A Government-commissioned report has found that land use regulations add about 56% to the cost of houses in Auckland; 'prices far outweigh costs in most major NZ cities'

By David Hargreaves

A Government-commissioned report has found that a staggering 56% of the cost of Auckland houses may be due to land use regulations.

The report, which looked at housing in seven major cities in the country, says that land use regulation is hampering the flexibility of housing supply. The report and summary are available here.

“Relative to a world with no land use regulation, regulation could be responsible for 15% to 56% of the cost of an average dwelling across a range of New Zealand cities,” the report says.

“In Auckland, land use regulation could be responsible for 56%, or $530,000 of the cost of an average home.”

The report was commissioned by the Minister of Finance in September last year and was done by Sense Partners for government agency Superu (full name the Social Policy Evaluation and Research Unit).

“Most of our cities cannot build quickly enough to respond to increasing demand for housing, so land prices have gone up, as have housing prices across our cities,” the report says.

“Local geography is likely to play a role, but even in New Zealand cities with plenty of flat land, prices are higher than might be expected in a well-functioning market.

“There could be benefits from land use regulation, but these would need to be large and increasing over time to justify the status quo,” the report says.

Finance Minister Steven Joyce said the construction sector tended to be singled out for raising costs “but house prices in many areas are far in excess of construction costs. We must keep a strong focus on land supply so that section prices become much more reasonable.”

The report was commissioned by the Minister of Finance in September last year and was done by Sense Partners for government agency Superu (full name the Social Policy Evaluation and Research Unit).

The report says that New Zealand’s housing market “defies gravity”.

“The price of housing in New Zealand has soared in recent years. Since 2010, relative to income, New Zealand’s house prices have increased more than any other OECD country.

“While the US experience has been a slow grind to recover the pre-GFC price peak, figure 2 shows house prices in New Zealand have risen dramatically over the same period. Since the Productivity Commission’s inquiry into housing affordability five years ago, house prices have risen 56%,” the report says.

 

“Most of our cities cannot build quickly enough to respond to increasing demand for housing, so land prices have gone up, as have housing prices across our cities,” the report says.

“Local geography is likely to play a role, but even in New Zealand cities with plenty of flat land, prices are higher than might be expected in a well-functioning market.

“There could be benefits from land use regulation, but these would need to be large and increasing over time to justify the status quo,” the report says.

Construction sector blamed

The report says that often the construction sector is blamed for rising costs.

“…But home prices are outstripping construction costs and rising. This could be a sign that the type of land market which underpins many New Zealand cities is not as effective as it could be in promoting a supply response.”

The report’s authors also tested the market for apartments and found prices “are substantially higher than costs and the ratio of prices to costs is increasing over time”.

There are many potential welfare costs arising from such high house prices, including labour market distortions, poor resource allocation and low productivity, the report says.

“In some cases, easing land use regulation is not straightforward and could require change to the urban planning system, including, for example, infrastructure financing.” 

‘Far in excess’

Finance Minister Steven Joyce, in releasing the report, concurred that the construction sector tended to be singled out for raising costs “but house prices in many areas are far in excess of construction costs”.

“We must keep a strong focus on land supply so that section prices become much more reasonable.”

Joyce said the new Auckland Unitary Plan, the latest RMA reforms, the National Policy Statement on Urban Development Capacity, the Crown Building Project, the Housing Infrastructure Fund, SHAs and increasing the availability of Crown land for housing, “are all helping to increase land supply for housing”.

“The Government will continue to work hard to ensure councils in rapidly growing urban areas are able to provide enough land for new housing and business development.

“New Zealand’s strong economy and high job growth means more Kiwis are choosing to work and bring up their families here. As our population grows we need to keep investing to support that growth and provide capacity to grow further.” 

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