During lunch break at AUT I read about an open seminar organised by The New Zealand Work Research Institute to be held on 31 March. The speaker Chris Parker (Auckland Council Chief Economist) would give a talk about The future of Auckland: What is the role of economics for urban policy? I happily signed up, hoping to hear more about Auckland’s housing bubble and the council’s policy measures to allow for a long-run city development and growth.
The seminar was opened with reference to the house price-to-income ratio (median multiple) in Auckland. According to the World Bank this measure of housing market performance addresses both housing affordability and the presence of market distortions. As a rule of thumb a median multiple of 3.0 or less indicates good housing (Chaston, 2016). As I cannot remember the exact figures in the presentation I refer to the latest Demographia International Housing Affordability Survey of 2016 here. Auckland currently has a multiple of 9.7 in line with Melbourne and San Jose. This is only beaten by Hong Kong, Sydney and Vancouver worldwide. Well, that sounds like a real issue to me, so I was keen to hear about policy measures to increase affordability again.
As Parker concluded that housing has transformed from a consumption commodity into a speculation good he proposed a cyclical model to address urban planning and affordability with 3 key factors, namely:
- Investment in fixed assets (land and housing)
- Investment in productive assets (productive infrastructure)
- Urban land prices
As far as I understood, this model can either set off as a vicious or virtuous cycle. The former is started by investment in fixed assets driving up urban land prices. The latter is started by investment in productive infrastructure, moderating urban land prices.
The seminar then had an interesting twist to neoclassical land market models. Well, in university we have learned about Ricardian rent theory which proposes an inelastic (vertical) supply curve and to me this has made sense so far as land is ultimately a limited resource. You cannot create more land than you are endowed with. However, Parker introduced neoclassical rent theory with reference to Alan W. Evan’s book Economics, Real Estate and the Supply of Land (2004). He presented a model where the supply of land for urban development is actually upward sloping. To my understanding this is based on the argument that there are competing uses for land and because of the underlying motivations of landowners which are influenced by price. Ultimately this makes land for urban development a speculation good with the question when to harvest, i.e. sell the land. Another important factor is monopolistic competition in the land market. Land is assumed to be a heterogeneous good with location as the ultimate determinant. Certainly this gives landowners a lot more power than in a competitive market.
The policy recommendations in the seminar were to improve the efficiency of the land market in Auckland as well as introducing more rural land into the urban land market. Another interesting proposition was to provide more localised infrastructure solutions. The idea is to have planned corridors or designations for future infrastructure but that demand comes first.
The seminar concluded with a short Q&A. One interesting question was about Auckland’s transport system as this wasn’t covered by the presentation. I liked the idea that dysfunctionally managed networks which are already overused cannot become better by growing and the argument of having forgotten how to grow. For the short run propositions were congestion charging, dispersed land use and efficient pricing. In the long run, however, there would need to be growth and economic development and major transport projects.
Overall I really enjoyed the seminar. It gave me insights into the work of an Economist at Auckland city council. It was interesting to see that Economic models are actually used in decision-making and the analysis of Auckland’s land market!
Chaston, D. (2016). Median Multiples: House price-to-income multiple. [online] Available at: http://www.interest.co.nz/property/house-price-income-multiples [Accessed 02/04/2016].
Demographia (2016). 12th Annual Demographia International Housing Affordability Survey: 2016 Rating Middle-Income Housing Affordability. [online] Available at: http://www.demographia.com/dhi.pdf [Accessed 02/04/2016].
Evans, A.W. (2004). Economics, Real Estate and the Supply of Land. Oxford, UK: Blackwell.