Density the only win-win situation for Auckland

8 July 2016

Increasing the number of dwellings in the city will make housing more affordable without eroding land value. 

Increasing urban density is the most equitable solution to the housing crisis. House prices in Auckland must halve if we are going to get serious about housing affordability. Increasing urban density will do it in the fairest possible way.

Property in Auckland is among the most expensive in the world when compared to what you can earn here. The average house sells at 10 times the average annual household income - more expensive than in London, New York or San Francisco.

To its credit, the Auckland City Council has set itself a target for housing affordability. It wants the average price of a dwelling to be five times the average household income by 2030. That seems reasonable. But at current income levels, that would require house prices to halve. Former Reserve Bank chairman Arthur Grimes agrees, recently calling for a 40 per cent reduction in house prices.

In contrast, the stated policy target of our Government is slower house price inflation. That is not good enough. If house prices do not come down, incomes must at least double to make housing affordable again. That is simply not going to happen anytime soon.

The calculus is inescapable: House prices must halve. That is a difficult reality to come to terms with. And it will be even more difficult to actually achieve.

We often see demand-side policies offered as a solution to the problem, and I think all cards should be kept on the table. But it is clear that these policies would not be enough to cut prices in half.

Banning foreign investment or implementing a proper capital gains tax would not do it. Even a low land tax would not be sufficient: The Tax Working Group estimated that a 1 per cent land tax would bring down values by only 17 per cent. Drastically reducing immigration would not be enough.

It is possible that some combination of these demand-side policies would actually succeed in cutting property prices in half. But such a policy would be quite reckless. It would come at a huge cost to those who have diligently used housing as a savings vehicle. And it would also push the mortgage on many recently purchased homes underwater. That is a terrifying prospect for many families.

Indeed any policy that caused property prices to halve would not be fair to these groups of people. But the status quo is not fair to prospective home-buyers either. The only policy option that is fair to both groups is to increase urban density.

To understand why, first note that there is a distinction between the price of a property and the price of a dwelling. With increased density there will be an increase in new dwellings supplied to the market, putting downward pressure on dwelling prices. But this does not mean that the price of property has to fall.

Property that can be redeveloped under the relaxed density restrictions will retain its value: You can always bulldoze the villa and build two homes that make better use of the available space. That option to redevelop will be capitalised into the value of the property – and could in fact increase property values - provided that the Unitary Plan grants the right to redevelop.

Which brings us to the crux of the issue.

Increasing urban density is the only policy that ensures both current and prospective home owners can win. Any other policy - including the status quo - will punish one of these groups.

There will be other costs that everyone in Auckland will have to bear. More traffic. Upgraded infrastructure. Loss of character neighbourhoods. But with sensible urban planning some of these costs can be mitigated and, more importantly, shared across all the residents of Auckland - not heaped on to the residents of lower socio-economic neighbourhoods.

And to be frank, the time for gripes over traffic and loss of character neighbourhoods is over. Next time you are stuck in rush-hour gridlock, just be thankful that you have a home to get to, and that you won't be spending the night in your car. Auckland desperately needs more housing.

The current version of the Unitary Plan does not go as far as the version that was voted down in February, but it still allows for big increases in urban density.

The Auckland Council will decide next month whether to go ahead with the current version of the plan. The time has come for the council to do what is right. 

Read the published article: NZ Herald

Ryan Greenaway-McGrevy

Dr Ryan Greenaway-McGrevy is a Senior Lecturer in the University of Auckland Business School's Department of Economics, and Director of the School’s Centre for Applied Research in Economics.

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