By Leith van Onselen

This week, I was asked by New Zealand’s leading finance and business commentary site, Interest.co.nz, to publish a guest post for their Friday Top 10.

Given the vigorous debate in New Zealand around housing affordability and freeing up the planning system, I decided to use the post as an opportunity to summarise my views on urban consolidation policies, and why I believe they are incompatible with affordable housing and often lead to perverse outcomes. Friday’s Top 10 is reproduced below:

1. Strangling supply worsens housing affordability

Over the past few decades, many of the world’s housing markets have grown increasingly restrictive as urban growth boundaries, minimum targets for ‘brownfield’ development (urban consolidation), up-front infrastructure charges, amongst other measures, have been implemented across jurisdictions.

A key outcome of such growth control measures is that land supply and housing have become increasingly unresponsive to changes in demand, resulting in higher prices and declining affordability.

It is a phenomenon that was acknowledged in 2006 by former RBA Governor, Ian McFarlane, but has fallen on deaf ears from policy makers and the planning profession alike, with devastating impacts on affordability in places like Auckland, Sydney and Melbourne:

Why has the price of an entry-level new home gone up as much as it has? Why is it not like it was in 1951 when my parents moved to East Bentleigh, which was the fringe of Melbourne at that stage, and where they were able to buy a block of land very cheaply and put a house on it very cheaply? Why is that not the case now? I think it is pretty apparent now that reluctance to release new land plus the new approach whereby the purchaser has to pay for all the services up front – the sewerage, the roads, the footpaths and all that sort of stuff, has enormously increased the price of the new, entry-level home …

2. The volatility machine

Another consequence of urban consolidation policies, and the strangulation of land/housing supply, is that it makes housing markets not just less affordable, but also more prone to boom and bust cycles.

According to Harvard’s Edward Glaeser and Wharton’s Joseph Gyourko, who in 2008 released their seminal study of various literature relating to urban economics:

Recent research also indicates that house prices are more volatile, not just higher, in tightly regulated markets. …price bubbles are more likely to form in tightly regulated places, because the inelastic supply conditions that are created in part from strict local land-use regulation are an important factor in supporting ever larger price increases whenever demand is increasing.

The authors went on to show that in the house price booms of the 1980s and 1990s “price increases were much higher in markets that were more supply constrained.” They also noted that housing bubbles generally do not occur in responsive markets:

It is more difficult for house prices to become too disconnected from their fundamental production costs in lightly regulated markets because significant new supply quickly dampens prices, thereby busting any illusions market participants might have about the potential for ever larger price increases.

3. Enjoy the ride up, and the fall down

Glaeser and Gyourko (2008) are by no means alone in their thinking, with a number of US researchers uncovering that the markets that experienced the biggest housing busts were also those with the greatest restrictions on land/housing supply.

Included amongst these reports is the below comprehensive study from Huang and Tang (2011), who sampled more than 300 cities and found that those that experienced the biggest booms brought about by supply constraints also experienced the biggest busts:

In a sample covering more than 300 cities in the US from January 2000 to July 2009, we ﬁnd that more restrictive residential land use regulations and geographic land constraints are linked to larger booms and busts in housing prices. The natural and man-made constraints also amplify price responses to the subprime mortgage credit expansion during the decade, leading to greater price increases in the boom and subsequently bigger losses. Contrary to prior literature, our ﬁndings indicate a significant link between supply inelasticity and price declines during the bust …

4. Faulty logic

The rationale behind urban consolidation is the concern that excessive suburban sprawl is increasing humanity’s ecological footprint and greenhouse gas emissions, as well as requiring expensive new infrastructure to be built in these new developments.

By restricting urban growth, it is claimed that these ‘costs’ can be reduced via less car dependence and energy usage, as well as more efficient (intensive) use of resources.

The evidence, however, is sketchy at best.

For example, data from Sydney shows that inner city residents consume far more resources than suburban residents who, in turn, consume more than those from smaller cities and towns. While there is an income component to this – higher income residents will consume more than lower income residents – it does highlight one of the many fallacies of urban consolidation policies.

The sustainability challenge is the challenge of consumption: how much and what we consume drives our impact on the planet. But presuming that by enforcing urban intensification we will transform ingrained patterns of consumption in favour of the environment may be a step too far…

Ultimately, how we live is more important than where we live. What the evidence here confirms, though, is that under current patterns of consumption promoting large scale urban consolidation is flawed as environmental as well as urban policy.

5. Planner sprawl

Many of the policies implemented to restrict growth and reduce urban sprawl also tend to have the opposite effect, thus eliminating many of the purported benefits.

Perverse outcomes occur principally because measures aimed at excluding growth from one jurisdiction naturally generates pressure to accommodate it elsewhere, and exurban, underdeveloped jurisdictions beyond the metropolitan limits tend to be more inviting.

For example, the imposition of an urban growth boundary (UGB) can force many lower income households to ‘leapfrog’ the boundary and settle in far flung locations where housing is more affordable. UGBs, therefore, can act to exacerbate urban sprawl and increase car reliance and energy usage, which has detrimental distributional impacts in particular on lower socio-economic groups. The below example is from Adelaide, Australia, but the story is similar in just about every place where growth constraints exist.

In the words of Kieron Barnes, senior planning officer at Adelaide Hills council, “The South Australia Labor government created an urban growth boundary around Adelaide three years ago [2002] with the intention to stop the sprawl and to consolidate the city. But you could have guessed what happened then: People decided to move behind the growth boundary to places like Mt Barker from which they then commute to work in Adelaide [map of Mt Barker in relation to Adelaide shown below]. I was actually lucky to have bought my house there just before the growth boundary was put in place because after it was introduced land prices in Mt Barker soared.” How did the state planners respond? “Well, now they have created more growth boundaries around the smaller cities as well to stop this kind of leapfrogging.” Talking about his own personal house preference, he admits that he likes having a large house and does not mind commuting to work by car. Asked whether that was not actually contradicting planners’ beliefs in consolidation and promoting public transport, he smiles: “It’s difficult for planners not to behave hypocritically when it comes to personal choices. Many I know live in big houses on large parcels of land with two cars that are not necessarily environmentally or economically efficient.”

6. Density in the wrong locations

A related phenomenon to leapfrog development is that by forcing-up the cost of land within a UGB, households budgets are squeezed and they are forced to trade-off both space (smaller homes) and location efficiency (i.e. live further out).

This is reflected in absurdly dense fringe suburban development, whereby postage stamp sections are crammed into cul-de-sacs in patterns that have been mathematically designed to maximise the number of saleable properties. They typically also have narrow streets, minimal number of intersections (as it’s a waste of valuable space), minimal public green space, and no bike paths or walking tracks.

Portland, Oregon, is held-up as a model for urban consolidation in the United States. Yet as revealed by Alain Bertaud, senior research scholar at the NYU Stern Urbanization Project, Portland’s urban consolidation policies have driven increased density at the fringe but not nearer to the CBD.

Market forces would normally increase population density around the CBD and decrease it progressively toward the suburbs… Portland developed the concept of an Urban Growth Boundary (UGB), which limits for 20 years the area within which the city may develop… Most neighborhoods resist any attempt at increasing significantly the current density and developers are uncertain about demand for higher density residential areas close to the center. As predicted, land prices are going up because of the supply constraint imposed by the UGB, developers respond by developing higher density housing in the vacant areas between the limits of the current built-up area and the UGB… In the long run, the higher density which is built-up on the vacant land along the UGB will increase the accessibility of suburban shopping malls at the expense of the relative accessibility of the CBD. This is not the outcome that the planners intended.

7. Urban consolidation will ensure people live closer to work, right?

Most urban consolidation policies are based on the presumption that the bulk of the population commutes to the central core for employment.

As such, there is the desire by planners to limit urban sprawl, which is believed to reduce overall commuting times, resource use and pollution, and the need for costly infrastructure improvements, such as new rail lines.

Similarly, there has been a growing desire by planners to increase the proportion of housing located along transit nodes, such as train stations, again based on the assumption that most citizens commute to the central core for work.

In most modern economies, however, the overwhelming majority of employment is located in the suburbs.

In fact, research derived using data from the Australian census shows that less than 15% of workers in Australia’s major capitals work in the inner-core – a result that is likely to be replicated in New Zealand.

Moreover, this trend away from the CBD is only likely to grow as more employees embrace technologies such as telecommuting. It also throws into doubt expensive new rail investment, which can only ever serve a small minority of the population.

…despite their profile, our CBDs account for a very small proportion of jobs in the economy. Census data for employment has its limitations but even with these limitations in mind, the evidence is emphatic: employment in our cities is overwhelmingly located in suburban locations …

…what will also come as a surprise is that in the past decade, suburban jobs have been growing as fast or faster than in the inner city, meaning that CBDs are only holding their share, or losing their share, to suburban employment. This has come about despite what has arguably been a decade or two of intensive debate and policy investment into our inner city locations.

8. But doesn’t everyone want to live in the inner city?

For decades now, an array of commentators and academics have written-off suburbia, claiming that households are increasingly choosing to live in the inner city in order to be closer to night life and amenities. Of course, planners and governments have climbed on board, erecting barriers to contain the urban footprint and force more in-fill development to take place in pre-existing areas, often arguing that they are “improving housing choice”.

Again, the data often does not live up to the hype. For instance, the 2010 Census – by far the most accurate measurement of demographic trends – showed that over 90% of all metropolitan growth over the past decade in the US took place in the suburbs. Moreover, the suburbs actually did better in the 2000s than in the 1990s, when they accounted for only 85% of the growth. This result is even more remarkable given the growing use of urban consolidation policies across many US cities.

In any event, if planners and policy makers are so certain that most home buyers no longer want to live in detached houses on the fringe, then why are urban consolidation policies required at all, since consumer preference would drive such an outcome? Why not free-up land supply and planning requirements and let consumers choose for themselves?

In his masterwork A Planet of Cities, NYU economist Solly Angel explains that virtually all major cities in the U.S. and the world grow outward and become less dense in the process. Suburbs are expanding relative to urban cores in every one of the world’s 28 megacities, including New York and Los Angeles. Far from a perversion of urbanism, Angel suggests, this is the process by which cities have grown since men first established them… Clearly the data supports a long-term preference for suburbs. Even as some core cities rebounded from the nadir of the 1970s, the suburban share of overall share of growth in America’s 51 major metropolitan areas (those with populations of at least one million) has accelerated—rising from 85 percent in the ’90s to 91 percent in the ’00s. There’s more than a tinge of elitism animating the urban theorists who think that urban destiny rides mostly with the remaining nine percent matters. Overall, over 70 percent of residents in the major metropolitan areas now live in suburbs…

9. The urban consolidation end game

The UK is arguably the developed world’s most dysfunctional housing market. Thanks to the Town and Country Planning Act 1947, the right to develop has been virtually nationalised and the UK is ruled by NIMBYs. All of the major cities and towns in the UK are surrounded by “greenbelts” that are off limits to development. And the centralisation of government finances has also led to a situation whereby local governments receive little benefit from increased population and development, but bear most of the costs, making them anti-development.

The end result is a chronic undersupply of homes, driving-up both prices and rents. And the situation has recently been made worse by the implementation of the government’s “Help-to-Buy” shared equity scheme for first home buyers and the Bank of England’s “Funding-for-Lending” program, which have artificially increased demand and pushed against the constipated supply system to further inflate prices.

If you want to see the ultimate end-game of forced urban consolidation, look no further than the below video, which shows that when you constrain land/housing supply via planning, you end up with deleterious consequences.

Essentially, Generation Y (dubbed “Generation Rent”) is unnecessarily being forced to live in expensive, cramped living conditions, renting at exorbitant prices from asset rich Baby Boomers or investors, who are gaming the rigged housing system to their own advantage.

10. It ain’t rocket science

Ultimately, expecting to achieve more liveable cities by restricting the urban footprint at the same time as the population is increasing is a contradiction in terms and mutually exclusive.

Residents in pre-existing areas will always oppose development, whereas owners of vacant land within the urban growth boundary will land bank in full knowledge that they do not face competition from land holders on the other side of the growth constraint.

The end result is a further appreciation of urban land values, deteriorating housing affordability (despite shrinking home sizes), development in the wrong locations, and worsening levels of congestion. Those lucky enough to be pre-existing land holders will benefit from the rising wealth brought about from higher values, whereas those yet to enter the market (and future generations) will suffer immensely.

The solution is as clear as day: free-up the supply of land; deregulate the constipated planning system with “right to build” laws; and improving the funding and provision of housing-related infrastructure.

The New Zealand Initiative’s recent report, Different Places, Different Means: Why Some Countries Build More Than Others, provided a number of viable reform options, with the Texas model my preferred approach: