Under a competitive market, in theory at least, companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum.
As the theory goes, what is going to drive down house prices over time is more competitive land markets. House prices should reflect the cost of constructing the house, financing and profit margins for the developer and the land value. The costs of construction are known, and industry practice sets parameters around financing and profit. The wild card is land values.
Presently, land values are said to be out of whack. Land values for urban activities should not be more than competing uses, after accounting for any 'improvements'. In a greenfields situation, raw urban land values should not be much more than the value of the land for farming, for example. There will always be value added to urban land through infrastructure, earthworks, road links and the like. But if these costs are set aside, then the raw land value shouldn't be much more than what another farmer may pay for the land. If the raw value of urban land is much higher, then lots of farmers should be motivated to sell to a developer, and so prices should drop back to be closer to alternative use value through competition.
In a brownfields situation, alternative uses are a bit more complex to work out, as density can vary considerably, and there may be alternative uses such as for industry or retail. But the same idea holds true - if one piece of land is too expensive, then there should be the ability to look elsewhere.
Planning interrupts this process of competition. By zoning some land for housing and related urban activities, but not other land, it concentrates purchase options into smaller areas. Landowners in these areas get handed a 'free gift'. By being more flexible about how cities grow out and up, then there should be more competition and hence less ability to mark up land values.
Having enough capacity is a back door way of trying to create more competition. Lots of capacity should equal lots of development options, which should mean lots of competition between landowners to sell to a developer. Perhaps the draft urban development capacity National Policy Statement talks about 'capacity' rather than competitive land markets because capacity is the language of planning. Maybe capacity is a softer sounding word than competition. Competition implies winners and losers. It can mean mass production and limited quality, all things that home owners get worried about when looking after their prime investment.
But the concept of competitive land markets is much more than about lots of development options. So should the NPS spell out what needs to happen to foster a more competitive land market, rather than just capacity?
The list of things that make a competitive market seem to change, but a typical list might be:
· there are many
buyers and sellers;
· consumers have
many substitutes if the good or service they wish to buy becomes too expensive
or its quality begins to fall short;
· new firms can
easily enter the market, generating additional competition;
· there is good
information and buyers and sellers have equal access to this information;
· there are no
unpriced externalities;
· transaction costs
are low.
On all the above points, land markets face some issues and difficulties:
· there are not always many sellers, and when there are
sellers, they are often in a position of some strength. Cities tend to grow
along logical corridors due to infrastructure and natural features, even if
planning didn't exist;
· land isn’t
exchangeable —one piece of land isn’t necessarily easily exchangeable for land
elsewhere, and so favoured land will always demand a premium;
· costs of entry
into the development market (ie setting up a new development company) steadily
get higher and higher due to the complexity of the subdivision and development
process, need for access to finance, skills and resources and so on;
· local
externalities abound;
· information is
often not equally held. It is actually quite hard to work out what the real value
of a piece of land is. Each parcel of urban land is a little bit different than
any other parcel, which means urban land can always sustain a mark-up of price
over cost;
· transaction costs
are high – often sites need to be aggregated or access gained to network
infrastructure across neighbouring sites. Holdout bargaining drives up the cost of land for development.
· landowners
· developers
· financiers
· infrastructure
providers
· buyers.
These imperfections can combine so that there is a 'first mover disadvantage' to much urban development, while change can get heavily concentrated in some areas only, to the detriment of others.
The question then becomes, how do we address these imperfections? Here the debate quickly turns to how planning gets in the way of more competitive markets. To date, the emphasis has been on speeding up planning (Special Housing Areas, specific plan preparation processes like Auckland and Christchurch). Increasingly the debate is shifting from faster planning to less planning. Moves to enable competitive processes by speedier planning at least implicitly recognised the value of planning. But speedier planning doesn't seem to have lead to more competitive markets.
The current tenor of debate is that 'less' planning is needed to create more competitive markets. Planning constrains supply, which constrains competition. So less planning is needed. In simple terms, if a developer cant find a willing seller (ie willing landowner) in one area, then they should be able to go to another area to find a seller. In simple terms this may mean:
· in a greenfields
situation, the developer can go to an area where there is less incentive for
hold outs, for example leap frogging existing future development areas to a
true 'greenfields’ site
· in brownfields,
being able to range across the urban area and not be constrained by density or
height controls.
But is it just planning that constrains choices? What about topography and bulk infrastructure networks. What happens when they concentrate development in some areas but not others?
The alternative view is that the urban land market needs a degree of structure to them that is not needed in other markets, because of the prevalent imperfections listed above. The Royal Town Planning Institute Report "Delivering the Value of Planning[1]" has some really good points on the role of planning in shaping markets.
Good planning helps to 'de-risk' development by:
·
providing some
certainty to buyers over what may happen in the surrounding area;
·
giving confidence
to lenders over the degree of competition that a development may face;
·
managing
externalities;
·
helping to
co-ordinate infrastructure; and
·
reducing transaction
costs by providing a mechanism to resolve disputes between parties as to how to
use resources (public and private).
In this light, planning helps to stimulate
development. Perhaps more development than if there was less planning and more
'open competition', especially over the longer term. In this view, planning is
not just about dealing with negative externalities, or even correcting market
failure; it is more about shaping and enabling markets. In other words, it is
much more positive. But it is a fine balance. Planning can also generate monopolistic type environments if development opportunities get concentrated in some areas, leading to 'rent seeking behaviour', while a degree of certainty and order provides fertile ground for speculative behaviour. It is these downsides that the call for less planning seeks to address. But are there better ways to manage these issues than just say: 'less must be better'?
Certainly in other areas of the economy, the government tolerates less competitive, oligopoly type arrangements, but with controls over pricing and market reach. These arrangements are tolerated because in a small country there may be only room for a few players to operate effectively. Better a few bigger, more stable, but regulated players than lots of comings and goings of smaller players?
So what to do?
1. Capacity and competition are important concepts to
take into account in growth planning
2. But so too is some structure and certainty
3. Where natural features and/or bulk infrastructure networks naturally concentrate growth, by being directive planning can help to make more effective use of the
land available, to support the longer term growth and development of these areas
4. When planning concentrates growth for good reasons,
then the 'side' effects of reduced competition also need to be taken into
account
5. In both cases of concentration, there may be good
reason to manage the consequential effects of reduced competition. The benefits
of reduced competition tend to flow into land values, and so there is a basis
to look at how some of that value can be captured for public benefit and to off-set the higher costs. Planning
can do that also.
[1]
http://www.rtpi.org.uk/media/1915891/rtpi_delivering_the_value_of_planning_full_report_august_2016.pdf
