How should Auckland respond to the Global Crisis?

A little question – globally speaking (how significant is Auckland on the world scene?) - but a huge question for Auckland. So many opinions to consider and assess in a sea of uncertainty. A few disorganised thoughts follow. The main point I wish to make is that I think the “adjustment” that is happening to the global economy is as much to do with the decline in cheap fossil fuel sources, as it is to do with the political mismanagement of property speculation.

The Roots

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.

Auckland Should be afraid, very afraid...

Auckland should be afraid, very afraid, of election promises threatening years of local government work to smarten regional economic development and stop urban sprawl.


With weeks of campaign commitments still to come, National has promised to rewrite the Resource Management Act within hundred days of getting elected, and Labour has promised to build a toll-free Penlink Motorway which will open up the Hibiscus Coast to a new wave of speculative development. And there will be no shortage of development interests lobbying both parties to further loosen planning controls, build more roads, and let greenfield property development rip.

The Metropolitan Urban Limit imposed by the Auckland Regional Council (ARC) almost ten years ago was widely criticised at the time, as was its support in 2005 for shifting $1 billion from motorway investment to public transport. These planning initiatives have slowed the sprawl tsunami that has engulfed so much rural land and led to longer and longer commutes to work and school.

ARC research reveals that transport costs amount to more than 30% of household budgets for an increasing number of low decile families living in South West Auckland. This problem can be expected to worsen as fuel costs escalate.

Already Auckland has one of the least efficient metrocity economies in the western world. Analysis shows that a full 13% of Auckland’s productive revenue is expended on transport when its annual cost of transport is compared to its regional GDP. In modern Asian and European cities the comparative figures are 6% and 8% respectively.

Auckland’s economy runs like a car with the choke out, and this is primarily because of the huge distances everything and everybody has to be transported. This economic drag will worsen with more sprawl, more and longer roads, and fuel scarcity.

It is ironic that adding value to milk through the sort of processing carried out by Fonterra, and adding value to logs before export, is regarded as sensible economic development by central government and political parties, but the same thinking is not applied to the development of land.

This has not always been the case. Between 1925 and 1950 it was government policy to develop urban rail from the proceeds of land development. The 1926 Town Planning Act imposed a 50% capital gains tax on land zoned for intensive development. This funded rail infrastructure and state housing as well. In 1953 this provision was repealed, and developers pocketed all windfall gains from rezoning.

It is obvious that an economic incentive like this turns greenfield development into a goldmine. While the recent Local Government Act (2002) developer levy regime has taken some of the cream from these profits as a contribution to infrastructure costs, developers continue to enjoy huge short-term gains when their land shifts from rural to urban zoning.

Developers tell me they’ll still take their chances by investing in land just over the current metropolitan limit, rather than risking a mixed use urban regeneration project in Auckland, North Shore, Waitakere or Manukau Cities. Yet these are the developments Auckland needs more of, if it genuinely wants to become more economically competitive. But brownfield redevelopment projects need good urban design, and they will only happen if councils recognise and encourage good urban design, and when councils reward developers by supporting such projects and speeding them through consent processes.

According to urban design authorities Jacobs and Appleyard good urban regeneration design means:

• liveable streets and neighbourhoods;
• a minimum density of residential development as well as intensity of land use;
• an integration of activities – living, working, shopping – in reasonable proximity to each other;
• buildings that define public space - as opposed to lonely buildings that alienate the public realm;
• and separate, distinct buildings with complex arrangements and relationships - as opposed to a few, large buildings.

This sort of development is about place-making and people destinations. And it needs careful funding and more planning. Not less planning.

The New Lynn rail station and town centre is the first significant example of this sort of thinking on the ground in Auckland. It needed almost $200 million central government investment. Auckland’s waterfront needs government investment too – not necessarily a stadium – perhaps a gallery, museum (like Te Papa), convention centre, or national Polynesian maritime heritage venue. The economic multiplier effects of this sort of government investment are known to be huge over the long term. Auckland could leave its tinsel-town short-term profit-taking image behind through government investment in cultural and network infrastructure.

This is the sort of government intervention Auckland needs now so all of New Zealand can truly benefit from this special part of the world.