Artificial land scarcity

The median multiple house price is the median house price divided by median annual (household) income. This is a reasonable approach to assessing house prices. Problems with it are that it ignores different tax rates, household income may range from 1 to 2 persons, and people’s expectations of what they are prepared to live in.

Countries and cites can be rated for median multiple house prices to assess housing affordability, an important contributor to standard of living as it is usually a family’s largest asset expense.

Rating Median Multiple
Affordable 0–3.0
Moderately Unaffordable 3.1–4.0
Seriously Unaffordable 4.1–5.0
Severely Unaffordable 5.1+

A recent international survey states that historically house price

has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices having generally been from 2.0 to 3.0 times median household incomes (historical data has not been identified for Hong Kong), with 3.0 being the outer bound of affordability.

Yet this is now much higher especially outside North America. Of the 8 large cities surveyed in New Zealand, 3 had a multiple median house price of 4.1–5.0 and 5 were 5.1+.

And what is one of the major contributors to this? Land prices. Specifically the refusal to designate more urban zoning.

Overwhelming economic evidence indicates that urban containment policies, especially urban growth boundaries raise the price of housing relative to income. This inevitably leads to a reduced standard of living and increases poverty rates, because the unnecessarily higher costs of housing leave households with less discretionary income to spend on other goods and services. The higher costs ripple into rental markets, tightening the budgets of lower income households, who already suffer from lower discretionary incomes.

The principal problem is the failure to maintain a “competitive land supply.” Brookings Institution economist Anthony Downs describes the process, noting that more urban growth boundaries can convey monopolistic pricing power on sellers of land if sufficient supply is not available, which, all things being equal, is likely to raise the price of land and housing that is built on it.

Urban containment policy has been associated with greater price volatility and greater speculation. Investors and speculators are drawn to metropolitan areas where “quick” money is to be made, because of the inflexibility of the supply market. Econometric research also identifies an association between slower economic growth and urban containment regulation.

In the Introduction, Bill English states as much,

Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses. It simply takes too long to make new land available for development.

This is something I have been saying for years. If houses sell for approximately the cost they are to build then when demand goes up more houses get built. There seems no good reason to me why housing should have significant capital gain over inflation. Most assets decrease in value. New Zealand does not lack land, its population is less than 5 million, its land area is 268,021 km2 (larger than the United Kingdom). It is amongst the least densely populated countries in the world and most of the land suitable for human habitation. Yet less than 2% of the land is designated urban/residential.

High house prices impact the poor the most. They are less likely to buy, more likely to rent. Rents are higher when housing is higher. And a higher percentage of their income goes toward house cost. New Zealand needs to drastically expand residential zones and open up land for housing

If you add together the floor area of all the houses in New Zealand, the total area would be what compared to Lake Taupo?

A. About a quarter of Lake Taupo.
B. About half.
C. About the same.
D. Twice the size of Lake Taupo.
E. Ten times the size of Lake Taupo.

A. About a quarter of Lake Taupo. The total area of Lake Taupo is 616 square kilometres. The total floor area of all New Zealand houses is 164 million square metres or 164 square kilometres which is just over a quarter the size of Lake Taupo. [Source]
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