More on competitive markets, housing supply and planning.

A couple of blogs back (The search for competitive land markets) I looked at competitive land markets. For house prices and affordability, while important, a competitive land market is probably a second order issue to a more responsive building industry. Land is a component in building houses, but far from the only one. More expensive land does not necessarily mean more expensive houses, it could translate into less land area per dwelling to help retain price relativity.

The bigger question is why is the building industry is so apparently unresponsive to the increase in house prices, particularly in Auckland.  The very high house prices must reflect a lack of supply. But look at the following graph.

Figure 1: House sales, residential building permits and value of housing stock, NZ.

The graph above tracks three aspects of the NZ housing market, from 1990 to 2016:

1. The total value of NZ’s housing stock as calculated by the Reserve Bank

2. The number of residential units authorised by building consents

3. The number of residential house sales.

To ease comparison, the numbers have been translated into an index with 1990 being 100.  I can’t find the same figures for just the Auckland Region.

The value of the national housing stock has increased eightfold over the period 1990 to 2016. The number of dwellings sold and the number of permits issued each year for new units has barely budged. What is interesting is how closely the number of permits issued tracks the number of house sales, rather than the value of the housing stock.

The graph typically prompts the question:

Why has the number of building permits not responded to the price signal generated by the ever inflating value of the housing stock? There must be a blockage.

A deficit of housing is necessary to explain the increase in house prices (demand exceeds supply). Supply-side economics (the current vogue) always looks for blockages to explain things.

The alternative question of whether the growth in the value of the housing stock reflects the accumulation of excess capital is less often asked.  But let’s come back to that.

First up, is poor planning (i.e. the lack of zoned land or development opportunities) holding back the response of the building industry? The above figures are national figures, if we just look at the Auckland Region, then since 2011, when the Region began to come out of the GFC, building permits issued have increased, as follows:

June Year	Building consents for new dwelling units
2011	3,394
2012	4,197
2013	5,343
2014	6,873
2015	8,300
2016	9,651

The Minister of Housing usually attributes this increase to the Special Housing Areas identified across the city since 2013. These SHAs have opened up land previously locked up in the planning filing cabinet.

However when you read the SHA monitoring reports, such as the latest one -  Second Quarterly Report for Third Accord Year October 2015 to September 2016 - a different picture emerges. Most of the above consents are issued outside of SHAs. So it is the day-to-day zonings of the legacy operative plans that are in place that is providing the capacity. Not the zonings under the Proposed Unitary Plan (which is only just kicking in), or the SHAs.

The following is in the October 2016 Monitoring Report (page 28):

In Accord Year 1 to 30 September 2014, 429 new residential dwellings were consented in special housing areas. In Accord Year 2 to 30 September 2015, a further 797 dwellings were consented bringing total dwellings consented in SHAs since the start of the Accord to 1,226. The first half of Accord Year 3 has seen a further 524 new dwellings consented in SHAs to 31 March 2016, bringing the total to 1,750 dwellings. (Source RIMU, Auckland Council). This is over 8% of all dwellings consented in Auckland over the 3 year period. In the first half of Accord Year 3 the 524 dwellings consented in SHAs was 11% of 4,799 total dwellings consented in that period.

So over the 3 years 2013 to 2016, 8% of new dwelling permits issued were in SHAs. That means 92% were not. The 8% may be an important addition, but it is hard to see a lack of operative zonings being the main constraint on delivery of houses, given the numbers now being issued.

But when the number of building consents are compared to the population growth, then the number of consents are lagging behind. If we use a simple approach of comparing population growth, housing demand and housing supply for two three year blocks from 2010 to 2013, then the following is calculated:

Period	Population  growth (estimate)	Dwelling demand @3 people per dwelling	Number of building consents issued for new dwellings	Deficit
2010-13	53,600	17,867	12,934	-4,933
2013-16	121,200	40,400	24,824	-15,576

This is a standard type analysis of the housing ‘deficit’. If you go back further, the deficit increases. During the period 2008 to 2010, there was a big decrease in building. But that was the GFC, not lack of zoning.

So how to explain this deficit? Maybe what is zoned for development is expensive and difficult to develop, so less housing than needed is developed. There is some truth in that, as the stock of development enabled by plans developed in the 1990s steadily gets eroded, but the SHA monitoring report data hardly backs that up as being the main reason for a deficit.  

So if zoned capacity is not holding things back, then what else is going on?

One explanation is that:

1. In the short run, housing supply tends to be very price inelastic;
2. The development market is a market prone to sentiment;  
3. Housing development is risky, lengthy, and an increasingly debt financed business.

These ‘soft’ factors affecting the responsiveness of the building industry are rarely considered, I presume in part because (like most markets), the industry is not necessarily totally responsive to price signals, which suggests some issues with regard to demand/supply relationships.

Getting back to the ‘deficit’, if we assume that building consents lag population growth by a year or so (it takes time to get plans ready and get them approved by council, more hammer hands have to found. Tried getting a plumber recently?) then the deficit comes down. That is, lets assume the number of consents issued for the 2010-13 demand is based on the numbers issued in 2011 to 2014. Likewise for the period 2014 to 2016, plus a guess for 2017. If we assume that between June 2016 and June 2017, 10,000 building permits will be issued (easily anticipated in the above trends on building permits issued), then the following figures can be generated:

	Pop growth estimate (June Years)	Dwelling demand @ 3 people per dwelling	Number of consents issued (1 year lag)	Deficit
2010-13	53,600	17,867	16,413	-1,454
2013-16	121,200	40,400	27,951	-12,449

So between 2011 to 2014, maybe the housing development market wasn’t so out of step with demand from the period 2010 to 2013. Taking into account the lingering effects of the GFC still being felt in the 2011 building consent figures, it is not a bad result.

But what about 2013-16? Still a deficit. Yes it is, but also population growth was much higher, more than double the previous three year period.

Now let’s look at the issue of sentiment. How certain can developers and builders be sure of the population estimates provided? The population growth is being driven by migration. If migration swings upwards quickly, it can also swing downwards quickly; there is a risk. If you are building 20 or 30 units in a complex, what are you going to assume will happen in 2 or 3 years time when the development is complete? While talk of deficits helps with the idea of a bunch of willing buyers lined up to buy, it still feels a bit risky. Sentiment is probably the reason why building permits so closely track house sales, rather than population growth or growth in the value of housing stock.

If we look at the actual components of population change over the period 2010 to 2016, what is striking is the huge increase in the 15 to 39 year old category between 2013 to 2016. The following are the Stats NZ estimates of population growth in the Auckland Region by age band.

Figure 2: Population growth - Auckland Region, 2010 to 2016

So the housing market had to not only anticipate the doubling in population growth in the period 2013 to 2016, but also the huge increase in the number of 15 to 39 year olds? As the media has been pointing out, much of that growth is related to foreign students and people on temporary work visas. Granted, many of whom do want to stay in NZ, but from the housing market point of view, they are an unknown quantity.  

Now it may be entirely rationale for house builders to say “I'm not too sure about this spike in 15 to 39 year olds.”Will they stay"? ”Once they get residency, will they all take off to Australia?” It seems a bit tough to say that builders and developers will leap to their feet to meet this spike in demand with out first taking some deep breaths.  

If we take a complete stab and say that the demand for housing from this age group (not demand for lodges or other forms of temporary accommodation) is about half the increase estimated, then you get the following picture for 2013 to 2016, again assuming a 1 year lag:

	Pop growth (estimate)	Dwelling demand @3 people per dwelling	Number of building consents issued (1 year lag)	Deficit
2010-13	53,600	17,867	16,413	-1,454
2013-16	121,200	27,500	27,951	+ 451

The 27,500 demand figure for 2013 -16 is based on 121,200, less half of 77,500, divided by 3.

Suddenly there is no deficit, and the housing market could be said to be acting in a rational manner (given its characteristics).

Now I agree that I made some leaps with the above figures, but they are not improbable leaps. Developers also have to make leaps in terms of assessing demand. Financiers are likely to make similar assumptions about the sustainability of demand. Certainly employment growth has been strong in the Region, but not so strong to say that the above population growth figures are ‘real’. Sentiment about the future is as important to the housing market as any other market, more so now that it has a strong investment component to it and that there is a large reliance on bank finance.  

So is there really a deficit (maybe there is a hangover from the GFC, but that is a different story) that is driving house prices?

And yes, before you ask, setting aside the deficit issue, more housing capacity as provided by the Auckland Unitary Plan is a good thing, along with more options for different housing choices, but will it affect house prices?

Geoffrey Meen has written about the factors affecting house prices and affordability. See for example his recent lecture to Sydney University: HOUSING AFFORDABILITY IN AUSTRALIA AND THE UK: COMMON PROBLEMS AND COMMON SOLUTIONS (1).  His main message: “the trickle down effects of a general expansion in housing supply are likely to be modest”. In part this is because the private sector will not run ahead of demand. Housing affordability for the lower ends of the income spectrum will remain a problem. Where have we heard of trickle down effects before?

Finally, back to the graph at the start. If we add in money supply (M3) as measured by the Reserve Bank into the picture, then we get the following graph, but starting from 2001, as that is when the data is available.

Figure 3: Value of housing stock, M3 money supply, house sales and building permits, NZ

M3 is a measure of the total money supply in the economy. Now, is that supply growing in response to the growth on housing value, or is it the other way around? Certainly the growth in house values seen in the last year outside of Auckland suggests that the rise in house values are far from a land supply issue.

Something to think about over the summer break.

1. http://sydney.edu.au/halloran/publications/MEEN_housingAffordability.pdf

Is Urban Design Evidence-Based?

Evidence-based plans. That is the call these days. An interesting issue is how urban design gets tangled up in this call for "evidence” and comes out the other end not very well off when in fact it is evidence-based.

The Independent Hearings Panel that looked at the Auckland Unitary Plan took up the call on evidence-based plans, and good on them. In their overview report they state (1):

“constraints on choices should be based on evidentially-validated thresholds and not on the consent authority’s preferences”.

To make the point clear they repeat it again a bit later on (2) :

“The reasons for objectives, policies and rules must be based on objective evidence rather than anecdotes or subjective considerations”.

But what is objective and what is subjective? One of the curious aspects of their decision relates to urban design and its place in resource management. You get the feeling that the Panel don’t like urban design. For example (3):

Good design is based on principles rather than rules. Mere reference to good design or the listing of preferred design principles is ill-suited to a regulatory framework which imposes binary ‘grant/decline’ outcomes. Discretionary decision-making must be exercised on the basis of relevant and clear objectives, policies and assessment criteria rather than on subjective preferences.

The Panel are not the only ones to hold this view. The Productivity Commission in their draft report on urban planning said something similar (4):

The role and skillset of urban planners needs to be more tightly defined. A more tightly defined role for urban planners would require some elements of the planning profession (notably urban designers and those promoting New Urbanist ideals) to develop:

• a greater understanding of the scope of influence of the planning profession;
• a clearer focus on the evidential basis for decisions; and
• a greater understanding of the responsibilities that come with the use of the coercive powers of the state.

What I find odd about these comments is that my understanding of urban design is that it is grounded in empirical observations of town and cities and how people interact with the spaces and places created. It is far more grounded in observation and reality (evidence if you wish) than much discourse about what is and isn’t good urban planning. The whole debate around zoning, land supply and housing affordability is driven more by theories about what should happen than evidence about what is happening, for example.

The empirical nature of urban design is what attracted me to the topic. You only need to look at the classic texts on urban design like the Death and Life of Great American Cities, Responsive Environments and the works of Jan Gehl to see how important observation is to the basic building blocks of urban design, while much urban planning is normative.

Urban design is grounded in people’s behaviour when in different urban environments – why do some city environments attract people and activity, while others appear to repel people and activity?  It is clear to me that people are very sensitive to the urban environment and small physical changes can lead to big changes in behaviour. This should not be taken as environmental determinism; rather it is an acknowledgement that we live in a complex world where people and businesses have options and choices, and those choices get shaped by the places around them. As Winston Churchill said - "man makes the town, then the town makes the man".

Urban design identifies and creates conditions that help to make places safer, more inclusive and more user-friendly and therefore successful in economic, social and environmental terms, over time. In so doing, it recognises that there are many different user groups that need to be considered, and that their needs and wants do not completely overlap. So for example in the city centre there are workers, business visitors, shoppers, local and out-of-town tourists, residents, educational users, recreational users (walkers, joggers, cyclists), as well as general visitors. Urban design therefore has a strong element of equity running through it - places that enable all people to use them. From equity comes efficiency.

In urban efficiency terms, good urban design assists with the generation of positive externalities that arise when people and businesses are congregated together (agglomeration benefits). It also helps to avoid negative externalities - in a dense urban environment, a poorly designed building that does not relate to adjacent buildings or public spaces can create a deadening effect on these neighbouring places and buildings, fostering crime and reducing amenity, for example. This is a negative cost on others that the poorly designed building does not carry. Urban design address these externalities by applying a design-based approach, rather than rigid standards - surely a good thing.

I often wonder if the dislike of urban design arises from:

1. observations of built environment outcomes suggests that individual actions in relation to how a site is developed (particularly the public-private interface) don’t necessarily add up to a wider benefit - contrary to the cornerstone of economic orthodoxy that pursuit of individual welfare adds up to community welfare, so long as environmental externalities are addressed;
2. You could say that ‘equity’ of access to and use of urban environments is as important to urban design as urban efficiency, so again its swimming against the tide;
3. Urban environments and their inhabitants are incredibly sensitive to small changes. Sometimes, micro management is needed. But micro management is not the flavour of the month.  

Getting back to urban design, I accept that it can be its own worst enemy sometimes. There is no universally accepted definition of urban design, and as a result urban design evidence can often be wide ranging and not comparable. Principles rather than standards and rules are used due to the complexity of the urban environment and our lack of the precise understanding as to the myriad of interactions involved.

Urban design can therefore be perceived to be “subjective”. But that is a easy stone to throw at urban design if you don't like the message.

Often the only recourse to objectivity is to compare and contrast different urban environments; that is to compare the proposed urban environment with an existing environment with similar qualities and to see if the claimed benefits and costs (positive and adverse effects)  are the same or different. This is, of course, not without difficulty, because of the different contexts involved. Principles need to be applied to a place in a considered way.

In terms of the degree of prescription involved in urban design, this flows on from the above point about small changes having ramifications that flow through an urban area (in complex, interconnected systems, small changes can have amplified effects). Cities are complex systems; to manage complex systems, sometimes a few simple rules are needed, in other cases detail is the deciding factor. When you are in a car at 80km per hour, details of the urban environment don't really matter and a few simple rules probably work OK. When you are at the scale of a person walking down a street at 5km per hour detail matters; detail is everything.

Until we are in a position to fully understand the links between the built environment, human behaviour and wider social, economic and environmental outcomes then there will remain a degree of judgement in urban design as to what may or may not make a successful area or precinct. But that doesn't mean we should down play the basic messages of urban design and their empirical foundations.

Footnotes:

1: Page 36, IHP Panel report to AC Overview of recommendations 2016-07-22

2: Page 37, IHP Overview

3: Page 37, IHP Overview
4: Page 328, Productivity Commission Draft Report: Better urban planning