Below is a good summary of an email discussion about the Housing affordability: Learning from Experience article between some fellow housing affordability colleagues.
I have been a bit busy all day. Glad to read all these contributions.
The dynamics of distorted urban land markets are very complex. We have two distinctly differing outcomes to consider, in history.
One is the “UK” outcome. Chronic under supply, with up-zoning boosting land values and incentivizing owners to “hold”.
The other is the “Spain” outcome. Supply ramping up in the face of continued site value inflation, as if something has induced site owners to sell or develop, rather than “hold”.
I wonder if the difference is that there is a class of speculative buyer of “housing units” who are prepared to pay exorbitant prices, at least temporarily. When there is chronic under supply along with high prices, it is a case of the market “clearing” with few genuine buyers at the high prices, yet the resulting recorded sale prices setting expectations for all site owners.
What factor is it, that makes a class of investors go into a frenzied buy-up of new apartments at exorbitant prices, often even off-the-plan before commencement? And the market tips from chronic under supply, to a classic combined oversupply and price bubble. “Affordability” is achieved after the crash — yet even then, it becomes clear that much of the oversupply was simply the wrong kind of housing anyway. If consents in Auckland are rising, does it indicate an effect like this kicking in?
David suggests it might be that site owners are retaining ownership and the development is for long-term rentals. This is a possibility, which is different, I think, from the Spain frenzy, which involved overseas investors buying the apartments. The same is going on in Melbourne now. It could happen in Auckland.
We will only know this in hindsight, and of course it is completions of housing units, not consents, that matter. The UK has a massive disconnect between consents and completions, as part of their problem.
Donald commented: “…The collapse in housing construction in Auckland mid-2000’s did not cause a price drop, just a collapse in the construction industry…”. Actually I believe the price of housing in real terms, fell 15% over two years. Because this price volatility is all in the land, that means that developers sites probably halved in value, and this is what wiped the industry out, and the finance companies backing them.
Lastly, there has been a fascinating episode in Houston running from around 2013 to 2015. The development sector was being starved of finance (possibly deliberately and maliciously, by Wall Street interests) and there was a quantifiable shortfall of new housing. But the result was a historically abnormal gap opening up between the price of new housing and the price of existing. This implies that land prices remained static in spite of a “shortfall of supply of housing”.
My hunch is that this proves that land prices are all about land supply, and chokes on construction itself, are not as serious as we might be thinking. The mere fact that everyone knows, in Houston, that there is land allowed to be built on, in superabundant quantities, means that no scarcity expectations get built into the price of it, even when there is a bit of a constraint in the ability to build on it at full scale volumes. The scarcity relative to demand, in new houses, is reflected in a windfall premium price for new houses, possibly captured by the builder. It does not seem to be captured by the land vendor.
I believe that Auckland land prices could be brought down, and hence house prices brought down, if there was clear liberalization of land supply. Even if the construction industry was unable to ramp up in its current form. However, you can bet that opportunities of all kinds would be taken up, especially if there is a premium falling to the builders, in the case of new housing.
The ability for families and friends to add houses to lifestyle blocks, would be a partial racket-breaker. Young people could rationally endure a wait while things were coming together for a cheap home — waiting for a builder, waiting for off-grid services to be put in by whoever, waiting for a Canadian pre-fab house to come in, etc. Land owners would be unable to gouge merely because there was going to be a wait for the actual housing to happen.
Data shows that land values in US cities started falling long before the Interstate Highway program and the Levitt Brothers. Just as soon as people could get from town to some primitive rural spot by Model T Ford, the prices of land trended downwards. What the Levitt Brothers actually did, was provide extremely good value-for-money fully serviced housing. Prior to that phenomenon, people were happy to endure all sorts of “off grid” conditions to escape the city land rentiers. A similar phenomenon today, is that in developing countries, illegal slums are sprawling out at reduced density and higher quality because of motor scooter ownership. Absence of formally-provided services and even formal titling, does not prevent “land availability” from bringing the price down.
As in the case of the Model T era in the USA, our existing rural road networks would provide sufficient access.
Of course explicit planning — rights of way in particular — would avoid the negative-externality traps of untrammeled lasses-faire sprawl of this kind.
One would hope that international businesses would see opportunities in doing master-planned communities. I found it massively ironic that the iconic master-planned community of Daybreak, Utah, was done by Australia’s Rio Tinto. Rio Tinto show no interest whatsoever in doing similar value for money developments in Australia itself — of course there is no need due to absence of real competition of the kind that exists in Utah. There, you actually have to attract customers with a combination of amenity, quality, and true value for money. In Australia and other racket-dominated urban land markets, you simply charge what people can stand, for the minimum you can get away with.