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.
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