Cities must be allowed to expand to reduce housing costs

Dr Eric Crampton
The Post
2 September, 2023

When land prices are wrong, it’s hard for anything to be right.

When zoning makes it too hard to build in places where people want to live, land prices will be out of whack.

When councils see only downsides from zoning enough land for houses, townhouses, and apartments, zoning will be a mess.

And inflated infrastructure costs make everything harder still.

Two reports released in the last fortnight, taken together, make for grim reading.

Britain Remade put the UK’s infrastructure building costs into global perspective. They found the UK’s roads, rail, tunnels and tramways cost more per mile than almost anywhere else.

Tramways cost from three to nine times more than in France. Tunnels for metro lines cost £113 million (NZ$240m) per mile in Spain, £411m in Australia, £676m in the UK, £717m in Canada, and £1.25 billion in the United States.

They note that “Norway built the world’s longest road tunnel and the world’s deepest subsea tunnel for less than the LTC [London Transit Commission]’s planning application.”

The problem? The lengthy approval processes in places with legal systems that largely follow the UK’s example. Consultation brings delays and project rescoping. All of it causes costs to blow out.

The consequence? Places with high infrastructure costs cannot afford to have nice things. Tramways, light rail lines and subways that could make sense if construction costs were not astronomical, become infeasible.

As Britain Remade put it, “Brits are less productive as a direct result. Outside of Britain, bigger cities tend to be more productive.”

Cities lose much of what makes them wonderful when people can’t get from A to B. And impossible infrastructure costs make it too hard to get around.

But it gets worse. New Zealand was not included in the report. Late last year, the NZ Infrastructure Commission found the Auckland City Rail Link tunnel would be a “high outlier” in per-kilometre tunnel cost compared to Europe. And it would be among the most expensive 25% of tunnelling projects in North America.

When infrastructure is impossibly expensive to deliver, city councils try hard not to deliver any. They instead set zoning and consenting restrictions to try to stop cities from growing in places where there may be a need for infrastructure.

The result is a sharp appreciation in the value of land zoned for urban use because zoned land is very scarce relative to demand. About 1% of the country is in urban use. There is plenty of room for cities to grow up and out. But cities try to avoid it.

And that brings us to the second depressing paper of the fortnight.

Professor David Card is one of the world’s top economists at finding the stories hidden within statistics.

Card and his co-authors wanted to check the effects of location on earnings. More productive people can be drawn to places that are more productive, that is, where their skills will add the most value. But because they would be more productive wherever they happened to be, teasing out the causal effect of place becomes challenging. The kind of challenge that Card likes to take on.

After a lot of detailed statistical work, one of their findings was that “local housing costs at least fully offset local pay premiums, implying that workers who move to larger Commuting Zones (effectively an urban area) have no higher net-of-housing consumption.”

There’s a lot to unpack there, and none is good.

If land markets work well, a city becoming more productive means wages go up. Higher wages draw in more people. More people need more places to live. So, developers turn paddocks into subdivisions, houses into townhouses, and townhouses into apartments. Increased demand for housing turns into more housing.

In cities constrained by bad zoning, that doesn’t happen. And some of the United States’ most productive cities are as screwed up as New Zealand’s.

If a zoning-constrained city becomes more productive, wages go up. Higher wages attract more people. But there is no more housing. So, the price of land under existing houses, townhouses, and apartments goes up instead, along with rents.

The city’s existing landowners wind up benefiting from improved productivity, instead of the businesses and workers who drive that productivity increase.

Perhaps that’s one reason our political parties seem to have given up on trying to improve productivity. Unless our cities can grow as they need to, it’s almost futile.

We know that land prices aren’t right. The Infrastructure Commission already showed that zoning adds almost $1300 to the price of a square metre of land at Auckland’s boundary. It will push up the price of land across the whole city.

Until that’s fixed, it will be hard for anything else to be right, either.

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