City of Auckland Chief Economist Chris Parker has called for establishment of a house price to income ratio objective of 5.0, to be achieved by 2030. The recommendation was included in a report commissioned by Auckland Mayor Len Brown and Deputy Mayor Penny Hulse.
Housing Affordability and Urban Containment Policy
The recommendation has been brought about in response to Auckland's severely unaffordable housing. Recent reports indicate a price to income ratio over 9.0, at least triple that of New Zealand to the early 1990s.
Like a number of metropolitan areas, Auckland has had urban containment land-use policy for some time. Auckland has drawn an urban growth boundary around development, largely banning new greenfield housing outside the boundary. As economics would predict, with a continuation of strong housing demand and the significant supply reduction, house prices have been shot skyward. The latest Demographia International Housing Affordability Survey showed Auckland to have a median multiple of 8.2 (the median multiple is the median house price divided by the median household income), though later data indicates a further deterioration (above).
Avoiding the Consequences of Urban Containment
House price volatility has been a growing concern in urban containment markets where house prices have escalated so strongly relative to incomes and economic productivity. The bursting of the US housing bubble in the last decade indicates the damage that can be inflicted on people and their finances when exorbitantly high house prices collapse. This is a fate governments seek to avoid not only in Auckland, but at the national level.
According to Parker's report, the city of Auckland is expected to add 1 million additional residents over the next 30 years. Parker indicated that: "If high house prices are sustained or continue to rise relative to incomes then ... consequences and risks will become more significant:" He cited:
"-loss of social cohesion — an increasingly socially divided city with a line drawn between those in the housing market and those outside
-macroeconomic instability via rapid house price deflation.
-Increased unemployment as businesses relocate activities to other more competitive cites locally (e.g. Christchurch, Hamilton, Tauranga) and internationally (e.g. Melbourne and Sydney)
-Increased household crowding and related social ills."
City Councilor Dick Quad echoed similar concerns in an email: "It’s staggering that Auckland’s homeownership is now down to 50% from 64% just 9 years ago. The social chaos we are creating can be seen on a daily basis with overcrowding, third world diseases (resulting from overcrowding) poor educational outcomes, and a city in which the landed gentry have grabbed all the wealth. We are engaged in a social experiment which is destined to end in disaster."
Councilor Quax applauded Parker's work, but had concerns about implementation, indicating that the policy "flies in the face of what many of our politicians believe."
According to Parker, reaching that the objective will include a number of both supply and demand side strategies. Most, importantly, Parker's list includes opening greenfield land for development. Even urban containment (smart growth) theorists agree that the imposition of urban containment boundaries, such as in Auckland, is associated with higher land prices within the urban area. Their hopes that higher density housing would cancel out the housing affordability losses have been dashed, due to the massive increase in land costs. For example, comparable land on either side of Auckland's urban containment boundary varies by a minimum of 8 times. Without the boundary, the expected difference would be virtually nil. In addition, high density housing is considerably more expensive to build than the detached housing people prefer.
Yet, only in a few places have policymakers taken the important step from failed intentions to the reforms necessary to reverse the housing affordability losses. Among the major metropolitan areas with the most severe urban containment policies, house prices have risen to two to three times the rate of household incomes.
The "Good:" Better than an Unattainable "Perfect"
Even if the 5.0 price to income multiple were achieved by 2030, housing would remain seriously unaffordable in Auckland. Parker argues that a lower target (such as the 3.0 Demographia International Housing Affordability Survey standard) would not likely be achievable:
"It is doubtful that a 5.0 median price multiple could be achieved considerably earlier than 2030. (Unless there was a substantial bust, which should be avoided, given that so much is now at stake with existing high prices and the macroeconomic risks that would result.) The types of changes needed are structural (and change at a glacial pace), and will take many years to compound."
His point is well taken. The "perfect" strategy of a 3.0 objective could well be the enemy of the good.
Reaching a 5.0 price to income multiple by 2030 would be a great improvement. Two decades of housing market distortion cannot be erased overnight.
The alternative could be continued house price increases in a policy environment that continues to outlaw building the new housing that people prefer.
As the city continues to examine options for improving housing affordability, it will be important to set interim objectives, such as annual improvements or perhaps improvements on a three year basis. Further, it will be important for the city to continually review its policies and liberalize regulation even further if the targets are not reached.
Setting an Example
Auckland could be taking a significant step by seeking to reverse the damage done by out-of-control house prices. Certainly, the prodding it has received from the New Zealand government has helped. Just a couple of weeks ago, Deputy Prime Minister Bill English told a university audience: "... while the justification for planning is to deal with externalities, what has actually happened is that planning in New Zealand has become the externality." Research commissioned by the Productivity Commission of New Zealand may have also been influential.
The city's Auckland Development Committee recently endorsed Parker's proposal and agreed "in principle" to include the objective in the next update of Auckland's metropolitan plan. By lowering housing costs, the city would improve standards of living and reduce poverty. Auckland could also become an example for metropolitan areas as diverse as Vancouver, San Francisco, Portland, and London, where all of the talk about improving housing affordability has remained just that, while prices continue to soar beyond the means of the middle class, particularly young families
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.
Lead photo: City of Auckland Coat of Arms by Jayswipe (Heraldry photos) [Public domain], via Wikimedia Commons
Email this Story
