Planning has Become the Externality: New Zealand Deputy Prime Minister


One of the frequently cited justifications for urban planning is to mitigate negative externalities --- detrimental impacts that people or organizations impose on others in society. While acknowledging this, New Zealand Deputy Prime Minister Bill English charged that urban planning itself has become the externality, by virtue of its impact on house prices, equality and the economy in New Zealand.

In a speech to the Victoria University Business and Investment Club in Wellington, the Deputy Prime described the government's program to reverse the decline in housing affordability  that have seen national prices relative to incomes (the median multiple) nearly triple, to 8.0, in Auckland, the largest metropolitan area. He outlined three motivations for the government's policy:

Consequences of Planning: The Economy

English said: "The first is that a housing market that is not properly functioning can have a significant effect on the macro-economy."

"Over the last five years, the Auckland housing market has been the single biggest imbalance in our macro-economic system.

The point is that when the supply of housing is relatively fixed, shocks to demand – like migration flows increasing sharply as they have recently – are absorbed through higher prices rather than the supply of more houses."

He noted the destabilizing effect of strong land use regulation:

"What they’ve [economic researchers] found is that, across different markets subject to rules which vary by state, more-intense regulation of urban development is associated with higher house price volatility.

The effects of planning rules can extend to the macro-economy.

Research indicates that when planning rules prevent workers shifting to higher-productivity locations, then there is a cost in terms of foregone GDP."

It's only relatively recently that economists and politicians have understood the scale of those effects.

So when we're talking about something as apparently dry as the Auckland Unitary Plan [metropolitan land use plan], we're talking about a set of rules that will have a major impact on the city, on current and future residents – but also on the wider economy."

Consequences of Planning: Increased Inequality

English went on to say: The second reason we focus on planning and its consequences is that poor planning drives inequality.

"Poor regulation of housing has the largest proportionate effect on the lowest quartile of housing costs and rents.

So when we're having the debate about whether there is sufficient land available, we have to recognise that the people who lose the most from getting that decision wrong – and who stand the most to gain from fixing those decisions – are those on the lowest incomes."

Housing costs are becoming a larger proportion of incomes – and that matters the most at the bottom end of incomes among people who have few choices.

The new supply of lower-priced, affordable housing has dried up.

There are parts of Auckland where no new houses are entering the market priced at the affordable end of the market.

It is not surprising to see prices and rents rising disproportionately at the bottom end given this lack of supply."

The Deputy Prime Minister also said: "Planning is often seen a public good activity that must address the needs of those who are most-vulnerable and have the lowest income," and noted:

In fact there is a strong argument to say it does exactly the opposite.

Poor planning favours "insiders" – homeowners – on high incomes and who have relatively high wealth.

In particular he mentioned strategies that drive up prices:

Those rules include urban limits [urban growth boundaries], minimum lot sizes which prevent subdivision below a certain size, and maximum site coverage rules which prevent a house covering more than a certain proportion of the lot.

Working in combination, these rules reduce opportunities to develop affordable homes.

He has particular criticism for Auckland's urban growth boundary and its impact on house prices:

"Another indicator relates to Auckland's former Metropolitan Urban Limit, now called the Rural-Urban Boundary.

A study found that the value of land just inside the urban boundary was ten times higher than the value of land just outside it.

That huge price difference around an arbitrarily-selected line on a map indicates that there are housing opportunities outside that boundary that cannot be taken because of planning restrictions.

Consequently, first home buyers trying to access the housing market are being prevented by land prices inflated by an urban boundary."

English also cited the paradox that the higher house prices driven by excessive regulation lead to additional, more expensive requirements (called "inclusive zoning" in the United States).

Now that planners are recognising these consequences, they are now creating even more rules to offset these effects; for example by requiring some developments to include up to 20 per cent affordable housing.

That is implicit recognition that planning rules have driven the costs up so much that another rule is required to offset it.

Consequences of Planning: Higher Government Costs

English said that the third motivation is the fiscal cost to Government: "The impact of these rules on inequality, and on household incomes, leads to a third reason for why the Government is focused on the housing market."

"Today we spend $2 billion each year on accommodation subsidies. 60 per cent of all rentals in New Zealand are subsidised by the Government.

The state owns around $21 billion worth of houses.

One house in every 16 in Auckland is a Housing New Zealand property."

Planning as the Externality

The Deputy Prime Minister says that planning has, in effect, abandoned its public purpose:

"For those among you who are economists, I would go so far as to say that while the justification for planning is to deal with externalities, what has actually happened is that planning in New Zealand has become the externality.

It has become a welfare-reducing activity.

And as with other externalities, such as pollution, the Government has a role to intervene, working with councils to manage the externality.

We're starting to get analysis that shows planning’s costs."

The Costs of Planning

It is not only in New Zealand that urban planning has become a negative externality. From London to Vancouver, San Francisco, Sydney and elsewhere (God forbid, even Liverpool) the land rationing strategies of urban planning policies have been associated with the losses in housing affordability, with an up to tripling of house prices relative to household incomes. These policies have lead to significant economic losses, including expanded inequality and labor market distortions. Important domestic goals shared by nations around the world, such as improving the standard of living and reducing poverty cannot be addressed efficiently or effectively in such an environment.

Wendell Cox is Chair, Housing Affordability and Municipal Policy for the Frontier Centre for Public Policy (Canada), is a Senior Fellow of the Center for Opportunity Urbanism (US), a member of the Board of Advisors of the Center for Demographics and Policy at Chapman University (California) and principal of Demographia, an international public policy and demographics firm.He is co-author of the "Demographia International Housing Affordability Survey" and author of "Demographia World Urban Areas" and "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life." He was appointed to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member. He served as a visiting professor at the Conservatoire National des Arts et Metiers, a national university in Paris.

Photo: Auckland Harbour Bridge (by author)