This is a post from Peter Nunns. See Part 1 here and Part 2 here.

In the first two posts in this series I introduced the postgraduate research project I’ve been working on, which looks at the causes and economic consequences of rising regional housing prices in New Zealand, and outlined the role of scarcity in driving house prices up, especially in Auckland.

If housing was more abundant (and cheaper) in Auckland, would more people live here?

Anecdotally, it seems like people are leaving – or staying away – due to the city’s housing crunch.

For instance, consider this article in The Wireless about people moving to the Hawkes Bay and other places:

Lucy says she would never go back. “We hated living in Auckland, we couldn’t get our heads above water, we were in the grossest flat. Just cold, damp, not somewhere you want to raise a child. We knew we couldn’t afford to buy there; it just wasn’t an option for us. I still have friends in Auckland but most of the people I know who live there don’t have kids, so they still flat or they can buy a really small home and not worry about kids clawing at the walls. Here the kids can run around. I would never choose another lifestyle anymore.”

To understand why people might want to stay in Auckland or move away, and to estimate what they might do if housing was more abundant, I used what economists call a ‘spatial equilibrium’ model. In effect, this is a systematic way of thinking about the impact of various ‘push’ and ‘pull’ factors.

The first ‘pull’ factor is wages. All else equal, people prefer to live in more productive locations that offer them higher incomes. I used Census microdata to analyse variations in income for people who work in different places, controlling for their level of education, age, gender, ethnicity, etc. I found that Auckland and Wellington offer higher-than-average wages – perhaps a 5-10% wage premium over the national average – while rural places like Northland and Gisborne experience a substantial wage penalty of around 20%.

This lines up nicely with the evidence on urban agglomeration economies. But regional wage differences are quite a bit smaller in New Zealand than, say, the US, where wages in San Francisco / Silicon Valley are around 50% higher than the national average. That suggests that New Zealand still has some room to agglomerate.

(As an aside, the model I used doesn’t actually incorporate agglomeration effects, which imply that adding more workers to a city will raise its average productivity level. Rather, I assumed that there would be diminishing returns from adding more workers, due to the ‘dilution’ of a fixed stock of natural resources and business land.)

The second ‘pull’ factor is natural and urban amenities. Some places are nice places to live, and so people are willing to earn a bit less or pay a bit more for housing to live there. This could be due to a warm, sunny climate, great beaches, access to regional parks, a beautiful urban environment, abundant entertainment options, etc.

Measuring all of these factors directly would have been a pain in the neck, so I instead inferred which places were unusually nice by looking for places are attracting lots of people in spite of the fact that wages are low relative to house prices. On this measure, Auckland and Queenstown seem to have some of the best amenities in the country.

The major ‘push’ factor is, obviously, the price and quality of housing. The house price data described in the previous post suggests that scarcity of housing has played a significant role in recent price increases, especially in Auckland. What if the ‘push’ from high house prices wasn’t quite as strong?

The last piece of the spatial equilibrium puzzle is that people’s decisions about where to live are ‘sticky’. That is, we don’t always do what is economically ‘rational’. If people have family or cultural ties to a place, they may want to keep living there even if it strains their budget. However, New Zealanders obviously aren’t that sticky, as everyone here is either an immigrant, or descended from someone whose ancestors migrated here within the last millennium. So I tested various assumptions about stickiness.

After developing this model, I used it to investigate alternative scenarios for recent house price increases. In effect, I looked at scenarios where housing was more abundant and in which we’d avoided scarcity-driven price increases over the last generation. In this scenario, house prices would have still risen – but at a much slower rate.

The first finding was that people would move around quite a bit within New Zealand, generally to Auckland. I’ve illustrated that in the following diagram. Depending upon your choice of stickiness assumptions, this suggests that, rather than experiencing a slight outflow of New Zealanders, Auckland would have instead experienced an inflow of between 60,000 and 150,000 people from other regions since 2000.

And, because Auckland is more productive than other regions, GDP would rise slightly as a result.

However, inter-regional migration isn’t actually where the real action lies. At present, around one in seven New Zealanders works in Australia. From 2000 to 2016, I estimate that somewhere in the range of 120-130,000 working-aged New Zealanders moved to Australia.

When I extended the model to include New Zealanders working in Australia, I found much larger effects on population distribution and economic performance. Depending on assumptions, making housing abundant throughout New Zealand would have reduced outflows to Australia by 50 to 100 percent.

The economic impacts of having more New Zealanders working here, and fewer in Australia, would be quite large – up to 7.7% of GDP, or around $21 billion per annum. This would be a rising tide that would lift most regional boats. Auckland would have attracted a significant share of these people, but a lot of other places in New Zealand would grow economically

and socially as a result.

This all sounds a bit pie-in-the-sky, and it is, a bit. We’re used to the current reality, which is that Auckland is growing rapidly and struggling to keep up on housing and transport. The idea that Auckland could add another 200,000 workers without severe problems seems unreal.

But maybe we should rethink that assumption.

I’ll give you some other figures to consider. To accommodate another 200,000 workers, Auckland would have needed to have built at least another 100,000 homes since 2000. From 2000 to 2016, Auckland actually consented around 125,000 new homes, which comes out to an average of just under 7,400 per annum. If the city had instead consented 13,000 per annum, year-in, year-out, it would have met this target.

Going from 7,400 to 13,000 sounds challenging. But data published by Auckland Council’s Chief Economist Unit shows we’re currently tracking towards that figure. And future population growth projections suggest we will have to keep that up on an ongoing basis. Why not make an ongoing commitment to keep building until housing is abundant enough to meet everyone’s needs, and attract your kids back from Australia? It might just be good for us!

Addendum:

For anyone who’s interested, here are the summary results for the three scenarios I modelled in the research paper. They are:

Scenario 1: Reduce housing supply constraints in Auckland . This scenario is assumed to halve the growth in scarcity-driven price increases in Auckland. As a result, average Auckland region house prices would have risen to around $816,700, rather than the observed level of $999,000. Other regions would be unaffected.

. This scenario is assumed to halve the growth in scarcity-driven price increases in Auckland. As a result, average Auckland region house prices would have risen to around $816,700, rather than the observed level of $999,000. Other regions would be unaffected. Scenario 2: Reduce housing supply constraints nationally . This scenario is assumed to prevent any further increase in housing scarcity over the 2000-2016 period. Average house prices would still increase due to increases in the value of buildings and increases in the hedonic value of land, but increases would be considerably lower.

. This scenario is assumed to prevent any further increase in housing scarcity over the 2000-2016 period. Average house prices would still increase due to increases in the value of buildings and increases in the hedonic value of land, but increases would be considerably lower. Scenario 3: Reduce house price distortions to zero. In this scenario, comprehensively overcoming housing scarcity in all New Zealand regions would result in a further reduction in price distortions over and above Scenario 2, although prices would still rise slightly relative to 2000 levels due to building improvements and the rising hedonic price of land. This is an ‘aspirational’ scenario that provides an upper bound on the economic gains that could be achieved by reducing house prices. This scenario has the largest economic impacts.

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