Sprawling housing not really cheaper

As promised, some further thoughts  about the way Auckland should or could grow. One of Auckland’s biggest problems is housing affordability and any plan to grow the city must address this. 

While housing affordability is a serious issue for all NZers, it’s particularly bad in Auckland. Recently I asked the Parliamentary library to do some research which showed the average house price in Auckland is generally at least $100,000 higher than the national average.

This is largely because Auckland is growing so quickly  – and it’s going to get worse! Another 600,000 people are predicted to move into Auckland over the next 20 years.

Unfortunately, it seems the government has brought into the myth that the best way to increase housing affordability in Auckland is to encourage greenfields development on the fringes of our cities.

This is at best only a short-term solution to housing affordability. Houses on the urban fringe may cost less for first time buyers but over time they’ll cost us all more. Why? Well, the cost to local and central government of providing new infrastructure and services (e.g., waste disposal, water, electricity, roads, public transport) to spread out developments on the peripheries of cities is high.

The Auckland Regional Council commissioned a report into this recently. It looked at various scenarios for Auckland’s growth.

It found that if Auckland was allowed to grow outwards rapidly at a low density it would cost $10 billion more to provide just transport infrastructure (let alone water, energy etc), than if it grew in a more compact fashion.

That’s a lot of extra rates for people to pay!

Also, the cost of transport for people who buy houses on the periphery of our cities is significant.  For example, to commute by train from Ranui to the CBD would cost $170/month. Of course, any family living in spread out Ranui would likely need a car as well with all the related running costs.

Right now, it might still be cheaper to buy a house in Ranui and commute than live in the CBD. But given the various reports coming out about the likelihood of increases in oil prices (and petrol has cracked the $2.00 / litre mark again) , it seems very likely that the cost of transport (particularly private vehicles) will rise dramatically in the near future.

Finally, the more people live on the outskirts of our cities in areas with poor public transport the more likely they are to commute by car. Added congestion on motorways heading into the cities costs us all in terms of lower air quality, wasted time, and stress.

And, of course, when they get into town they need to park their cars somewhere – taking more space in the centre of our cities that could otherwise be used more profitably for housing or commerce.

So is sprawl really a long term solution to housing affordability in Auckland? I doubt it. I’ll blog more about Green solutions to this problem next week.

20 thoughts on “Sprawling housing not really cheaper

  1. It found that if Auckland was allowed to grow outwards rapidly at a low density it would cost $10 billion more to provide just transport infrastructure (let alone water, energy etc), than if it grew in a more compact fashion.

    The problem that I have with the ARC analysis is that they didn’t do “Option 6″ which would have been providing public transport services whilst allowing sprawl. What would “Option 6″ do to your overall costs?

    Finally, the more people live on the outskirts of our cities in areas with poor public transport the more likely they are to commute by car.

    Wouldn’t the solution to that problem be the provision of public transport services as the houses go up instead of a decade later?

    So is sprawl really a long term solution to housing affordability in Auckland?

    Name me one place in the world where you have the sort of restrictions on housing that you favour that has a median house price of between 3 and 5 times the median household income?

    I’ll blog more about Green solutions to this problem next week.

    Let me guess – a Capital Gains Tax? Well, need I remind you that the Americans and the Australians both have Capital Gains Taxes and both countries had an insane housing boom in the areas where surprise surprise, there were heavy restrictions on housing development.

    Like or Dislike: Thumb up 5 Thumb down 1 (+4)

  2. Ever considered people might *want* to live in the suburbs over the cities? and are willing it put up with extra transport costs, time travelling, etc to do so..

    Like or Dislike: Thumb up 9 Thumb down 2 (+7)

  3. $10 billion sounds like a lot, especially when you put it in bold. In reality it’s about ten thousand dollars per person. Meanwhile the same people are paying an extra hundred thousand for a house. Let’s put this another way, the additional cost of overinflated house prices is One Hundred Billion Dollars!

    Now, if making more land available will make housing more affordable, it might not be as big a price to pay after all.

    As another note, the CBD commute argument is a bit misleading, in reality what percentage of workers actually work in the CBD, I think it’s seventeen, does anyone know?

    Like or Dislike: Thumb up 10 Thumb down 0 (+10)

  4. We lived in Melbourne a few years ago. A Green oriented Academic did a great long study that was supposed to show that people who lived in the outer suburbs, and remember Melbourne is much larger than Auckland, were terribly deprived and unhappy. The Academic’s viewpoint was that hey all wanted to live near the CDB and have access to Opera, Art Galleries etc.
    Well it turned out they didn’t. They were entirely happy living far from the CDB, near their friends and family, and they didn’t work in the CDB and really didn’t want anything to do with it. They wanted to live far out in the suburbs and to have a piece of land and a stand-alone house.
    Our Academic’s view? They didn’t know what was good for themselves.

    Like or Dislike: Thumb up 9 Thumb down 0 (+9)

  5. Yes, and in the US they:

    A. Do not apply the Cap Gains to a house you own and live in yourself
    B. Provide that the interest on a mortgage on your first home is tax deductible.
    C. Cap-Gains tax is at a rate of 20% vs 33% for the ordinary tax.

    They don’t have the “rental houses as investment” going as much as we have here, no LAQC needed to deduct interest, and the rules are subtly different, but they definitely have a structure that distorts the market blowing up prices.

    So please do not call the Cap Gains into question on the back of the US experience, when the Cap Gains rates in the US are a fraction of the income tax rates.

    BJ

    Like or Dislike: Thumb up 1 Thumb down 2 (-1)

  6. So please do not call the Cap Gains into question on the back of the US experience, when the Cap Gains rates in the US are a fraction of the income tax rates.

    The problem is though that while all three aspects are universal for the United States, not all areas underwent a housing boom. Places such as Houston and Atlanta largely steered clear of the insane spike in housing prices.

    Like or Dislike: Thumb up 2 Thumb down 1 (+1)

  7. My point remains John-ston – The US experience does not in any way reflect the NZ situation and the presence or absence of a Cap-Gains in the USA is relatively minor compared with the ability to deduct 20K off your income, for the interest on the price of a house.

    Which also affects your State Income tax where there is one, Texas has none.

    The rule is simple – where you wish to argue for or against a tax measure, don’t use the USA as an example. I lived there, I live here now, the rules are sufficiently different that it simply does NOT make sense… even if it seems useful to you it really does not make sense. The income tax is different, the deductions are different, the law governing that one tax has an entire wing of the congressional library, and it contains exemptions for individual companies. The law about Capital Gains is not much better.

    We do better here with much simpler rules. I consider strongly that making comparisons between the tax systems is a lot like comparing a glass of tap water to an electric lawn mower.

    No, there isn’t and that’s the point.

    So so so… shall we argue cap-gains on their merit here in NZ? I think it unnecessary as we will not persuade each other. Nor would cap-gains be a single measure that would get the house prices in Auckland down to reasonable levels in any case. At best it would be one of a set of measures… I WOULD expect to do it, but I would not rely on it in isolation, any more than relying on LAQC modifications in isolation…. because at the end of the day there have to be more rooms with beds accessible to Auckland.

    This is accomplished, in every city I know of except LA, and every port city with difficult harbor transits, by building apartment houses, not sprawling out. It is worth noting that none of those places is particularly affordable in any case. The population grows faster than apartments can be built.

    Every country has different rules, taxes, culture and experience. To say X won’t work here because it didn’t work over there, is simply wrong. Not necessary to even define X.

    “Option 6″ alluded to above, would entail planning the expansion of the city and its public transit together. That is what we used to do I think? Now the people who develop the land are responsible for building the infrastructure, and can only recoup it at the initial sale. This makes no sense at all. The dwellings will pay rates to maintain the infrastructure through dozens of owners and hundreds of years. Requiring the developer to do it seems… wrong… and leaves far too much (in terms of things like public transport) out of the process.

    BJ

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  8. I should think that in places like Auckland the days of the quarter acre, pavalover paradise are over.

    Planners are going to have to make tough decisions as to how much real estate is going to be built on land that is productive for growing food!

    Many of you may think that this is a contradiction; but I think that it would be green to go high rise!!!

    Like or Dislike: Thumb up 2 Thumb down 1 (+1)

  9. I’ll address your other points in a day or two bjchip, but I wish to address this one:

    “Option 6″ alluded to above, would entail planning the expansion of the city and its public transit together. That is what we used to do I think? Now the people who develop the land are responsible for building the infrastructure, and can only recoup it at the initial sale. This makes no sense at all. The dwellings will pay rates to maintain the infrastructure through dozens of owners and hundreds of years. Requiring the developer to do it seems… wrong… and leaves far too much (in terms of things like public transport) out of the process.

    I wasn’t suggesting that the developer should pay for public transport improvements at all, what I was suggesting is that we should make public transport improvements as the houses go up instead of waiting a decade (or more) before we make those improvements. When we do that, then we get success.

    One example of a success story was in the Central Coast of New South Wales. In 1960, the line through to Gosford was electrified to allow for heavier freight trains, but had the side effect of allowing for electric train services either involving carriages hauled by 46 class locomotives, or EMUs of the U-Set variety. As the area grew, the number of people using the train service grew and within ten years, that line needed double decker trains – the V-Sets of today. Today, Gosford is the busiest station outside of the Sydney suburban area.

    Basically, we had a public transport improvement made when the area was farmland, and when the people started moving to that area, the public transport service was there for them to use. When a public transport service is not there for them to use, then of course they will use their cars and it becomes that little bit harder to entice them to use public transport.

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  10. Didn’t mean that the developer should foot that bill as well… meant that the developer should NOT be on the hook for other costs of the subdivision… that the “developer” should have responsibility for building houses, but that the council should have the responsibility to lay out roads, put in sewers and water mains and the like, and that this comes out of rates as it has always. As things stand now the initial purchaser of a new home is fronting the initial (and TOTAL) cost of the infrastructure supporting that home… even though it is unlikely that they will be in the house more than 10-15 years. This is to make the developer whole after he puts in the sewers, the rough landscape the roadworks the water etc. Those things that should be amortized over a hundred years are paid for in the first.

    Makes little sense if that (which is how I understand things are done) is actually how they are done.

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  11. You are bang on. There is an extensive movement afoot to reapply the principles of sustainable urban design to modern cities. Coming from the UK, NZ is shockingly poorly supplied with public transport. Worse even than the UK. In even two years time this is going to be an insurmountable problem for most people and its probably too late to start looking at solutions. I have no intention of living through the coming oil squeeze but fully intend to find some nice little farming town in the rural North Island to live within cycling distance of.
    :~D

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  12. One problem with housing affordability is the valuation system used in New Zealand. Existing buildings are consistently undervalued and land over-valued. When Valuation New Zealand does valuations it largely just inflates the value of land over time and leaves buildings as they were – this despite the fact that this is way below replacement cost. Why should the cost of new house building, when increasing the market value of existing property, just increase the value of land existing homes are built on – it makes no sense. And of course the whole thing is compounded when this over-valuation of land results in new land for sub-development becoming over-priced, inflating the cost of bringing in new housing creating a bubble market cycle circle. The government should really step in and re-direct them to improve their act as it has a negative impact on the wider economy.

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  13. As to why countries with a CGT have property bubbles – well the prospect of a profit is not diminished by losing some of it in tax. A CGT is to ensure a fairer tax system.

    The asset bubbles occured here and elsewhere because of the credit available to those who had existing assets (or investors who could deduct the interest cost of the debt financed rental property) – from 2002 the western world was flooded with credit.

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  14. My point remains John-ston – The US experience does not in any way reflect the NZ situation and the presence or absence of a Cap-Gains in the USA is relatively minor compared with the ability to deduct 20K off your income, for the interest on the price of a house.

    How about the Australian situation then? Or indeed the situation in many other Western states where house prices shot up like anything in spite of the existence of a Capital Gains Tax. I agree that deductibility of mortgage interest is a problem in the United States, but it is something that has existed for decades and it was only in the last ten years that we saw a wild housing boom – it cannot be that deductibility that caused it.

    Which also affects your State Income tax where there is one, Texas has none.

    The problem with that notion is that Washington State also has no State Income Tax, and yet house prices in places such as Seattle went through the roof.

    The rule is simple – where you wish to argue for or against a tax measure, don’t use the USA as an example. I lived there, I live here now, the rules are sufficiently different that it simply does NOT make sense… even if it seems useful to you it really does not make sense. The income tax is different, the deductions are different, the law governing that one tax has an entire wing of the congressional library, and it contains exemptions for individual companies. The law about Capital Gains is not much better.

    I agree that the US taxation system is a mess, and the US Congress could probably solve the deficit by doing a sweeping reform of the taxation system similar to what happened with our taxation system in the late 1980s. However, even if we take the United States out of the equation, we still saw an insane housing boom in other Anglo-Saxon economies in spite of the other Anglo-Saxon economies having Capital Gains Taxes. It is clear that a Capital Gains Tax will not prevent a housing boom, because if it did, then none of those countries would have experienced it, or it would have been far milder.

    This is accomplished, in every city I know of except LA, and every port city with difficult harbor transits, by building apartment houses, not sprawling out. It is worth noting that none of those places is particularly affordable in any case. The population grows faster than apartments can be built.

    Low housing prices are achieved in places such as Atlanta and Houston by allowing the city to grow instead of constraining it. Building apartment blocks isn’t easy when you consider that to construct a development of the kind that have been seen in Auckland in recent years (Sacramento in Botany Downs and Ellerslie Gardens on the Ellerslie-Panmure Highway are two examples), you need a lot of land – at least an acre. To get that acre, you have to potentially wait years until that little old granny at number 21 finally dies and her property goes on the market after sixty years.

    I would also note that Atlanta and Houston are among the fastest growing cities in the United States, so population growth and house prices don’t necessarily correlate.

    Every country has different rules, taxes, culture and experience. To say X won’t work here because it didn’t work over there, is simply wrong. Not necessary to even define X.

    I seem to recall that Einstein once said that the definition of madness was trying the same thing again to see if the result was different. If Capital Gains Taxes did not prevent a housing boom in the United States, in Australia, in Canada, in the United Kingdom, in Ireland and in Spain, then why on earth would New Zealand be any different?

    Planners are going to have to make tough decisions as to how much real estate is going to be built on land that is productive for growing food!

    More land has been removed from growing food over the last hundred years thanks to improvements in farming than the growth of cities. Even then, a lot of the “productive” land outside of our cities is being removed anyway courtesy of lifestyle blockers who own a few acres of land and don’t do much with it – and that is assuming that land around Auckland is particularly productive; the area to the north of Auckland hasn’t traditionally been a very productive area.

    Makes little sense if that (which is how I understand things are done) is actually how they are done.

    I’m in agreement there – what council and other governmental entities need to do under “Option 6” is to set aside corridors for transportation, both public and private, and then as the houses go up, build the public transport option.

    The asset bubbles occured here and elsewhere because of the credit available to those who had existing assets (or investors who could deduct the interest cost of the debt financed rental property) – from 2002 the western world was flooded with credit.

    Again, the problem is that the whole of the United States had access to that cheap credit, yet only a third of all the housing markets in the US experienced a massive housing boom. If cheap credit caused housing booms, then the whole US market would have experienced the mother of all booms.

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  15. john-ston

    So most of the western world went on a housing boom in the same period – the period of cheap credit, and you say, that because much of the house inflation in the USA occured in some housing markets and not others, this was not the cause.

    Are you for real? It was clearly the cause.

    As for why there is the patchy impact in the USA, thats a related topic but it’s not the exception that disproves the rule.

    FACTORS

    1A. Access to cheap credit resulted in the cheap short-term loans to those who could not repay them when they rose to market, access to credit allowed developers to build more houses than there were people to (buy and or) occupy -the market is not perfect.

    1B Where rising demand and supply balanced prices did not rise.

    2A Obviously there are the areas of the USA where industrial jobs have been lost to China and the people are leaving (housing markets falling against the trend).

    2B No amount of cheap credit could save these markets.

    2C Where the people who lost their jobs migrated to experienced an increase in housing demand – which may or may not not have been matched by supply.

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  16. So most of the western world went on a housing boom in the same period – the period of cheap credit, and you say, that because much of the house inflation in the USA occured in some housing markets and not others, this was not the cause.

    SPC, only a third of the US went through that housing boom, and part of the problem is that many of the other places in the Western world that did experience the housing boom had the sort of planning restrictions that were commonplace in the places in the US that did experience a housing boom.

    Are you for real? It was clearly the cause.

    Name me one city that had the sort of planning restrictions that limit the ability of cities from expanding into the hinterland that maintained house prices of between 3 and 5 times the median household income.

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  17. john-ston – are you saying that one third of US markets (which rose) and 2/3 of US markets which did not, had distinct planning codes? Given the variables in demand and supply and unemployment – I doubt it.

    But if you can demonstrate that, is it true that the US planning laws you refer to are unique to them? If not, I’ll stay with the cheap and available credit theory – without any re-consideration.

    A worldwide debt crisis (valuation downward review without any planning law changes) and it was all about planning laws – what price RMA reform …

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  18. Having just spent several days in Paris, i was impressed at the vibrancy and life in the central city. People live happily in apartments with a miriad of shops beneath that provide for all their needs; wonderful little fruit and vege shops, bakeries and cafes. If many cities are struggling to keep their central areas viable they need to ensure they are attractive places to live. Good public transport and cycle friendly roads meant living in the centre was a pleasure without the need for cars. If shoppng malls are continually built to serve suburban development is just encouraging the sprawl and supporting the use of cars does similar.

    Like or Dislike: Thumb up 3 Thumb down 0 (+3)

  19. wonderful little fruit and vege shops, bakeries and cafes

    The problem is that those sort of shops tend to have higher prices – compare the prices that your local butcher charges with the prices that your local supermarket charges.

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  20. Sprout has proven my point; a city can build up and keep it’s aesthetic and ergonomical integrity.

    There can be bee hives and gardens on the roofs tops and virtical gardens of say scarlet runner beans and tomatoes climbing the blank walls.

    Nasturtiums can grow with tomatoes to add colour and keep off the aphids while it’s capers can be pickled and they also lower blood pressure.

    john-stons comment that those little shops are usually higher in price than supermarkets maybe correct in NZ.

    But are they more expensive than supermarkets in Paris Sprout?

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