In this blog I want to look more closely at the modelling of
residential development feasibility carried out for the Proposed Auckland
Unitary Plan (PAUP). The concept of development feasibility has been central to
the consideration of the PAUP. As I set out in my blog of 5 August 2016, while
the plan recommended to Auckland Council by the Independent Hearings Panel
provides the physical space for up to 1.5 million dwellings, feasible capacity
is assessed by the panel to be 420,000 dwellings. The 1.5m number was driven by the need
to get to 420,000, not the other way around.
The need to provide capacity for future residential growth
is an important aspect of any plan, and the AUP has taken considerable strides
to open up capacity in the existing urban area. This is a good thing. What I
want to look at is how the plan has estimated capacity and what the implications are for planning practice.
First up, the difference between what can be termed a
theoretical measure of capacity enabled by a plan (in the case of the PAUP, the 1.5m dwellings) and what may be realistic or
feasible has been an issue know to planners for a long time. What is different about the AUP process is the extent to which determination of what is feasible has been
driven by commercial considerations, and the extent to which the feasible
capacity (rather than theoretical capacity) has dominated the deliberations of
the Panel.
To date, planners have tended to focus on the theoretical
figure and used a number of proxies to work out what may be feasible within
that number. That feasible number is then considered in terms of whether there
is enough capacity to meet short to medium terms needs, knowing that what is feasible will change over time and that plans get
modified and updated. Taking a different approach to both issues is
not necessarily wrong, but there are policy implications to consider.
First up is the question of which to look at first: theoretical
or feasible capacity? As I said,
planners have always been taking stabs at what is feasible, rather than just
theoretical, but in doing so they have always had an eye on the theoretical
number as the starting point. Why is that? Well the Council's 2013 Capacity For
Growth Study makes the following point[1]:
"It is critical
that we understand the maximum number of dwellings that the plan has enabled in
various areas, because although it is highly unlikely that all of these
opportunities will be taken up, it is probable that at least some could be. It
is important to be able to accurately capture the degree of maximum theoretical
change the plan enables as a best (or worst) case scenario to determine what
the maximum level of change that the plan allows is, based on the existing
level of development, current cadastre and generally compliant future
development".
What are the risks of not estimating theoretical capacity? The Council report doesn't say exactly, but I
guess they could be infrastructure-related or possibly in terms of potential
cumulative changes to the amenity and character of an area. If you are an infrastructure provider - like
the Ministry of Education thinking about future schools - which number do you
plan for in a specific area: the much bigger theoretical number or the smaller
'feasible' number? If you are trying to communicate to a community what is
likely to happen to their area in the future, which picture do you paint: the
theoretical or the feasible? The community will probably go straight to the
theoretical maximum figure and say that is what should be planned for in terms
of transport, open space and the like.
Are these big risks? If there is a big difference between
the plan enabled number and the feasible number, perhaps. If the numbers are
not too dissimilar then it is not such a worry. Equally, if growth is lumpy and
concentrated in some areas more so than others, then yes, there may be issues
focusing on one set of numbers and not the other.
The counter point is that too much of a focus on the
theoretical situation means that actual feasible capacity may be insufficient
to meet housing demands and as a result ramp up land and house prices. As we
are constantly being told these days, there needs to be lots of feasible
capacity for the housing market to operate efficiently. So don't focus on the theoretical figure.
In the past, planners ran off some rules of thumb as to the
difference between theoretical and feasible capacity. I can remember in the early
1990s estimating for the former North Shore City Council area that about a
third of the plan enabled capacity figure was realistic and likely, while
another third may be feasible in the longer term, but the final third was never likely to
happen. This was based on a survey of people's intentions to redevelop their
sites. In coming to a picture of the theoretical capacity, we had already discounted
(based on a sample survey) residential properties where we considered physical
constraints precluded redevelopment. So the estimate at that time of feasible
capacity was based on people's intentions and a stab at immovable constraints.
I judged that so long as there was 5 to
7 years supply of feasible capacity relative to demand, then there was
sufficient buffer in the system, and there was time to do the forward planning
needed to identify and rezone more land over that time to provide for growth 7
to 15 years out. The 2006 Auckland Regional Council Capacity for Growth Study
did something much the same. Plan enabled residential capacity was estimated to
be around 216,000 dwellings. A modified assessment to take into account
feasibility issues reduced that number by 30%. That adjusted number was judged
sufficient to cater for about 15 to 20 years growth.
Up to the mid 2000s, this approach to estimating capacity seemed to work Ok. Since
the late-2000s, house prices have accelerated and the question of whether there
is sufficient feasible supply has become a core issue. Whether house price rises have been driven by
a shortage of capacity (rather than a shortage of housing) is something to come
back to.
The focus on house prices and the need for 'buildable' development capacity has
brought forward the idea of commercial (or financial) feasibility of
development as the way to determine what may be realistically built, rather
than some form of consideration of
physical constraints or people's intentions.
The approach to feasible capacity based on a 'commercial'
model of development is a relatively new approach in NZ. It is a principle set
out in the draft National Policy Statement on Urban Development Capacity recently
put out by the Minister for the Environment. It is a strong feature of the UK
planning system post changes to their National Policy Framework.
What is it? The Panel's Overview report[2] says
that "feasible enabled residential capacity means the total quantum of
development that appears commercially feasible to supply, given the
opportunities enabled by the recommended Unitary Plan, current costs to
undertake development, and current prices for dwellings. The modelling of this
capacity at this stage is not capable of identifying the likely timing of
supply".
The report to the Panel from the relevant expert group does
note that all versions of the model used to estimate feasible development
capacity (the ACDC Model) "are not a forecast of development – they are a
measurement, based on a snapshot in time of the opportunities for commercially
feasible development given ‘today's’ costs, prices and planning frameworks".
Is it a realistic means of estimating the capacity needed? Here
you have got to say that the IHP and associated experts have taken the concept
much further than others are prepared to go. As I mentioned, the concept of
development feasibility is part of the UK planning system and so a range of reports and guidelines have been
developed in the UK as to how to assess feasibility on a site-by-site basis. They all
basically follow the same methodology.
Sale prices for new dwellings to be constructed are estimated, costs of
building them are then deducted along with fees and charges, allowance for financing
costs and profit for developer; and in the UK at least, the costs of any planning obligations. The residual (expected return less costs) is
what can be spent buying the development site. If sales less costs means a
residual greater than current value of the development site, then the development is
feasible. But if sales less costs result in a residual less than current site values,
then the development is infeasible.
But can you apply this methodology across space and time? The Royal Institute of Chartered Surveyors (RICs)
state that area-wide feasibility testing over a medium to long term time frame
is not reliable or possible at present (see for example: RICS April 2015, Financial Viability
Appraisal in Planning Decisions: Theory and Practice).
The Auckland capacity model (ACDC) uses site
level rating valuation data in relation to costs of purchase of development sites, but as
we know mass appraisal data is not market value (but where else do you start?).
And what about costs over time? Has the ACDC model been calibrated? Has it been
applied to two known points in time, such as rating data from 2011 and the
results compared to what actually got built up to 2015?
RICs go on to note a number of issues with standard development
feasibility testing at a site-by-site level, not the least of which is how you
address land values. Land values should always be hovering around the point of development in-feasibility. Under the ACDC model used by the IHP (as far as I can tell),
land values are static. But wont land values rise once the new zonings are in
place? It is easy to estimate the increase in the number
of units that may be built on a site and say that sale values will be x rather
than y, and as the result the residual increases. Landowners are not dumb
and over time land values will adjust to the new normal.
In short I'm pretty suspicious of the feasible development model
because of these issues. My prediction is that in 5 years time, a re-run of the
ACDC model will show that feasible development capacity with the zonings and
development envelopes of the AUP in place is much less than that estimated by the
current modelling round. This is because of land values adjusting (let alone cost
information changing). There will be renewed calls to expand capacity and that house prices are rising due to constricted supply.
However I accept the point that some form of estimate of
feasible capacity is needed. I'm just not convinced that the ACDC model is the
right way to go. At the end of the day what seems to be needed is a competitive
land and development market, with more willing sellers of land ready for
redevelopment than buyers. Isn't that what we need to aim for? Using the
commercial feasibility approach to increase the pool of available development
sites is one way to go about it, but it is a complex way. The other way is to develop some form of
heuristic that gets close enough. For example, the various runs of the ACDC
model seem to be consistent at around 15 to 20% of theoretical development being feasible. So in other words, if needed feasible capacity is 100 dwellings, then theoretical capacity needs to be 500. The
other way to crack it might be to say that to enable a competitive market, for
every development needed, there needs to 3 to 5 sites to choose from, or
something similar.
Does it matter at the end of the day? Well the question I
posed in my 11 August 2016 blog was whether in getting to the 420,000 figure,
the AUP panel has overlooked some more practical issues of where the feasible
capacity is located. Added to that is the price of the dwellings needed to
justify the redevelopment anticipated. Here the ACDC model and consideration of commercial
feasibility is a bit more useful. As an example, below is a table and graph
which compares feasible development capacity, as estimated by the ACDC model for
the Council planner's evidence to the Panel and what the Panel has recommended.
This is for business and residential zones. I have grouped the data into the
four sub regions I used in 11 August blog.
Table 1: Feasible development capacity estimate (dwellings)
Urban Sector
|
Council's
plan
|
IHP's plan
|
Difference
|
North
|
36,800
|
71,878
|
35,078
|
West
|
36,200
|
24,109
|
-12,091
|
Central
|
41,800
|
81,636
|
39,836
|
South
|
60,400
|
52,710
|
-7690
|
Total
|
175,200
|
230,333
|
55,133
|
Figure 1: Feasible development capacity
So feasible capacity, while growing overall between the two
versions of the plans, increased in some areas but reduced in others. The
reduction in feasible capacity between the two plans in the west and south seem
odd. You would think it would be helpful to increase capacity in the west and
south, given the affordability profile of these areas. Of course the results may
be a contrivance of the ACDC model assuming that the capacity in the west or
south requires more expensive forms of housing (e.g. apartments) which are less
likely to sell, when in fact the capacity available will be taken up by less
intensive (and cheaper) forms of housing like town houses, terraces and infill
units. Is the increase in capacity in the north sensible, given transport constraints and limited employment opportunities?
In terms of the sales values of the resulting houses needed
to make the redevelopment feasible, Figure 2 below is from the data in the
Panel's report and similar data in Council's evidence.
Figure 2: Estimated sale price of feasible dwellings ($1,000s)
While probably needing to be taken with a grain of salt given the above reservations, the
data suggests that the feasible capacity is heavily dependent upon higher
priced dwellings being built and sold. A number of folk have pointed out the
miss-match with household income profiles for the region. One response is that
the houses actually built will be smaller than that estimated, or
alternatively, there will be fewer houses. A steep drop in house prices and
land values would alter the calculations. But is that likely to happen?
So after all that, is the feasible development capacity enabled by the plan really 'feasible'?
[1]
Capacity for Growth Study 2013: Methodology and Assumptions, page 50. Auckland
Council. Retrieved from: http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/reports/technicalpublications/Documents/tr2014009capacityforgrowthstudy2013paupmethodolgyandassumptionspart1.pdf
[2]
Page 49.
http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/plansstrategies/unitaryplan/Documents/ihprecommendations/ihpoverviewofrecommendations.pdf
