contemplate.

The existing Christchurch CBD should be relegated to “node” status and a pattern of new nodes allowed for, especially through the provision of intelligent and high capacity road connections.  Some of these nodes could be in existing popular growth “suburbs” (mini-CBD’s) and some should be on “Greenfields”. Known earthquake and other natural risks should be taken into account. 

Flexibility is important; agglomerations of certain economic and social activities occur spontaneously and planners have a poor track record of anticipating and controlling them.  Temporary rapid “churn” of land use does NOT indicate “failure” of planning or markets, but healthy functioning of markets to ultimately efficient ends.  The ultimate character of each “node” should not be pre-determined by “planners,” but “rightS of way” and so on for future roads and infrastructure should be put in place for low-cost ultimate provision of efficient infrastructure to support successful “node” growth in the future.

The need now to purchase “built out” land for roads, new infrastructure, etc. years down the track, DOES represent a costly failure of previous “planning.”

Generally, Greenfields infrastructure is lower cost than upgrading existing built-out areas in the case of increased density or disaster reconstruction.  The NZ Productivity Commission Inquiry into Housing Affordability included an excellent appendix of academic references on this subject, and this writer has several more. Existing areas possibly might be reconstructed efficiently at new LOWER densities, with many structures simply removed and turned into “green space”. 

The existing CBD could still be maintained as “heritage” much more practically by abandoning unreasonable notions of rapidly returning previous business activity to the area, especially under the utterly unreasonable uncertainties and cost requirements being imposed on businesses in the process. The existing CBD should be allowed to “heal” and rejuvenate on an indeterminate time frame. The money WILL ultimately be forthcoming from private investors seeking to “buy in” to the area, which will not cease to be a tourist attraction and a centre for cultural and artistic activity.  It is merely unreasonable to expect funding for reconstruction according to strict heritage maintenance requirements, combined with safety standards, to come all at once, right now. 

There are numerous international precedents for long-term self-rejuvenation of what were even once-blighted areas but still having the “potential” of a certain “period” charm.  Christchurch’s CBD’s potential will be glaringly obvious, including to serious international investors, bearing favourable comparison to some of the international urban “rejuvenation” success stories that were far from obvious at one time.

HAVING DRIVEN UP THE price of urban land in cities, “planners” have now moved on to take "regional" control of development, to prevent people from living in lower-cost rural areas and commuting very much further than historic norms, to city jobs. But had urban land prices been kept lower in the first place, much LESS development would move to rural areas and to "fringe node" development, and the infill of “fragmented” land would take place faster. (Shlomo Angel et al find this in comparisons of Houston with Portland, in their paper “The Fragmentation of Urban Footprints.”)

It is said that many CBD property interests favour the proposed but still long-delayed government-favoured “rebuild” of the central city. CBD property interests do not care however what the broader cost-benefit of a particular project is, as long as the benefit to them exceeds the cost to them. The correct way to fund light rail systems, conventions centres, and sports stadiums however is not to to soak taxpayers and ratepayers. It is to levy special assessments on the interests who expect to turn a profit, particularly the nearest property owners. If it was clearly understood that this was to be the funding mechanism, the “support” for these proposals would evaporate. What usually happens however is that the costs are, say, $4 for every $1 of benefit, but the $1 of benefit is reaped by the nearby property owners, while the share of the cost borne by them is 50c or less; the other $3.50 being wealth transfer and deadweight loss borne by the region’s households and businesses who do not benefit. 

Roger Sutton himself pointed out early on that the Canterbury region’s GDP had barely blipped with the disaster, and the Airport and the Port were busier than ever. What I believe, is that ChCh has become, completely by accident, a working example of a city that is more efficient without a traditional dense CBD at all. Sir Bob Jones’ intuitions in his various writings are absolutely correct. ChCh’s “Plan”, if it really was going to be bold and objective and futuristic, should involve going with the flow of the ever-powerful economic forces of urban decentralisation.

One of the many distortions of policy that CBD property-owning interests are historically responsible for, is the “radial” nature of all transport planning. I have a copy of a very interesting paper that discusses the policy debates that took place in the USA when the Interstate Highway System was being planned. At the time, there was an enlightened fashion among urban planners in favour of investment in inter-suburban arterial networks and “parkways” to support the already-evident trend to decentralisation. Victory went to the interests that advocated for the highways that connected cities, to penetrate right to their CBD’s. Of course this was regarded as “free” Federal money; just another example of the hazards of excessive central government powers of taxation and spending. (Federal subsidy of Commuter Rail is another example today).  

Prof. Peter Gordon’s latest papers (University of Southern California) have been concentrating on the point that urban economies, when they are allowed to, find their own balance between agglomeration economies, congestion diseconomies, transport costs, and land prices. He suggests that this underlies the high productivity of US cities, whether NYC with its skyscrapers and high finance, or cities with lower-density industry and workforces. Refer Gordon, (2012): “Thinking About Economic Growth:  Cities, Networks, Creatitivy & Supply Chains for Ideas.”

ChCh should position itself as an enlightened city that has abandoned the old radial and monocentric ideas that are mainly a result of rent-seeking by the property owning interests involved.

Generally, local businesses and developers, as opposed to incumbent land-owning investors, have much more practical ideas for development and progress. It is misguided in the extreme for politicians and advocates to be in bed with the latter, at the expense of all others. The wealth transfer that takes place away from first-home buyers and renters is an indictment of our loss of moral compass.

There is actually no “democracy” like the free market. Exponentially more people vote with their feet and their money, for stand-alone family homes and suburban malls, than would ever bother to participate in “planning” processes to put up a fight in favour of such things. Contemporary “consultation” processes are no more than a sham that enables busybodies with too much time and taxpayers money, to impose their ideological beliefs on society.

A common complaint in these post-enlightenment times is that humans are failing to conserve their environments. Yet land converted to urban use has frequently had chemical fertilisers routinely spread on it and cattle and sheep defecating on it, with far worse effects on local waterways and groundwater than urban developments have. Furthermore, agricultural production has low value-to-bulk ratio and requires far greater provision of transport per dollar income generated, than the economic production of urban areas. If agricultural production was so important to the nation’s economy, agricultural land would be sufficiently expensive that it would not be worth converting to urban land. Such basic and glaring economic principles should not be beyond our discernment.

Phil Hayward is a Wellington housing researcher and commentator.

* Those opposed to car use should reflect that bus public-transport efficiency is greatly enhanced by the same features that enhance mobility for individuals in cars.  Rail public-transport however  is completely incompatible with economically competitive urban structure in any low-population nation like NZ:

How do you stop land banking?

The case of the land-owner in Auckland’s Flat Bush who stands to make  a profit of over $100 million on land he bought for less than a million eighteen years ago—and having done nothing to it—has everyone hating “land bankers.” So everyone hates “land banking,” but no-one apparently knows how to stop it.
But what if, with one hit, you could stop land banking and provide affordable housing? Guest Poster Phil Hayward reckons it’s a snip. You just stop ring-fencing the city …

Consider basic urban economics: if we draw a curve showing land values for an urban economy, it slopes up gradually from the fringe to the centre and is based, among other things, on the cost of transport that might be saved at a more central location.

Where there is no Urban Growth Boundary (UGB) and no bidding war for the land on which planners have imposed a quota, this curve's slope is gentle and continuous. It actually extends miles out into the country beyond the existing fringe, and the amount of land involved is massive; like 100 years or more "supply" for urban growth. If some speculator "corners" all the land within the first mile or two, which is quite some feat, then competitors can simply "leapfrog" the holding. It is only two minutes drive on an open road anyway, and about another $1,000 worth of real estate value versus "transport costs saved."

At least, this is how it works in cities without an Urban Growth Boundary. "Affordable housing" is basically an issue of whether or not people can "leapfrog" land bankers’ holdings to build themselves houses. When there is no Urban Growth Boundary, as is the case with affordable US cities, no-one bothers to land bank.  The "supply" of land in these cities that is economically accessible with only a few minutes and a couple of dollars worth of further car travel is far too big for anyone to "corner."  [And nor would there would be any expected economic windfall from landbanking, which only offers massive returns when land supply is artificially restricted.]

When the land supply is not constrained, land prices are determined more by the price able to be paid for alternative users of fringe land i.e. farming, forestry, etc. Therefore, there always ends up being houses available (or potentially available) with little or no "planning gain" incorporated into the price of land.

This anchors the price of all housing, in "rural value plus location/transport cost saving premium" – which is far lower than "planning gain" when there is a growth boundary.

Here then, based on the above understanding, is the basic flaw with the oft-argued idea that central planners have “released” rural land formerly outside the Urgan Growth Boundary, such that (as they might say) "X years supply of land has been zoned, or released."  The flaw is this: this newly “released” amount is not the amount that would normally come to market in the next X years on the "rural land" market. It is only the total quantity of land within the zone, whether or not it is economic to use at the prices it can now command.

To really have "X years of economic supply," it would be necessary to include in the zone enough land such that the quantity truly needed for "X years supply" would come up for sale anyway in a normal rural market, and at normal rural prices. Which is to say, at prices that would be affordable on which to build. This would mean a zone with about ten to twenty times as much land as the planners’ notion of "X years supply for urban growth," and without the high prices produced by the zoning constraints.

Note that the land parcels comprising "X years supply" (by the planners’ standards) is being used for something already by those parcels’ present owners, and no present owner has any inducement to sell their parcel at the value that it is worth in its present use. But property developers who need to secure land for new developments will rapidly exhaust the "supply" of land that is coming onto the market anyway.

Since each development takes years, and sites for the next development need to be secured before the previous one is completed, they will soon need to start "door knocking" to plead with land owners to sell.

Meanwhile, having become aware that they are part of a newly created oligopoly holding of the next "X years supply of land for urban growth," the land owners cease to think in terms of rural land values at all, and start thinking like
investors or speculators. Or land bankers.  None of them will be satisfied with a 10% capital gain, or even 20%.
Expectations of gains become a reason to hold land rather than sell it, just as with speculators in bullion or commodities in a rising market. So the planners’ "X years supply" becomes a lot less than the "X years supply" they thought it would be, purely because of typical investor psychology. By their interference in what would have been a natural process, the planners have actually reduced the likelihood that any one land owner within the zone will in fact sell the land within the "X" years at all.

Which means in order to make a purchase, developers will have to offer land owners an amount greater than the
"present value" of what the land owner thinks the value might reach if he holds the land. And every developer has to out-bid every other developer for the parcels that might go on the market.  Meanwhile, the rising prices paid by developers feed heightened expectations on the part of the remaining land owners. And so it goes on like a nuclear chain reaction, blowing up this time in the face of would-be affordable-home owners.

And as with a nuclear chain reaction, it is impossible to have "just a little, harmless explosion." Urban planners need to understand that an Urban Growth Boundary does not cause a little, harmless explosion in greenfields land values.
Setting time limits on land banks won't change this. Neither will land taxes or capital gains taxes. Regardless of the mechanism, the developers are the meat in the sandwich between land vendors and the ability of the consumers of housing to "pay." An increasingly thin slice of meat.

Hence the prices will always find their level at the point at which the population's ability to pay for housing is maxxed out [Are we there yet? – Ed] ; and developers are being sorted into winners and losers in what has become the gaming of the land supply, with some going broke and the rest making a killing.

The fact that no-one involved in modern urban planning advocacy has ever shown any evidence of having thought of this, is just a sign of how grossly unqualified they are to be dictating outcomes at all in the first place. These economic realities at least were far better understood decades ago, when the paternalists who devised the original UK Town and Country Planning System decided they would have to include in their proposed system compulsory acquisition of land. When an Urban Growth Boundary is set, they said, the government should buy the land within it compulsorily at the same prices as still apply outside it, and then seek proposals from developers regarding what they would put on the land and what prices they would sell it for, if they were allotted some at the government's cost price.

Horrible? Yes. But this is the logical economic extension of the mess the planners have created. Another demonstration of the dictum that controls necessarily lead to further controls, and on ad infinitum.

Then, of course, we could simply not "restrict" urban fringe growth in the first place…

RELATED POSTS:

• Message to planners: "Don't fence me in!"
• “Sprawl” versus “intensification”
• 'Smart Growth' is not Green
• More sprawling arguments
• Sprawl: A compact history
• Decentralisation, and those who oppose it
• Sprawl is good; regulation is not
• Building slums while banning growth

Q: Who do you need for an affordable city? A: Developers.

Whale Oil’s irregular correspondent Policy Parrot is worth following on so-called “planning and development issues” in Auckland Council.

Just yesterday, he pointed out that the allegedly “permissive” Unitary Auckland Plan is about to become anything but, with the heights and densities “permitted” by planners about to be scaled back, and the Council announcing that most (all?) new developments will be “notified”—meaning every new development will have to cross a lake of fire on a wooden boat to gain “permission?” to proceed.

And today, he’s pointing out that everything council is doing to achieve their “liveable city” is killing off the very people who are supposed to be building it: developers.

Auckland Council has bred a culture of hate towards property developers. Those cardigan wearing bohemians at Council love to hate developers. Everyone knows it and if one didn’t believe that then this Parrot advises them to apply for a Resource Consent and see what dreaded deathly hallow ensues.
    Property Development is very difficult. For most property developers life is a hard slog where projects take long periods of time and income arrives sporadically in lumps. Financing projects is hairy and onerous. Risks are higher than Everest. Margins are low. Turnover even lower.
    There is an urban myth about property developer margins which needs dispelling (and before readers say ‘cry me a river’). Mostly development margins sit between 12-25% on paper and typically half that by project completion. 

That’s if the developer is lucky.

Let’s make it clear – there are plenty of businesses in NZ of different ilk that produce more substantial margins and returns on capital or turnover than property development. Some of our listed companies run double digit margins every year. So development is not a golden sunrise…
    Auckland Council generally makes life difficult for developers, particularly where planning officers have a say in the design and outcomes of a development. Council does this fiddling though onerous planning rules that give rise to forensic analysis of consents, impose notification and community revolt (let’s not forget they hate developers too), forced changes to projects and forcing costs onto developers in return for consent approvals. This process hurts development substantially. The process can take a very long time and the consultancy costs sky rocket along with interest payments…
    There is no other industry in NZ subject to such detailed interference. Imagine a Governmental agency with discretion and a seat around the table deciding outcomes for Nike running shoes, Apple iPhones or Fonterra Milk products. It would be a scandalous proposition. Yet Auckland city pokes it’s fingers into development  [daily]...
    Not that this Parrot has a particular affinity for property developers and nor is this Parrot suggesting Polly Developer should be fed a nice easy cracker.
    This Parrot is saying that Auckland Council are stupid. They cannot see that the Auckland Plan and the Unitary Plan are meaningless visions without property developers. Len and his band of merry men shit all over the property development industry and yet they are utterly dependent upon them to deliver the goods.

He’s right, you know.

Except it’s not just developers they seem to hate. Because judging by those they’re hurting, it’s virtually everybody in Auckland.

[Hat tip Phil Hayward]

Will the Housing Accord cure the land banks?

Guest post by Phil Hayward

Now that a “housing accord” between the government and Auckland Council has been announced it’s worth asking, what’s been agreed and will it make any real difference. Last year after the  NZ Productivity Commission released its findings and recommendations over its Inquiry into Housing Affordability, Phil Hayward said they

completely fail to identify the extent of market freedom surrounding property development and the supply of land for it that is essential to ensure housing affordability and economic stability. There is a very real danger that “releases of land” will not be of sufficient quantity to eliminate the “gaming” by incumbent land owners and land bankers that leads to very high levels of planning gain, and hence may merely shift NZ from being a “housing bubble market” as a consequence of outright under-supply, to one in which over-building is possible along with the price inflation.

What’s changed?

The crucial factor determining the success of any “solutions”, is whether it is possible to forestall by market means the power of the original owners of land zoned for development to “hold out” for whatever prices the market can stand.

To restore affordability, within the area in which development is permitted to take place there needs to be enough willing vendors of land (at prices un-inflated by expectations of capital gain over and above normal rural values) to meet the “supply quantity” required for growth in the housing market. Of course any growth boundary that meets this requirement would have to be so loose that it might as well not exist. But there is no example in the world of a city with a “20 year” growth boundary (or less) that does not have a problem with unaffordable housing stemming from “planning gain” in the price of greenfields land.

There is not one "urban fringe property developer" who is interested in fighting for reform of growth containment regulations once they are entrenched. None of these people anticipated the consequences in the first place. If they stay in business at all subsequently, it was by becoming hostages to the racket and becoming rent-seekers themselves. That is, they are forced into a gladiatorial bidding war for the available land within the Urban Growth Boundary (most of the owners of which had no intention of selling it within the planners alleged "20 years supply" period or whatever) and once they have secured "land banks" at massive cost (including finance carrying costs), reform would bankrupt them.

In any case, their industry has become very high risk and many of them will become casualties anyway.

Within any given area of farmland, there is only ever a fraction of land owners intending to sell anyway - due to retirement or change of occupation - and the closer to the existing city fringe the land is, the closer to zero is the probability of the owners of that land are not anticipating considerable capital gain.

Academic analysis frequently misses the point that the price of housing in new developments does not inevitably have to be set by “what participants in the market can stand” – if it is set by “the most competitive price at which developers can turn farmland at farmland prices into developed housing,”, you will then have a happy condition of “consumer surplus” in housing just as you have in cars and computers and cellphones. The absence of consumer surplus and the pricing at “what participants in the market can stand” is a case of what some economists call “super profits” or “monopoly rent.” ¹

There is no justification to be found by analysing real-life data for banning the “splatter” development that results from the absence of an urban growth boundary or prescriptive zoning. The cities that have freedom to develop in this way do not suffer from any worse traffic congestion, or any less efficient commute times, or any less sustainable fiscal position than cities that suppress this freedom. In fact, all the analytical literature indicates that the end result is greater efficiency of the urban economy, along with a vastly greater housing affordability; this is because the best use of still-undeveloped land and the most cost-effective provision of infrastructure is far clearer after some years of gradual market-led conversion of land from one use to another.

By contrast, planners’ insistence on contiguous “carpet” development and heavily centralised infrastructure networks brings a whole host of negative consequences, not least for the cost of infrastructure – the very thing that their central “planning” allegedly minimise….!

In fact the best solution to our housing affordability, planning, and NIMBYism impasse, would be “new towns”—towns, hamlets and new villages built outside the rural-urban ring-fence with their own self-contained infrastructure. Ebenezer Howard, the “father of urban planning,” was obsessed all his life (in the first half of the 20^th century) with the elimination of “planning gain” by building his “new towns” on legally purchased farmland far enough away from cities that no higher land price expectations existed. He also intended each “new town” to have a balance of residences, jobs, and amenities.

Ironically, it is modern free market versions of this that have been far and away the most successful in the USA. For example, “The Woodlands”, near Houston. The initial purchase of rural land at dirt cheap prices, means that all sorts of “amenity” can be provided at minimal opportunity cost that needs to be recouped in the price of the sold sections. A combination of housing affordability, low urban density, short average trip times, high local amenity, and high fiscal sustainability sounds too good to be true. But our intuitions are too shallow. The expectation that really IS too good to be true, is the expectation that it is possible to achieve housing affordability, high urban density, short average trip times, high local amenity for all, and high fiscal sustainability; through “planning” – when the first effect of the planning is the inflation of the raw land cost by over a thousand percent.

The best solution to our housing affordability woes and associated unintended consequences, such as an epidemic of ultra-long commutes from rural towns to jobs in the unaffordable city, would involve a few new towns like “The Woodlands” springing up in the superabundant stretches of undeveloped land with which NZ (one of the world’s most lightly populated countries) is blessed. The existence of these highly competitive alternatives – for both home buyers and businesses (hence the excellent jobs-housing balance) – would soon take the pressure off the market in the existing cities, strangled as they are by NIMBYism as well as misguided planning.

Planned “releases of land” however for a specific 10,000+ new homes per year in highly specific locations, could be a failure as a “housing affordability” policy per se. When we analyse previous housing bubbles and crashes around the world, we find that the most volatile ones are those in which the price inflation was accompanied by frantic amounts of building. This seemingly contradictory combination is the result of insufficient market freedom to convert cheap rural land to urban use without its original owners holding out for “planning gain.”

“Housing affordability” is achieved most spectacularly post-crash under these conditions, as in Ireland and Spain; but this victory is a Pyrrhic one.

It is actually a lesser evil, economically, to have an outright undersupply of homes.

Phil Hayward is a Wellington housing researcher and commentator.

1. I hate using terms commonly associated with Marxism, by the way, but they are the technical terms understood by the economics profession, and no others have been devised instead.

NOTE: The problem Phil describes above is exacerbated by the way money is borrowed into existence , with the monetary inflation this produces occurring first in heavily indebted assets like land. Which means a large part of what is thought of as “capital gain” is in reality just early-stage price inflation.