New Zealand was attractive to colonise because immigrants could pick up gold nuggets in Otago rivers, and fertile harbourside land for a song from easily tricked Maori. The gold ran out long ago and they’re not making more, but changing land use patterns (urbanisation) and commodity opportunities (frozen lamb and now diary products) have continued to stimulate the property market. However, the true costs of New Zealand land development, and who should pay for them, remain largely hidden and therefore politically tolerated.
These costs include:
- infrastructure (roads, pipes, cables not paid for by development);
- unproductive economic overheads costs (high energy and fuel costs of transportation due to inefficiencies of distance, low density and location);
- finance industry imposts (interest, bank service charges, high risk loan practices);
- natural environment losses (long term pollution, permitted discharges to water, waste disposal to land).
Some of these costs are being paid, but often not by those incurring them. For example infrastructure costs are heavily subsidised by tax and rate payers (state highways, waste water treatment plants). Energy costs for transportation (people going to work, freight costs in manufacture and bringing products to market), are generally met by those requiring transportation services, but those costs impose an unproductive burden, reduce business margins, and generally impede efficient economic development. Finance industry costs are also met by those needing loans and banking services, and the consequences of the global property loan industry collapse are being born by almost everybody, while insiders escape early with their golden parachutes.
However environmental costs are not being met. What value is placed on the loss of streams and rivers due to excess water abstraction for agriculture? Who will pay to restore lakes that will suffer for decades from accumulated nitrate and agricultural chemical inflows? How will urbanised clifftop and developed seaside properties be managed from cumulative erosion effects.
After World War II, Auckland developed along the lines of the American Dream. In the 1950’s that dream looked very attractive: own your own home; big section; a nice car; cheap petrol; and great roads to get to work. Now that development pattern looks increasingly expensive and economically inefficient in the long term, but it’s still wildly attractive to land speculators, lured by the profits.
When to Intervene?
The alternative to a totally free market is some sort of regulation, formal planning, or public intervention. However there is rarely a neat separation between public and private. Increasingly interest groups are seeking public-private-partnerships. For example, Auckland’s Wynyard Quarter Waterfront development is a public-private partnership. The private sector plays a big part in delivering Auckland’s public transport services.
I think it would be rational to ensure infrastructure costs were met through fair capital gains taxes on land value increases (levied only on increases that arise through rezoning and because of publicly provided infrastructure – any value uplift arising directly through the efforts and investments of landowners would not be subject to such a tax.) There are precedents for this. For example Wellington was built and shaped by a tax like this established by Government in the 1920’s.
The extent of market failure in finance markets is in dispute. The current public suspicion with banks, lenders and loan sharks means this market is at rock bottom right now. But memories are short and the money lenders will be endlessly creative in establishing new opportunities for making money from money. It's not all bad - good productive business relies upon investment and investors. Who will make that call? Leave it to the market? I don't think so.
The link between the end of cheap energy and the finance crisis
But the really interesting question is what to do, how to intervene, in respect to land development markets, recognising that the era of cheap transport energy is coming to an end, along with the ideal of the American Dream.
Some doubt this. So here are a couple of useful graphs I found on the internet prepared by the Netherlands Bureau for Economic Policy Analysis. The first one shows what we all know. The change in crude oil prices.
Some analysts did predict a sharp fall in crude oil prices when supply became constrained. They point to the cost of coal and wood fuel now, compared to its relative cost when those fuels were the fuel of choice. The supply/demand/price pattern was that prices increased sharply as supply failed to meet demand - until the point when substitute fuels were found and adopted. Coal was the fuel of choice for industrial Britain, until it was replaced with electricity and other fuels. Coal was replaced for transportation fuel by oil. This graph doesn't really show anything new. Crude oil prices will likely go up again, but then they will fall because the market doesn't like uncertainty and being held to ransom.
We are in a period of post fossil fuel adjustment.
These next two graphs show changes in the US housing market.
There have been other periods in history when house prices have fallen sharply. This graph shows that houses prices began to fall sharply in the USA well before the finance crisis hit. The timing is more aligned with the steady and relentless increase in the price of fossil fuel.
The reasons for this must include growing public awareness of the transport component cost of living. The further your house is from the things you need: work, school, shops - the more you have to pay out of your pocket to live. Suddenly your housing choice affects the amount of discretionary income you have for other things. The home loan and transport costs have to be paid for - everything else has to be covered from what is left inthe wallet. I am aware that there are households in South Auckland where 40% of the household income is spent on transport: big cars, big families, located big distances (inefficient distances) from work and school. These costs are not covered by the developer of these distant American Dream sub-divisions. But the economy eventually pays.
This graph better shows the consequence of the combination of financial/property crisis and the end of cheap fuel. Fear, uncertainty and doubt has struck the property market. Again, these two graphs don't really tell us anything we don't already know. Property prices have fallen, and the land development/speculation industry has collapsed. A consequence of financial uncertainty and out and out profiteering and gaming by mortgage lenders - with Lehmans running with a ratio of 35:1 between the book price of its financial instruments and "true" assets. It was a house of cards - built on the presumption that the American Dream was infinitely expandable.
It is not. And it is not in Auckland. Policy settings need to be changed to incentivise the market and encourage the private sector to develop with the long term to the fore - not an after-thought.