The High Cost of Unreasonable Planning Restrictions
Cities are defined as ‘places where there is an absence of physical space between people’ (Edward Glaeser).
The replacement of the Resource Management Act (RMA) has been announced and new legislation will soon go through parliament. The new Acts are too comprehensive for this paper to give a full overview. But I think it is helpful to understand some of the structural problems that RMA reform is trying to address.
There has been a consensus from the two major political parties in New Zealand that RMA reform is needed. The opposition National Party for instance defended the removal of “red tape” planning restrictions that the Medium Density Residential Standards Act has bought and being “open to sensible changes” so that local councils (like Christchurch City Council) do fully implement the plan changes. Experienced political commentators have indicated because of how near we are to elections that RMA reform is likely to more contested. Hopefully that doesn’t prevent a sensible and effective outcome.
Many planning rules unreasonably interfere with the normal function and purpose of cities. For instance — extremely large minimum plot sizes (especially common in the US), restrictions on building multi-family dwellings, unnecessary low height restrictions, urban growth boundaries, car parking minimums, excessive protection of character, and so on.
Many planning restrictions are for unreasonable reasons, such as, excluding the ‘wrong’ type of person or due to a moral panic about density or overcrowding.
One viewshaft planning restriction that provides a view of the Mt Eden volcano from a 800m section of motorway (where tollbooths used to be located) has made Auckland a ‘City With A Billion Dollar View’, according to a published paper by economist Geoff Cooper. This gives an indication of the high yet largely hidden cost of unreasonable planning rules.
Fortunately the new Natural and Built Environment Act will eliminate this viewshaft planning restriction.
Unreasonable planning rules are those where the benefit to society is less than the cost. For instance, it is hard to believe that the above viewshaft was more beneficial than the one billion dollar opportunity cost of the missing city centre homes and businesses.
It is also unreasonable to use planning rules where there is a better alternative for managing particular externality costs. For example, congested roads and crowded public car parking could be managed by congestion road pricing and car parking metering, rather than by planning rules, such as, requiring private property owners to supply a minimum number of car parking spaces. Japan, for instance, essentially takes the first option of letting — ‘prices do the planning’ — to manage crowded streets.
Unreasonable planning restrictions should be removed across the city. They inflict a huge productivity burden on the economy because in effect they create an entry tax on workers participating in city labour markets.
Unnecessary high house prices in places where there are employment opportunities, such as cities, are like a labour permit system where there is a high permit price on entering the labour market. This ‘permit’ costs workers and business billions if not trillions of dollars — far larger than any other cartel, monopoly or rort in the economy.
Even worse than the productivity costs, excessive housing costs increases inequality. There is a danger that New Zealand society divides into ‘generation rent’ versus the ‘landed gentry’ — whilst a good proportion simply ‘opt-out’. The 2021 and 2022 declines in population in New Zealand cities illustrate the ‘opt-out’ problem. Compensating by loosening immigration settings has in the past ‘papered over the cracks’ but it does not fix the underlying distortions in the economy.
Environmentally there is also large benefits for more permissive planning rules that allow people to live closer to their daily travel destinations and for having alternative travel mode choices. New Zealand’s first emissions reduction plan has a goal of reducing transport climate change emissions by 41 per cent by 2035 from 2019 levels. Its first target (of 4) to achieve this goal is to “reduce total kilometres travelled by the light vehicle fleet by 20 per cent by 2035 through improved urban form and providing better travel options, particularly in our largest cities”.
Unaffordable housing because it restricts labour market mobility is making supply constraints worse. Supply constraints is one of the contributions to the high inflation rate. Yet New Zealand will use inflation targeting monetary policy to get inflation back under control because it is a statutory automatic stabiliser. The Reserve Bank has already started to raise interest rates. And given the stubbornly high inflation expectations interest rates will need to be hiked further. This blunt tool will reduce demand throughout the economy — including in some areas where the effect is not helpful — like residential construction. Ideally supply levers — especially those that improve housing supply responsiveness will also be fully engaged.
If New Zealand doesn’t improve supply levers it could face the same problem it had in the period around the 2007/8 global financial crisis. High interest rates pre GFC (one-year fixed mortgage interest rates peaked at 10% in 2007) were a blunt tool that disproportionately affected the construction sector. This pre GFC situation deteriorated even further post the GFC by financial company failings and a loss of economic confidence. This downturn for the construction industry in total lasted for about a decade (except in Canterbury which had a post earthquake building boom).
New Zealand risks going into another construction downturn as a consequence of recent interest rate hikes. Already large residential developers are experiencing a slowdown in sales and are beginning to lay off staff.
Currently many young workers face an impossible situation accessing affordable housing close to employment. This can be seen in Auckland where a median 25–29 year old household couple purchasing a lower quartile-priced home with a 10% deposit ($82,000) would need to spend 58.9% of their median take home pay on loan repayments. Even if the couple’s savings meant they had a 20% deposit they would be spending 46.1% of their income on the mortgage. “This is not just making buying a home difficult, it is putting it — beyond the reach of people on average wages.”
It shouldn’t be surprising that even though currently New Zealand has a very low unemployment rate and labour market shortages ranging from hospitals with missing nurses to ghost buses without drivers that people are leaving New Zealand cities. The equation of workers income versus cost of living is completely out of balance.
New Zealand doesn’t just have a problem building houses during the downturn part of the economic cycle. It is a long term chronic issue as recent research from the Infrastructure Commission has determined.
Prices now rise more rapidly because housing supply is slower to respond to demand. We estimate that when demand for housing increases, we now build one-quarter to one-third fewer homes than our grandparents did (Infrastructure Commission — Te Waihanga).
In the last few decades New Zealand experienced a switch in housing demand away from car dependent outer suburbs and towards better connected inner-city areas. Research from the Infrastructure Commission shows this is part of a multi-factor jig-saw that contributed to massive hikes in house prices over a period of many decades.
The Commissions explanation starts with the changing nature of city transport.
Auckland’s travel speed increased rapidly between 1950 and 1970 due to investment in replacing urban gravel roads with sealed bitumen roads. Speed slowed to a peak in 1990 before congestion caused a decline in average travel times. Meaning Auckland’s sprawling outer suburbs have longer and more congested journeys.
This caused a change in Aucklanders city location preferences which is not surprising from a urbanism theory perspective. People have daily travel time budgets which they prefer not to exceed. This is called Marchetti’s constant and has been found to be true back into history and across the world.
Another proven urbanism theory — the Downs-Thompson paradox — also helps explain what happened in Auckland. For cities that experience congestion it states that “the equilibrium speed of car traffic on a road network is determined by the average door-to-door speed of equivalent journeys taken by public transport” (or the next best uncongested transport mode alternative)— that people will keep driving until the alternatives are faster (or comparable in time yet more reliable and enjoyable). This video is a good explainer.
In the second half of last century Auckland failed to adapt to the plateauing and then slowing of travel times. It downzoned urban development opportunities and it did not make timely investments into alternative transport modes. These two mistakes meant housing supply was unresponsive which led to excessive house price increases. A 262% increase between 1978 and 2018 rather than a modelled counterfactual outcome of an 80% increase.
If Auckland had not made these urbanism mistakes then according to the Infrastructure Commission house prices could have been 69% lower.
Its research shows that in the long run unresponsive supply has a larger effect on house prices than demand factors, such as, population growth, migration, and income growth. Also probably interest rates, although they note a good long-term data series is lacking for this factor.
Experience should have taught New Zealand the dangers of neglecting urbanism reforms. Hopefully we have learnt this lesson and the new RMA legislation is fully supported so it can be implemented in a sensible and effective manner.