Soaring land values

This week a government research agency, the Social Policy Evaluation and Research Unit, released a report confirming what many have been saying for years. The report is called Quantifying the impact of land use regulation: Evidence from New Zealand and is available online. The question it sought to answer was, “What has caused the price of New Zealand houses to soar in recent years?”.

The two key points made in the report are:

• When there are few restrictions on what can be built where, a piece of land prior to development should have a price close to the price of the same piece of land after development. But the research found that prices post-development are four to nine times higher than for land prior to development.

• Relative to a world with no land use regulation, regulation could be responsible for 15 to 56 percent of the cost of an average dwelling across a range of New Zealand cities. In Auckland, land use regulation could be responsible for 56 percent or $530,000 of the cost of an average home.

It is telling that the post-development value of land is between four and nine times higher than its pre-development cost. In other words, the actual cost of the land to the developer is between 11% and 25% of the selling price. No doubt the anti-other-people-making-money brigade will say it’s because greedy developers are extracting super profits from the poor and needy. But those who understand how the numbers work will know most of the land resale value is in the intangible costs like the cost of obtaining a resource consent and the holding costs incurred while the developer is dragged through the process. Those costs are passed on in the sale price of the land. That’s why home buyers end up paying $300,000 for a section worth anywhere between $33,000 and $75,000 before the development process commenced.

If developers weren’t subject the whims of so-called “affected parties”, and if the consenting process took weeks rather than years, then we truly would have house prices that more closely reflect the actual land value and building cost.

Still on housing, last week the Government announced it is putting $600 million into a company called Crown Infrastructure Partners to invest in infrastructure for housing developments. The intention is to attract at least as much private sector funding to investment in infrastructure projects that would otherwise be funded by local government. The investors would receive a return on their investment via volumetric charges or targeted rates on householders benefiting from the infrastructure – in the same way that councils collect revenue at the moment. The initial projects will be in Auckland and the Bay of Plenty where there are critical shortages of housing.

In effect, the scheme removes the monopoly local councils have on property infrastructure and opens up the potential to draw upon a significant pool of private capital to get work done. There is little doubt the likes of cash rich iwi and the NZ Superfund would be very keen to get in on infrastructure investment knowing there would be a certain income stream from captive households. The concern would be that those with a private sector profit motive will extort those captive households for financial advantage, although protecting against that is presumably why central government is involved.

The Auckland Council has welcomed the new funding option because, like many councils, it is too heavily indebted to carry the funding itself. It is said that the inability of local councils to fund further infrastructure is a significant barrier to creating new housing, although I doubt that it is more significant than the regulatory hurdles mentioned in the Social Policy Evaluation and Research Unit report.

Having private sector interests involved in the ownership of infrastructure is quite a philosophical change from the present. It has the potential to open up a new reservoir of capital but it remains to be seen how keen councils will be to have their monopoly powers weakened and how the interests of homeowners will be protected from the maximise profit motives of the private sector owners.

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