The incapacity of development capacity

Dr Eric Crampton
NZ Herald
8 February, 2024

The way New Zealand’s councils decide whether they have zoned sufficient land for development makes it hard to zone sufficient land for development.

The problem is not any specific analysis. The problem  is the method itself. Or, at least, the absence of ongoing sanity checks on the figures.

The National Policy Statement on Urban Development requires larger councils to provide “at least sufficient development capacity to meet expected demand for housing and for business land over the short term, medium term, and long term.”

It sounds excellent in principle. But consider how that requirement is met.

Councils must evaluate the extent of commercially feasible development enabled by district plans and compare it to their projected demand for housing. Larger councils are required to provide zoned capacity of 20% above expected demand so sites have to compete somewhat for developers’ attention.

And council planning processes have pressures that lead toward providing no more than that small margin.

Consider the Independent Hearings Panel’s review of the Proposed Wellington City Plan.

Wellington Council commissioned expert evidence concluding that Wellington only needed to enable about 36,000 more dwellings between now and 2051 to provide the necessary margin over demand. The proposed plan, in the expert’s assessment, enabled approximately 50,000 more dwellings – more than is required.

The Panel subsequently recommended reducing the number of dwellings allowed in the district plan.

There are a few obvious problems.

Consider a simple analogy. Suppose a room has eight chairs for ten people. The chair shortage means two borer-ridden, rotting chairs seat two people rather than one.

If planners projected five more people would enter the room, allowing developers to build no more than six more chairs would be consistent with regulatory requirements.

But building six chairs would still leave us with only 14 chairs for 15 people.

The rotting chairs would not face much competition from new developments. Every chair, no matter how decrepit, finds a tenant in a shortage.

And fewer people might want to enter the room at all if everyone knows there are far too few chairs in play.

In short, it’s a backward kind of way of setting urban plans. Forecasts of demand are not only highly uncertain, they also depend on housing affordability.

If you start with overcrowded, poor-quality housing, you will have a hard time fixing it. And if the resulting unaffordability discourages people from moving here while encouraging young families to flee, projected demand is the wrong measure entirely.

None of it faces a simple sanity check. Land prices can quickly show whether councils have zoned sufficient land for development.

Last year, the Infrastructure Commission compared the 2021 price of land just outside of city limits to the price of land just inside the boundary. They accounted for the cost of turning rural land into urban land, like earthworks, surveying, planning, and development contributions. And they found that urban zoning quadruples the price of land inside Auckland and Tauranga’s boundaries, while more than tripling land value in Wellington, Hamilton, and Queenstown.

Those ratios had increased substantially since 2010.

Since the Commission’s work accounted for land development costs, the price multiples at the boundary largely reflects scarcity caused by zoning.

If it were legal to turn rural land around Wellington, like in Ōhāriu, into housing, land zoned for housing in Wellington would not cost $490 per square meter more than land just outside the boundary. As the typical Wellington section is about 600 square meters, the Commission’s figures mean zoning at the boundary added almost $300,000 to a Wellington section’s price in 2021.

This simply would not happen if Council had really zoned enough land for development.

But the problem is not just at rural-urban boundaries. It will also be at every other zoning boundary where zoning creates scarcity.

If land zoned for taller buildings is worth a lot more than comparable nearby land without that right, council has not zoned sufficient land for taller buildings. If land zoned for mixed use, like retail and grocery stores under apartments, enjoys a price premium, then council should consider more mixed-use zoning.

In 2015 work commissioned by the Ministry for the Environment, NZIER’s Kirdan Lees suggested using these kinds of price measures as a sense-check on council zoning decisions. If a council has really zoned enough land for different uses, there will not be sharp price differences at zoning boundaries – all else equal.

And easing zoning constraints in response to price changes can make more sense than trying to project the next twenty or thirty years’ of demand for housing.

The problem is bigger than Wellington’s district plan process.

The National-led government will let councils opt out of existing Medium Density Residential Standards requiring councils to allow building up to three homes of up to three storeys on residential lots. Councils opting out would be required to immediately zone sufficient land for thirty years of development. 

But if the council’s projections underestimated demand, overestimated the amount of development enabled by the district plan, or both, housing affordability would suffer.

Even if the forecasts were right today, demand can change over time. And the number of people and businesses that want to move to a city will depend on its affordability relative to other options.

If a council claimed a small increase in zoned land would meet expected demand, because prices were so high that few would want to move there, they could well be correct. But it would not be the outcome the government wants. Price changes could, and should, trigger reassessment and release of more zoned land.

Planning overall should rely less on city planners’ forecasts and more on the signals that land prices send about whether land for housing is scarce. And even more when those forecasts let councils avoid zoning enough land for development.

Wellington Council should ignore the IHP’s recommendations and set a more enabling district plan. And central government should take the warning about relying heavily on these kinds of forecasts.

Dr Eric Crampton is Chief Economist with The New Zealand Initiative

To read the article in the NZ Herald website, click here.

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