Productivity Commission too PC

This post is about housing affordability comparisons. It is a contribution to the discussion following the release of the Productivity Commission's preliminary report on housing affordability in New Zealand.

One of its recommendations is that more land at Auckland's urban edge should be released for urbanisation. A popular rallying call for free market advocates who know the price of commodities, but who ignore values that are hard to put a dollar figure to. That is why - in my view - the report is PC. It is politically correct - it's framed from a narrow viewpoint. From a property developer's point of view. But it is too PC because it does not fairly consider housing affordability from the point of view of the people who actually live their lives in houses.

The report's comparison between Auckland and Brisbane is an example. The analysis appears to concentrate narrowly on the price of land and the price of building a house on the land. A bit like comparing watches made in Korea and Switzerland, by taking them to pieces and counting the screws. The report appears to suggest it is wrong that land in Auckland costs more than land in other parts of New Zealand. Man oh man. What is needed is a broader look at housing affordability, and how that affects the productivity and quality of life of the people who live in that housing.

I make three suggestions in this post: the first is a broader look at what gives land value (which is often reflected in price); the second is a "Cost of Living" approach to comparing housing affordability; the third draws attention to ways of valuing amenity associated with housing location in Auckland.

What gives land value?

What makes land valuable to buyers? There is more than one answer. But “location, location, location” is a big part of it. For example the value of a property which is adjacent to property with a conservation easement (like a park) usually rises owing to the adjoining restrictions on development. Big cities have lots of parks. Devonport, where I live, has lots of little parks and reserves. Lots of private properties adjoin those parks. Paid for by ratepayer dollars over a hundred years or so. And reflected today in the value of those private properties.

Most buyers value assets on the land that are tangible keepers – like a useable house, well-maintained fences, garaging, other outhouses like a garden shed and swimming pool. But most properties in New Zealand have these things. That's what is common across New Zealand. But not all urban landscapes are as blessed with parks and reserves and heritage churches as Auckland and Wellington. So. Right there we have a good reason for land to be valued differently when it is part of existing urban development, and benefits from accumulating community assets and values.

Infrastructure in place — roads, footpaths, cycle-lanes, street trees, walks, bus shelters, wharves, ferry services, water, sewerage (that does not leak), phone, electricity, high-speed internet, cell service and so on — all have more monetary value than it’s usually accorded. When infrastructure is done conscientiously and comprehensively in an urban environment, it makes everything else easier, and it makes life sweet. And it shows in the land value. People and communities value living in established pieces of city blessed by effective and beautiful public infrastructure, built up and paid for since subdivision. And it means that people are prepared to pay more to live in or near those places. This should not be rocket science.

Calmness on a property’s periphery and in the general vicinity is worth paying for. Sellers rarely disclose nuisance, trespass and annoyance, which are often not obvious to a visiting buyer. But peace and quiet is worth a lot over time, though it may not be monetized by either seller or buyer. Communities work hard to build reputations for being good, cohesive, friendly, cooperative, supportive - and all those things. It has a value. People are prepared to pay more to live and bring up their children in places like that.

Social infrastructure that fosters those sorts of communities is also built up over time by public money, and by non-government organisations like churches and Rotary. Infrastructure like bowling clubs, tennis clubs, community halls, and local theatre. Schools flourish in urban areas where they have the support of local community groups and families. All of this adds value to land, and to the lives of those who live upon that land.

I see none of these matters given due attention in the Productivity Commission's narrow little economic treatise.

Cost of Living

We can probably learn something from the Commission's examination of the building industry itself. It is of interest to understand why it costs more to build the same house in Auckland, compared with Brisbane. However the cost of housing, or the affordability of housing, is about rather more than just the sum of the price of land and the price of a house.

Transportation costs are directly related to where you live, because where you live determines how far you are away from the things, services and amenities you need. Where you live also determines the property taxes and other taxes you must pay for the services you use. The costs of services you use are partly determined by how far you are away from the source of those services (be it a power station, a reservoir, a waste water treatment plant....). There are a number of useful websites that offer cost of living comparisons between cities.

Numbeo is one of those. It relies on data sourced from people living in cities. The image is from the site and indicates some of the media that have used comparisons from Numbeo in their reports and articles.

I used it to compare Cost of Living between Auckland and Brisbane. The data are presented in Euro.

This is the overall result produced. You see this for yourself here. This graphic contains some of the supporting data. You will note that the left hand column is Brisbane, while RHS is Auckland. I suggest you click this image to see it bigger.

The key thing is that this information appears to contradict the bald numbers that are contained in the Productivity Commission report which suggest that housing is cheaper (more affordable) in Brisbane, compared with Auckland. Auckland Housing Location Value Analysis

I came across an interesting paper last year, when I was preparing a presentation for a conference on housing affordability. It's worth sharing...

There has been increasing interest and research into house prices in New Zealand. Recent work has focused on the movements in market prices for houses, for land, and for house construction costs especially as these price movements affect consumer inflation, and housing affordability. To date the work released has not directly addressed the role of resource pricing in the allocation of urban land, and other matters affecting affordability with increasing urban density...


...paper discusses the issues around housing affordability in the context of increases in urban density, with consequent effects on resource pricing of land, industry profiles, residential density, employment participation and incomes.

You can see the rest of this posting here, which also contains a link to the original paper. Of critical importance is the paper's look at the economic benefits to those who live in housing located close to denser development. This is another factor in any useful analysis of the costs and benefits of housing to those who live in those houses. And while I'm on the subject here's a link to a significant posting I did on urban sprawl.

That's enough for this posting. Suffice to say, the Productivity Commission's work needs to be broadened for it to be useful. As it stands it is an assessment from the point of view of property developers, rather than from the viewpoint of those who live in those houses and who are faced with the true costs (and the true benefits) of housing.