A spoonful of economics helps land use bias go down

Roger Partridge
The National Business Review
27 September, 2019

“If the only tool you have is a hammer, everything looks like a nail,” American psychologist Abraham Maslow proclaimed  in 1966.

The concept refers to the cognitive bias that involves an over-reliance on a familiar tool. In the public sphere, the concept is known as regulatory capture – the tendency of regulators to look at things from the point of view of the issue they are regulating.

The problem afflicts the proposed National Policy Statement for Highly Productive Land released by Environment Minister David Parker for public consultation last month. And it threatens to cripple attempts to solve the housing crisis.

The proposed NPS relies on advice from both the Ministry for the Environment and the Ministry for Primary Industries. Unfortunately, neither ministry is tasked with solving the housing crisis – and they have duly ignored it.

Instead, the ministries claim New Zealand has a duty to “cherish and protect” its “highly productive land” for future generations. To achieve this goal, the NPS will require local authorities to ensure highly productive land is preserved for primary production and not lost to urban land use. The extent of the land potentially involved is vast – covering about 14% of New Zealand (compared with less than 1% for our major urban areas).

The affected land includes huge tracts of land on Auckland’s periphery – land desperately needed to house Auckland’s growing population. Consequently, the NPS directly clashes with the government’s other goal of improving housing affordability in Auckland (and elsewhere in New Zealand).   

The horns of a dilemma

If the rationale of the NPS is right, we are facing a terrible dilemma. We can allow our growing cities to spread to reduce the cost of housing but face rising food prices from a lack of highly productive land. Or we can preserve the highly productive land needed to produce food cheaply and efficiently at the expense of future generations of urban dwellers’ house-owning aspirations.

That would indeed be an unattractive trade-off. But even if it were true that the price of building houses on our most productive land is raising food prices, it is not obvious that protecting the land for agriculture is the right choice. After all, food can be imported while housing cannot.

But there is a more fundamental flaw with the economics of using the NPS to stave off a food crisis. Highly productive land (such as the Pukekohe silt loam on Auckland’s southern fringes) is sought after because it grows horticultural produce better than less fertile land. Because the value of land (like other capital assets) reflects the present value of the future profits it can produce, highly productive land is worth more than its less productive neighbours. However, high land value means higher land costs per hectare for horticulturalists farming highly productive land.

The alternative to highly productive land is less productive land. And, because it is less productive, it is also less costly. Indeed, its value will be lower in proportion to its lower productivity. It may be harder to farm but it costs the farmer less.

Rather than regulating whether land is used for housing and food, we can safely rely on markets to provide a solution: Where it is more valuable for housing, we should build on highly productive land and farm on less productive land. The latter may not be as easy to cultivate as the Pukekohe silt loam but it is a better choice than choking our cities and forcing up house prices to stave off a mythical food crisis.

Inadequate cost-benefit analysis

An even more alarming oversight in the analysis supporting the proposed NPS is the absence of a proper cost-benefit analysis. The Cabinet paper proposing the NPS acknowledges that “the costs of potential restrictions on urban expansion have not been quantified.” This is an astonishing omission.

To give credit, the Treasury officials alerted the ministries responsible for the Cabinet paper that the proposed protections in the NPS were likely to work against the government’s housing affordability goal. The Treasury also advised that the NPS had a “weak problem definition and rationale for intervention” and that this “creates risks of low benefits, high costs, unintended consequences and risks to achieving other policy objectives.”

Regrettably, the two ministries brushed aside these concerns with a ‘we know better’ response.  Perhaps this is no surprise when both are experts on the geography of New Zealand’s soils, but neither are experts on the housing crisis.

The ministries’ biases in favour of protecting what they know means they have failed their minister – and the public. Economics tells us we are not about to face a food shortage. The sooner our officials learn that, the sooner they will nail the real crisis: a shortage of development-ready land for housing.

Roger Partridge is the chairman of The New Zealand Initiative.

Stay in the loop: Subscribe to updates