Kiwi housing: land, land, land

In Māori tradition, land (Papatūānuku) is so much more than a commodity to be traded. She is the mother who gives birth to all things (including Tāne-mahuta), and like all mothers, she deserves to be looked after and treated with respect.

Built up

Statistics often get bandied about: “only 2 per cent of New Zealand’s land mass is being used for housing” - however much of the South Island, in particular, is completely uninhabitable mountains. More than 78 per cent of New Zealand’s land mass has no one living on it, mostly for pretty good geological reasons. (Similar arguments can also be made about Australian population density.)

According to satellite imagery data, land use in New Zealand has undergone some significant change over the past few decades. Grassland has made way for forestry to a degree that makes growth in urban land appear relatively small. However, that’s not to say the increase in urban land hasn’t been significant.

Between 1996 and 2012, built-up (settlement) land has increased by almost 21,000 hectares (or 210 km²) to a little over 187,000 hectares (1,870 km²). And given the latest data point is now seven years old, and the population has grown by almost half a million people over this period, it’s almost certain the amount of built-up land has continued to rise since then.

With land a finite, non-renewable resource, it’s little wonder the cost of land has made a significant contribution to house price inflation over the years. But it’s a bit of a chicken and egg story, as higher demand for housing lifts the price of houses while also lifting the price of “potential houses” (ie sections). So it’s hardly a surprise that median house sales prices and section prices move together.

On average, however, growth in median section prices has outpaced that of houses over the past two and a half decades. And using section prices as a proxy for land costs when buying a house, this suggests the cost of land has risen from around 39 per cent of the median house price 25 years ago to a little over 45 per cent currently.

However, it hasn’t been a straight line, with this share peaking at around 55 per cent in May 2008 following a period of strong growth in section prices. Over history, and in broad terms, the median section price share of house prices has had an inverse relationship with net migration flows, suggesting the existing stock of housing receives more of the initial impetus to housing demand from a population shock. Thereafter, as housing supply looks to catch up, it makes sense for land prices to follow suit.

Greater intensification

Looking through the noise, there are a number of reasons why land prices might outperform general house prices on average.

Supply constraints (which for larger towns and cities are generally a function of urban boundaries) are one, while changes in the rules that allow for greater intensification and therefore a higher potential capital value (more or taller dwellings on a given piece of land) are another.

The latter will be true for individual plots of land that are rezoned for higher density but of course will be a dampening impact on land prices in an aggregate sense. In addition, land costs become less relevant for an individual dwelling when construction shifts towards vertical multi-unit dwellings.

So with land prices such a significant component of house prices, could the New Zealand Government make housing more affordable by simply freeing up more land?

The short answer is yes, it probably could. And there are plenty of people advocating exactly this solution. However, there are real costs to this type of growth that make it far from a no-brainer as the best avenue to pursue. Urban sprawl means a larger carbon footprint; infrastructure requirements make it an expensive form of adding housing. Expanding urban boundaries also comes at the cost of diminished productive land for crops.

In any case, whether you view land-use constraints as an environmental or liveable cities no-brainer or merely the landed gentry protecting the value of their assets, the fact remains, with constraints on the degree to which land can be freed up for urban use, land prices appear set to remain a significant share of overall housing costs. In order to mitigate this, higher density housing (building closer and higher) is going to remain a very important part of meeting New Zealand’s housing needs.

Considered approach

All up, despite the fact land costs have made a significant contribution to house price inflation over the years, the downsides associated with simply freeing up more of it for urban use suggest a careful and considered approach is required.

Indeed, there are some major economic and environmental benefits associated with higher-density housing,which, in an economy where productivity growth is all but non-existent and carbon emissions reduction a priority, shouldn’t be overlooked.

And while consents data show we’re on the right track, survey data suggests a cyclical downturn in building activity may not be far away.

Miles Workman is NZ Senior Economist at ANZ