Uncompetitive urban land markets at root of housing problems

Opinion: The Housing Theory of Everything has one of those wonderful, self-explanatory titles. A good title matters. The 2021 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 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 they have zoned for about 20 percent more housing supply than expected demand. But expected demand will depend on whether housing is affordable, and tight zoning means unaffordable housing.

The Independent Hearings Panel reviewing Wellington’s proposed district plan managed to convince itself that zoning for more development wouldn’t affect housing supply or affordability. The panel’s report even scoffed at the idea that allowing more housing may improve affordability. Meanwhile, 98 percent of the country’s economists said that easing zoning constraints would increase supply and improve affordability.

Our resource management system simply does not understand how competition works, or care about the consequences.

It isn’t just housing. It’s uncompetitive urban land markets writ large. Housing, retail space, commercial premises, and land for industry are all affected.

During the Commerce Commission’s market study into retail grocery, it quickly became clear that it is in effect impossible to open a new large-footprint supermarket chain.

Few sites are zoned for retail grocery that aren’t already supermarkets. But even if you can secure a set of sites and jump through the Overseas Investment Office’s hurdles if you’re an international entrant, there’s a bigger problem.

To get a resource consent to open your supermarket, you will need to prove your new supermarket will not substantially hurt existing competitors.

Now the law isn’t written that way – in fact, it pretends that the opposite is true. But the effect winds up being the same.

You need to prove that your new supermarket would not have adverse retail distribution effects. What do councils mean by that?

Suppose an existing supermarket is an anchor tenant in an existing town centre. If that supermarket failed, because a new and better supermarket attracted too many of its customers, then that town centre’s viability could be eroded.

And existing resource management practice and precedent says that councils are supposed to worry about that.

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 making it almost impossible for new competitors to drive unproductive incumbents out of business.

Last week, I chatted with Kevin Counsell, the director of the economics consulting firm NERA, for the NZ 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 percent 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 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 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.

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.

In the short term, the Government could consider broader application of its new fast-track consenting system – for example, for new supermarkets and their required warehouses.

But ultimately any reform of our resource management systems must prioritise competitive urban land markets. The Commerce Commission could perhaps assist in assessing whether district plans have enabled or restricted competition. Processes and practices that embed anticompetitive outcomes, such as the consideration of retail distribution effects, must end.

Land prices could provide an ongoing check. When zoned land is scarce, that scarcity will affect its price. Those prices are a better signal of whether councils have zoned enough land for development than any planner’s forecast. If a suite of price indicators shows zoning has created scarcity, councils could be required to zone more land.

Enjoying the benefits of competition will require attending to New Zealand’s uncompetitive urban land markets. It would help address the housing crisis, and a whole lot of other problems as well.