Friday 8 March 2024

Afternoon roundup

The afternoon's worthies:

Tuesday 5 March 2024

Even Lowerer Hutt

One annoying thing about writing a Saturday column for the Stuff papers is never knowing whether a piece will show up in print.

I'd thought this one was a banger. 

Anyway - the column.

Even Lower Hutt 

Transport historian Dr André Brett has suggested that Wellington be renamed Lowerer Hutt, perhaps to help avoid confusion within the region.   

Economists Matthew Maltman and Ryan Greenaway-McGrevy have been looking at Lower Hutt’s housing boom. Their paper, released this week by the Economic Policy Centre at Auckland University, suggests Brett was onto something.  


Wellington City could use a bit more Huttite thinking. And especially while Wellington’s response to the Independent Hearings Panel’s report on the district plan is still in play. 
 


While Wellington City mulled over whether it should be legal to turn rotting wooden tents into townhouses and apartments, Lower Hutt started building. 
 


From late 2016, Lower Hutt started a sequence of plan changes. They reduced parking requirements and introduced new zones allowing taller mixed-use developments and medium density housing. They allowed greater density within general residential zoning. And they quickly implemented policy changes set as part of Labour’s urban growth agenda – like medium density rules and upzoning requirements near public transport.
 


The paper tests whether those changes to zoning had any effect on building. 
 


It might sound like testing whether water flows downhill. 
 


The New Zealand Association of Economists surveyed its members this month. 96% of economists agreed or strongly agreed that district plan land use restrictions reduce housing supply. 94% agreed or strongly agreed those restrictions reduce affordability. And 98% agreed or strongly agreed that easing district plan restrictions will tend to increase housing supply and affordability.
 


But Wellington’s Independent Hearings Panel instead seemed convinced by one expert’s odd argument that zoning to allow more building, even in an obvious housing shortage, may not lead to more building. 
 


And perhaps the Commissioners saw no reason to believe that evidence from faraway places like Auckland could also apply in Wellington. 
 


So the Lower Hutt evidence is important. At least for those who need very specific local proof that water also flows downhill in the Wellington region. 
 


On notification of the plan changes, and especially after the changes started taking effect, Lower Hutt started issuing a lot more consents for townhouses and rowhouses. In the new zones enabling medium density and mixed use, there was the same jump in consents for townhouses and rowhouses – and also apartments. 
 


But perhaps that was just coincidence and Lower Hutt was only following the same trend as other councils. 
 


The authors used a variety of ways of checking that the zoning changes made the difference. For example, after the plan change, Lower Hutt shifted from being a moderate fraction of overall consents in the Wellington region to overtaking Wellington City. 
 


The economists also built a synthetic Lower Hutt and compared what happened there with the actual city. This method basically sets a complicated average of patterns in other cities that tracks how Lower Hutt’s consenting rates behaved before the change. Following that ‘synthetic’ Lower Hutt after the zoning change gives a comparison. 
 


Lower Hutt consented approximately 3260 more units than expected – a tripling the number of housing starts over the six-year period. More houses. More apartments. A few more retirement village units. And an awful lot more townhouses and rowhouses. 
 


It also affected building in Wellington City. Because it became relatively easier to build in Lower Hutt, some development shifted to the Hutt. Overall, about a quarter of the new consents in Lower Hutt were consents that might have happened in other places otherwise. 
 


This also matters for theories that a region may only have so much ‘absorptive capacity’ – another dubious argument relied on by Wellington’s hearings panel. 
 


The vast majority of new consenting in Lower Hutt, about three quarters of it, was new building. It did not just displace building that would otherwise have happened elsewhere. Lower Hutt’s reforms, all on their own, provided a 12 to 17% increase in housing starts for the whole metropolitan area. 
 


Lower Hutt then helps to keep rents in Wellington lower than they might otherwise be, by providing some of the housing that Wellington City would otherwise block. Every renter in Wellington owes a bit of thanks to Lower Hutt council. 
 


If Wellington Council cannot see fit to propose a district plan more enabling than the economically illiterate plan proposed by the Independent Hearings Panel, the combined Upper and Lower Hutt populations could well wind up exceeding Wellington’s.
 


If that happens, I think we should look back at the good Dr Brett’s suggestion. The Hutts’ ascendancy ought to be properly recognised. 
 


Wellington would become Lowerer Hutt, as Dr Brett suggested – or perhaps my preferred ‘Even Lower Hutt’. All of it would be part of the Greater Hutt Regional Council. Somes Island would of course become Hutt Island. 
 


And the ‘special character’ that drove Wellington’s residents, and tax base, out to the Hutts could stand as warning to other cities to at least try to be less stupid than the country’s capital.
 

Meanwhile, The Spinoff's suggesting abandoning Wellington for the Hutts and young professionals are abandoning Wellington for points farther afield like Christchurch

Buchanan said Christchurch felt more vibrant and there were plenty of young families who’d moved from the likes of Wellington and Auckland.

“Talking to my peers, former colleagues, family, and being out and about around the city, Wellington has a brain drain.

“Whether it be young teachers, firefighters or psychologists, people are unhappy or moving.”

Christchurch offered about 1000 housing options to choose from, Buchanan said, thanks to an increased supply of medium density homes in suburbs close to the city.

In Wellington, he was left with just 190. Most were in places like Wainuiomata, a Lower Hutt suburb with notoriously poor links to the city centre for commuters. A friend had recently paid $1.1 million for a small section and an old three-bedroom house in Upper Hutt.

...

According to a December 2023 Infometrics report, the average house price in Wellington City is $1,023,966 – roughly $100,000 more than the national average.

By contrast, CoreLogic measured the average house price in Christchurch as $757,881.

Wellington has long fought new-build developments, especially in the older inner city suburbs.

These “character areas” where Victorian villas still cling to the hills were described in a recent opinion piece in The Post by Eric Crampton as “wooden tents”, while by contrast he praised Lower Hutt’s initiative at constructing new-builds.

Buchanan attested to this, arguing the new builds in Christchurch only added to the character of the area.

I also had a podcast chat with Danyl McLauchlan on related issues - though we ranged a bit more broadly.

Friday 1 March 2024

The Uncompetitive Urban Land Markets Theory of Everything

The Housing Theory of Everything has one of those wonderful self-explanatory titles. A good title matters. The recent and thorough essay explains how the anglosphere’s unnecessarily expensive housing affects, well, everything. Or at least almost everything.

Zoning makes it too hard to build houses where people want to build. Urban containment policies block new subdivisions, so downtown land no longer competes with land further out for developers’ attention and for residents. Land prices then inflate across the whole urban land market. Zoning that blocks new townhouses and apartment towers in places where people want to live further worsens scarcity and affordability.

It's at the root of a host of pathologies.

People aren’t left with much to live on after housing costs; inadequate housing causes misery.

The most productive cities could be even more productive if more people were allowed to live near each other. Bans on density are then taxes on productivity improvement, with existing landowners reaping the rewards. Those bans also make it harder than it should be to reduce carbon emissions.

The essay is superb. And it has been influential.

I’ve heard it cited by both Labour and National MPs, which shouldn’t be surprising as it explains a whole lot about New Zealand.

Uncompetitive urban land markets are at the core of the problem. Current practice requires council plans to demonstrate that they have zoned for about twenty percent more housing supply than expected demand. But expected demand will depend on whether housing is affordable, and tight zoning means unaffordable housing. 

Me over in Newsroom this week. 

I riff on a chat I'd had with Kevin Counsell on our podcast series about the economic consultancy reports that developers have to put up showing that there's massive excess demand if they want to get a building consent. 

A new supermarket then has to prove that there is so much excess demand that the new supermarket will not impinge on existing competitors’ viability.

And maybe that kind of outcome sounds great to the kinds of people who get involved in town planning. There’s already a supermarket, why should there be another one unless there’s enough customers for it?

The result is the neutering of competition, and substantial harm to consumers. If an existing business is seriously underperforming, a new entrant provides a service by driving it out of business. Even the threat of that kind of entry provides competitive discipline.

However, in New Zealand, that kind of entry would have a hard time getting a resource consent. The government likes to wring its hands about poor productivity performance while, at the very same time, making it almost impossible for new competitors to drive unproductive incumbents out of business.

Last week, I chatted with NERA director Kevin Counsell for the Initiative’s podcast series. When councils require evidence that a new development provides overwhelming benefits, someone has to write the economic analysis. Counsell writes a lot of the reports demonstrating whether there would be sufficient demand.

It isn’t just supermarkets. Consider potential entrants who need land at the edges of town.

In 2022, the government set a National Policy Statement on Highly Productive Land. That statement sets a very high hurdle if anyone wants to do anything other than farming on the 14% of the country that is classified in the top three soil categories.

Most of that protected land is dairy and sheep paddocks. Converting it to any other use requires proving a substantial benefit from that conversion.

Counsell has been working on a proposed new industrial park outside of Morrinsville. The National Policy Statement on Highly Productive Land requires that there be substantial benefit before anyone can build anything on a paddock.

How can you demonstrate substantial benefit? You have to prove that there is huge demand for the new use. The dynamic benefits of competition in forcing everyone to strengthen their game aren’t enough. They would be harder to prove in any case. Entrants wind up having to show that there is excess demand given current supply.

The effect is harshly anticompetitive. If a group of existing businesses organised in a smoke-filled room to block a new competitor’s entry, they could face criminal cartel prosecution. But resource management provides even stronger protection against competition whenever resource consents are required.

I titled this column ‘The Uncompetitive Urban Land Markets Theory of Everything’, but it’s never easy to tell whether a columnist’s draft headline will survive. The uncompetitive urban land markets theory of everything subsumes the housing theory of everything. Just about everything wrong in housing is downstream of uncompetitive urban land markets. But the same processes that block new housing also block new supermarkets, new commercial premises and new industrial parks. 

Go listen to the podcast. Our resource consenting systems entrench anticompetitive effects by making it difficult to set a new competitor unless the incumbent's existing rents are above a threshold, and dynamic Schumpeterian competition is largely blocked. 

Maybe, just maybe, if the government is worried that NZ markets are often less competitive than they'd like, and if they're also worried that the country's less productive than it should be, it could have a look at this?

Maybe would-be competitors shouldn't have to produce reports like this?

I swear a good third of government activity is creating giant problems, not noticing that they caused the problem, then running endless inquiries about the consequences. 

Monday 19 February 2024

Tino Rangatiratanga and localism

My piece for the Saturday papers weekend before last, and now ungated here, went back to a theme that Richard Harman had noticed in the Waitangi speeches
Minister Shane Jones argued fuller debate on the meaning of Tino Rangatiratanga is inevitable, saying, “There is a deep, committed view from Pita Tipene and others that article two is a charter for iwi sovereignty. And at some point in time, that debate is going to be flushed out. It’s not a conception that I share. I conceive it to be more localised.”

Prime Minister Luxon said, “We are a party and particularly a government that is actually about making sure there is localism and devolution and that those closest to the problem should solve the problems. …Our fundamental belief is localism and devolution. We do not believe in centralization and control through Wellington.”

It is certainly not for a Canadian economist to weigh in on Treaty interpretation. I have neither the standing nor the understanding.

But one bit of the Canadian experience might be interesting.

Canada’s overall policies regarding its First Nations have been abysmal. But Canada’s First Nations nevertheless have some rights comparable to Canadian municipalities.

Basically, Canada's First Nations Band Councils have powers on reserves comparable to municipalities, except under federal rather than provincial jurisdiction. 

Decades ago, Manny Jules did the work to get band councils the authority to levy property taxes on reserve to fund band council activities. 

And look at this section of the Indian Act - I've bolded the interesting bits.

81 (1) The council of a band may make by-laws not inconsistent with this Act or with any regulation made by the Governor in Council or the Minister, for any or all of the following purposes, namely,

(a) to provide for the health of residents on the reserve and to prevent the spreading of contagious and infectious diseases;

(b) the regulation of traffic;

(c) the observance of law and order;

(d) the prevention of disorderly conduct and nuisances;

(e) the protection against and prevention of trespass by cattle and other domestic animals, the establishment of pounds, the appointment of pound-keepers, the regulation of their duties and the provision for fees and charges for their services;

(f) the construction and maintenance of watercourses, roads, bridges, ditches, fences and other local works;

(g) the dividing of the reserve or a portion thereof into zones and the prohibition of the construction or maintenance of any class of buildings or the carrying on of any class of business, trade or calling in any zone;

(h) the regulation of the construction, repair and use of buildings, whether owned by the band or by individual members of the band;

(i) the survey and allotment of reserve lands among the members of the band and the establishment of a register of Certificates of Possession and Certificates of Occupation relating to allotments and the setting apart of reserve lands for common use, if authority therefor has been granted under section 60;

(j) the destruction and control of noxious weeds;

(k) the regulation of bee-keeping and poultry raising;

(l) the construction and regulation of the use of public wells, cisterns, reservoirs and other water supplies;

(m) the control or prohibition of public games, sports, races, athletic contests and other amusements;

(n) the regulation of the conduct and activities of hawkers, peddlers or others who enter the reserve to buy, sell or otherwise deal in wares or merchandise;

(o) the preservation, protection and management of fur-bearing animals, fish and other game on the reserve;

(p) the removal and punishment of persons trespassing on the reserve or frequenting the reserve for prohibited purposes;

(p.1) the residence of band members and other persons on the reserve;

(p.2) to provide for the rights of spouses or common-law partners and children who reside with members of the band on the reserve with respect to any matter in relation to which the council may make by-laws in respect of members of the band;

(p.3) to authorize the Minister to make payments out of capital or revenue moneys to persons whose names were deleted from the Band List of the band;

(p.4) to bring subsection 10(3) or 64.1(2) into effect in respect of the band;

(q) with respect to any matter arising out of or ancillary to the exercise of powers under this section; and

(r) the imposition on summary conviction of a fine not exceeding one thousand dollars or imprisonment for a term not exceeding thirty days, or both, for violation of a by-law made under this section.

It is fun to think about what could happen here if iwi had similar authority over building and development on iwi-held land, or Māori land more generally. 

For further fun, look at the 250 page services agreement between Vancouver City and the Squamish First Nation for the Sen̓áḵw development. That development is on Reserve land right next door to downtown Vancouver. 

It's very typical for Kiwi bureaucrats, or bureaucrat-adjacent types, to find the first hurdle that might cause an issue and just give up. Well, here's 250 pages of legal text working through difficulties and finding solutions. 

Back to the column.

A First Nations Band has autonomy over the Band’s land.

It isn’t mere parchment. The listed rights have consequences.

When Sḵwx̱wú7mesh Úxwumixw, the Squamish Nation, finally had five hectares of their land returned to them near downtown Vancouver, the Band had authority over that land. Not the city.

Vancouver has a housing shortage. And Sḵwx̱wú7mesh Úxwumixw wanted to build.

In Auckland, Section H27 of Auckland’s Unitary Plan sets out the Special Purpose - Māori Purpose Zone. A Marae is prescribed by H27.6.2 to be no more than 10 metres in height; height of buildings in relation to boundaries is prescribed by H27.6.3, and even the location of rainwater tanks is prescribed by H27.6.9.

Even if every one of those sections enjoyed the full agreement of every hapū when the rules were written, if a hapū’s needs changed over time, council would have to agree to any change. And City Council issues the consents.

Meanwhile, the Squamish Nation’s website describing the Sen̓áḵw development explains that “Sen̓áḵw is not part of the City of Vancouver, and is not subject to the City's typical development approval process.”

It appears that, in practice, collaboration with Vancouver City has been required in order to effect interconnection to water networks. But bargaining over such things is a bit different when the Band has real autonomy over its own lands.

The service agreement goes well beyond water of course. The Band Council levies a property tax on Sen̓áḵw to pay Vancouver for other services that Sen̓áḵw residents will enjoy. This stuff can be worked out. 

Localist approaches can be more responsive to local needs.

In 2015, the New Zealand Initiative put up a report on devolution. We argued that, if a local community saw central government’s regulations or policies as being unfit for local purposes, they should be able to negotiate their own carve-out. If the policy experiment proved successful, others could take it up. If it failed, the experiment would have been relatively small. Bespoke devolution options can make more sense where councils vary widely in capacity.

But nothing in that report needed to imply that local or regional councils are the only voices of local community. Devolution to iwi or hapū could also fit within the framework.

New Zealand has a housing shortage. Council zoning and consenting rules have obviously been part of the problem.

Devolving zoning, consenting, and rating authority over iwi-held land to iwi wishing that authority may be a longshot. And it would take a lot of work.

But it seems worth thinking about.

I have no expertise or experience in arguments around Treaty interpretation.

I just find it very hard to believe that iwi leaders signing onto the Treaty believed their descendants would wind up needing to beg a bureaucrat’s permission to build houses on their own land.

Morning roundup

The tabs did accumulate. A couple of worthies. 

YIMBY opt-outs

Marko Garlick makes the case for keeping the Medium Density Residential Standards but allowing small blocks to opt out through petition, with deed restrictions expiring within 25-30 years. 

If Houston was anything like cities in New Zealand (or Australia, the UK, or other big US cities) these density-enabling changes would’ve been fiercely resisted by density-hating homeowners. But by most accounts, these changes were largely uncontroversial. Why? Perhaps because Houston allowed pockets of homeowners to ‘opt out’ of these city-wide changes.

Anya Martin’s excellent article in Works in Progress goes through this opt-out process. Landowners within small blocks could collectively opt out of the density-enabling rules via private deed restrictions – similar to covenants in New Zealand – which are automatically recognised by the city. These deeds could be used to, amongst other things, set a higher minimum lot size than the new city minimum – effectively banning townhouses. A simple petition needed to attract just 51% support from landowners. These private deed restrictions would typically expire after 25–30 years.

In short the opt outs:

  • Apply to small geographic areas only; a block, not a whole suburb.
  • Require a majority consent from landowners in that area; a few people can’t decide for everyone.
  • Have a sunset clause; they don’t last forever.

It seems an easier way of operationalising opt-outs from MDRS than having it at district plan level, subject to easy-to-game requirements for immediately releasing 30-years worth of supply. 

Higgsean worlds

I was a panelist after Treasury Secretary McLiesh's talk at the Waikato Economics Forum on Friday morning.

I'd made a few notes to myself for my opening 5 minutes. I never quite say what I'd written down. But this is what I'd written down.
Fiscal consolidation and ratchet effects

Covid has taught us two awful lessons.

First, when Parliament gives government a loose rein to deal with a crisis as it sees necessary, trusting that fiscal capacity will be used to necessary purposes, that flexibility will be abused. Core agencies may provide veiled, and sometimes not-so-veiled, warnings that spending is difficult to justify. But ultimately neither they, nor the Public Finance Act, provide discipline. 

Second, New Zealand may well sit in a Bob Higgs world. And I certainly hope we aren’t.

Let’s take the latter first before looking back to the former.

In the late 1980s, Robert Higgs argued, in Crisis & Leviathan, that public spending exhibits a ratchet effect. It is easy for spending to go up in a crisis. Much of it may even be justified for dealing with the crisis. But fiscal consolidation after the crisis maintains a larger government share of overall economic activity than before the crisis: a one-way ratchet effect.

That isn’t a very good world to be in. If you’re in that world, it is harder to get agreement on giving the government the flexibility it might need in dealing with a crisis. There are always tradeoffs between speed and oversight. If you can trust the government to do its best honest job and to retrench after the crisis, then you can afford to cut the government a lot of slack – and get closer to a first best. If you can’t, then those who do not want a permanent expansion in the size and scope of the state have to trade off losses from an inadequate crisis response against losses after the crisis from the permanent part of that increase.

Treasury’s charts in the BIM showed that we might not have been crazy, ex ante, to think we weren’t in a Higgs world. After the Asian currency crisis, Core Crown expenses retrenched, under a Labour government to almost 28% of GDP. The GFC and then Christchurch earthquakes saw them hitting 34% of GDP before retrenching to below 28% of GDP by 2017. 

And the Great Wellbeing Budget promised that every social problem in the world could be solved, with Core Crown Spend projected at 28.8% of GDP by 2023.

In early 2020, there was phenomenal agreement that the government needed to be given the room it needed for dealing with the crisis. It had authorisation to issue the debt necessary for dealing with it. And it had widespread support across the business community. Few atheists in that foxhole. Core Crown spend topped 35% of GDP. 

During the 2023 election campaign, the National Party’s aspirational goal was to get Core Crown spending down to 30% of GDP – above what Ardern’s wellbeing budget had promised. 

And Treasury’s briefing to the government suggested a mix of spending cuts and tax increases would be needed to fill the gap. Inflation, all on its own, increased Crown revenue through fiscal drag by perhaps a billion dollars from Q1 2021 to Q2 2022 – if we can trust Treasury’s tax calculator for changes that large.

Those who prefer a larger size of government have painted normal fiscal consolidation after a crisis as being terrible austerity, and that that austerity’s purpose is to deliver tax cuts. 

It is a dangerous partisan game. 

If returning Core Crown spending, after a crisis, to a level higher than it was before the crisis is going to be painted as austerity, good luck getting social licence for government to have the flexibility it needs to deal with the next crisis. 

Worse, in the crisis, our institutions proved unable to constrain the government against diverting debt raised for dealing with Covid into party-preference spending, like school lunches, and into destructive measures like Envirojobs. 

When New Zealand was running a substantially positive output gap and the country’s lowest unemployment rates on record, the government was running make-work schemes. 

While Treasury did provide some warnings against misguided spending, it also provided the Finance Minister with substantial cover for his initiatives. Measures of fiscal impulse in budget documents seemed designed not to enlighten, but to provide the Minister with a way to claim that massive deficits fuelled by non-Covid spending were, in fact, fiscally responsible – because he was spending slightly less than the year before.

It is hard to avoid the conclusion that the only real fiscal discipline that our institutions provide is the need for vote allocations to compete with each other for a limited pool of resources. When a strong focus on value for money drives Cabinet decisions, Ministries will provide evidence in support of that. When other drivers determine allocations, Ministries will target those other drivers. And when budget constraints disappear because government has taken on tens of billions of dollars in debt, there simply is no restraint. 
Because Secretary McLiesh's opening pointed to the Treasury's view on the criteria for successful fiscal stimulus, with some emphasis on the need to get spending now back down (the limited party), I quoted back what she'd said at the June 2021 workshop Treasury and the Reserve Bank ran on the lessons of Covid. The first sentence is pretty much word for word what the Secretary said this time. The second bolded sentence, well, I wonder whether they've reconsidered that part.
"The well-accepted objectives for effective fiscal stimulus are that it is timely, temporary, and targeted. Overall, New Zealand's fiscal response is meeting those objectives perhaps better than most."

My Twitter thread on the full conference is here.

After my session, I was reminded by an attendee that previous large structural deficits meant the end of two careers in politics for those who had to clean up the mess. That attendee wondered where the hell Treasury was when the structural deficits were being locked in, this time. 

I wonder that too. 

It's like Treasury entirely forgot that regardless of whether one accepts the economic merits of Keynesian fiscal stimulus, the political economy of it just doesn't work. Government has a much harder time scaling back spending in the upswing than it has in scaling up spending in the downturn. And so it just doesn't work.