Cities are the Future
Cities are the future. Worldwide the proportion of people living in cities is increasing rapidly. New Zealand is no exception.
It is important that we get our cities right. And it is essential that we allow them to grow.
Cities thrive because they are efficient labour markets. They maximise the availability of labour for firms and the choice of employment and entertainment for people.
Most cities form around a centre. This maximises the inherent benefits. Firms that occupy the centre benefit the most and land values are highest there. Firms that benefit less from being in the centre locate further out, trading location for land cost.
Travel time used to restrict city size. Generally the maximum time people will invest in travelling to work is about one hour per day. However the wide availability of motor vehicles since the middle of last century vastly expanded the potential city catchment. Modern communications has reduced the need for, but seemingly not the demand for this daily travel.
Concentric cities work up to a certain size, but then problems such as road congestion start. At some stage, the additional travel time due to congestion distorts the time-distance relationship and development starts to occur at other points - creating the polycentric city.
Cities have reacted to this tendency for dispersal in a number of ways. Many cities have tried to reinforce the role of the centre by providing a central distribution system to increase the effective size of the centre, building motorways and railways to overcome congestion or provide alternative access to the centre. These solutions are usually very expensive.
Because catering for car access to the city centre is expensive, too little is provided. Cities subsidise public transport to encourage people to leave their cars at home. The attraction to infrastructure providers is that public transport uses less road space (or allows more people to use the space that we have).
But the effect of building motorways and subsidising public transport is to make commuting from remote suburbs even more attractive. People make location choices that seem rational to them but which impose excessive infrastructure costs on society.
The resulting outward expansion of cities (“sprawl”) is often condemned as environmentally unfriendly and socially alienating. It has given rise to a counter movement towards compact or ‘smart growth’ cities. The idea behind compact cities is that that population growth is catered for by increasing urban density, particularly towards the centre. It runs into several significant problems: firstly densification on the scale required means knocking down what is already there, and that can be both expensive and unpopular; then adding density in existing areas can create additional costs for infrastructure such as roads, water mains and sewerage; and thirdly you need some way of enforcing your urban vision otherwise people are still going to commute from afar.
‘Smart’ cities have tried to enforce their vision by legislating an urban boundary outside which development is not permitted. Where this has been tried, the effect has been to drive up the price of land inside the boundary. What is more, where the land available for housing is scarce and the quantity is limited, it becomes a good investment for speculators. As long as land value increases exceed rates of return on alternative investments, speculators have an incentive to hold land rather than sell, exacerbating the shortage. Small parcels of rural land released for development are also likely to be land-banked and have no effect on prices– the only way to break the hold is to restore competitive access to rural land. If that means expanding Auckland, that is what we should do. Pukekohe is cultivated for horticulture because it is close to Auckland not the other way around.
Some people argue that freeing up restrictions on intensification and ‘building up’ within the urban area would be a better way to cater for increased population. It could certainly help – if you can achieve it despite opposition from existing home owners and residents. But only if sufficient potential building opportunities are created for the supply to become competitive. Limited densification of selected suburbs won’t be enough to increase supply and lower house prices. It may lead to a modest number of additional houses being built but international experience is that they will be smaller and more expensive than if land at the periphery is developed. What is almost certain is that limited up-zoning will increase the value of the underlying land. That will further increase the difference between rates of return from holding land and the return on alternative investments and risk further suppressing development.
Of course it isn’t a case of either up or out. There is demand for high density housing near the city centre, just as there is demand for low density suburban houses. So we should try to find ways that both can be provided. What is needed is a relaxation of the planning rules to allow a greater range of development. That sounds simple, but people who have purchased houses on the basis of one set of planning rules have a valid grievance if the planning rules change. One way to address local opposition to changing the rules might be to permit experimentation with relaxation of local planning rules in the context of neighbourhood schemes where all property owners in a neighbourhood (a city block for example) band together and share in the development proceeds. Such voluntary neighbourhood schemes are discussed in the third part of this land contiguity article. The Economist has reviewed the economic literature on other methods to reduce the NIMBY effect here.
If affordable housing requires competitive access to rural land, how do we achieve this without imposing excessive costs for infrastructure and/or pubic transport services? One option is to abandon the mono-centric city. Deliberately build a grid of high capacity roads around which the future city can grow in a polycentric manner. Variations of this concept include the linear city and the development of sub-centres linked by high capacity road and public transport routes. Cities that have embraced and provided for expansion in this way have lower land and housing costs than cities that have pursued a compact city model.
But if the fundamental issue is under-priced infrastructure, why not address the problem? Roads in most parts of the world are under-priced (paid for by the tax payer rather than the user). Even in New Zealand, where money collected from motorists through petrol levies and road user charges for heavy vehicles and diesels pay a significant portion of road costs, there is a huge difference between what the motorist pays to travel on and the cost of providing big city CBD focussed roads. So right from the start, living away from the centre and commuting by car is heavily subsidised (albeit in New Zealand by other motorists). But it gets worse. In order to avoid the huge costs imposed by people availing themselves of these subsidised roads, we encourage people to travel by public transport by – you guessed it - subsidising that too.
If you let people make location decisions that weigh up the cost of subsidised transport against the savings from cheaper land, they are of course going to make socially inappropriate decisions. Part of the answer is to introduce efficient charges for transport infrastructure and services. Road pricing is being discussed in Auckland but in the context of raising revenue for big projects rather than as a means of managing the network.
If road prices are set to manage the network efficiently, they will reduce congestion and increase capacity – more people can travel quicker. But if the revenue is captured by AC or the government it is still likely to be opposed. To get buy-in from motorists and ratepayers the revenue needs to be recycled straight back. The most direct route would be through reduced petrol taxes and rates.
The most efficient charging system for roads is a charge that varies by time of day and location and is set such that the roads always flow freely. Five years ago that was a technological impossibility. Now it could be done with a smartphone app very similar to the Uber taxi app. Re-directing the discussion from what is seen in some circles as taxing motorists to pay for trains to road user charges to maximise network efficiency would make finding an accord with government easier. We will not need to fund alternatives to driving and can delay the construction of new road capacity – a road network without excessive congestion will carry more cars during the peaks than travel now and many more over the course of a day, while public transport operators will have the commercial incentive to invest. Buses, trams and trains can have a role depending on the price/service they can offer. Road pricing and public transport fares that increase the price for peak CBD trips but reduce the price for all others will discourage long commutes and thus affect location decisions for households and firms. Prices that encourage households to locate closer to jobs and services provide the sustainability benefits desired by advocates of compact city growth – and reduce the carbon footprint – without the coercion and unintended consequences for housing unaffordability of an urban growth limit.
Multiple infrastructure networks are under pressure from urban expansion. The three waters (fresh, storm and waste), electricity, and communications and possibly gas are also required. The capital cost of providing the three waters is often cited as a reason not to allow peripheral expansion – particularly not the sort of distributed development required if land supply is to be competitive. But why should such provision be the exclusive domain of the city authority? One option is to allow development of ex-urban communities that provide their own essential services. The concept – known in Texas as Municipal Utility Districts or MUDs, allows development to take place at no commercial risk or expense to the city.
MUDs can be thought of as geographically dispersed body corporates. Texas MUDs allow developers to transfer infrastructure such as the three waters to a body corporate type entity, these entities pay the developer using a debt instrument –a municipal bond, which is then paid off over time by the new residents’ rates. There are various audits and safeguards put in place to protect this process. The system encourages speedy developments so developers get compensated quickly and residents share costs over a greater number. Infrastructure costs for Texas MUD type systems are not absorbed into the section price as currently occurs in New Zealand. Like body corps, different MUDs can offer their residents different shared facilities such as swimming pools, sports grounds, neighbourhood heating or renewable power generating schemes etc., and compete on price and services. With more transparent infrastructure charging some MUDs might promote themselves as public transport hubs with features such as bike routes to and secure storage at interchanges, perhaps a driverless car pool for local transport, and a strategic partnership with public transport service providers for commuting to the CBD. Others might have a deliberate private car orientation. MUDs need not always be greenfield sites – neighbourhood redevelopments could also be undertaken using the MUD model -a variation on the earlier mentioned neighbourhood voluntary intensification concept.
MUDs offer a possible pathway to move from the current overheated property market to more rational land pricing without the collapse of house prices – the fear of which I believe is constraining some politicians from taking needed action. The city could adopt a programme of MUD license releases that start conservatively (thus holding up property prices in the short term) but which would become increasingly liberal. Unlike the ‘release’ of rural land, there would be some assurance that the land would be developed. Even without MUDs, councils could allow development outside the urban limit for a fee, with the fee reducing over time as the market stabilises.
Where the city provides infrastructure we need to ensure the charges reflect the cost of provision. The cost of operating and maintaining existing municipal infrastructure is largely determined by the size of the network, and that in turn is driven by the area covered. It is perhaps counter-intuitive, but rates on land value much more closely reflect the cost of providing municipal services than rates on capital value. (The cost of a sewer depends on its length, age and design capacity, not the number of connected pans). Rates on land value (for everyone, not just a tax on foreigners) have the added attraction of discouraging land banking and encouraging intensification. Rates on capital value have been favoured by some councils on ‘ability to pay’ arguments. Distressingly, they are mandated in the legislation establishing the Auckland City Council. The role of municipal councils should be service provision, not income redistribution.
In summary, the housing ‘crisis’ is but one of the problems that arises from failing to cater for the growth in demand for city living. Other problem include road congestion and finding the money for projects such as Waterview and CRL. Ask people what are the biggest problems facing Auckland and I suspect the answers will include housing unaffordability, road congestion and spiralling rates. What is the answer?
We do need cities, and cities need to grow. For efficient liveable cities we need planning rules that enable the city to meet people’s needs and respond to their desires. At the same time we need appropriate charges for infrastructure and services so the choices people make do not impose financial burdens on others.
In particular we need:
· to abolish the urban growth limit and relax restrictions on urban intensification,
· to introduce efficient road pricing to reduce congestion, help encourage sustainable growth and discourage long commutes,
· rates based on unimproved value to better reflect the cost of municipal service provision and encourage development of available land,
· to provide for self-sustained urban development areas to give new housing choice and mechanisms for funding other essential infrastructure.
It is important that we get our cities right. And it is essential that we allow them to grow.
Cities thrive because they are efficient labour markets. They maximise the availability of labour for firms and the choice of employment and entertainment for people.
Most cities form around a centre. This maximises the inherent benefits. Firms that occupy the centre benefit the most and land values are highest there. Firms that benefit less from being in the centre locate further out, trading location for land cost.
Travel time used to restrict city size. Generally the maximum time people will invest in travelling to work is about one hour per day. However the wide availability of motor vehicles since the middle of last century vastly expanded the potential city catchment. Modern communications has reduced the need for, but seemingly not the demand for this daily travel.
Concentric cities work up to a certain size, but then problems such as road congestion start. At some stage, the additional travel time due to congestion distorts the time-distance relationship and development starts to occur at other points - creating the polycentric city.
Cities have reacted to this tendency for dispersal in a number of ways. Many cities have tried to reinforce the role of the centre by providing a central distribution system to increase the effective size of the centre, building motorways and railways to overcome congestion or provide alternative access to the centre. These solutions are usually very expensive.
Because catering for car access to the city centre is expensive, too little is provided. Cities subsidise public transport to encourage people to leave their cars at home. The attraction to infrastructure providers is that public transport uses less road space (or allows more people to use the space that we have).
But the effect of building motorways and subsidising public transport is to make commuting from remote suburbs even more attractive. People make location choices that seem rational to them but which impose excessive infrastructure costs on society.
The resulting outward expansion of cities (“sprawl”) is often condemned as environmentally unfriendly and socially alienating. It has given rise to a counter movement towards compact or ‘smart growth’ cities. The idea behind compact cities is that that population growth is catered for by increasing urban density, particularly towards the centre. It runs into several significant problems: firstly densification on the scale required means knocking down what is already there, and that can be both expensive and unpopular; then adding density in existing areas can create additional costs for infrastructure such as roads, water mains and sewerage; and thirdly you need some way of enforcing your urban vision otherwise people are still going to commute from afar.
‘Smart’ cities have tried to enforce their vision by legislating an urban boundary outside which development is not permitted. Where this has been tried, the effect has been to drive up the price of land inside the boundary. What is more, where the land available for housing is scarce and the quantity is limited, it becomes a good investment for speculators. As long as land value increases exceed rates of return on alternative investments, speculators have an incentive to hold land rather than sell, exacerbating the shortage. Small parcels of rural land released for development are also likely to be land-banked and have no effect on prices– the only way to break the hold is to restore competitive access to rural land. If that means expanding Auckland, that is what we should do. Pukekohe is cultivated for horticulture because it is close to Auckland not the other way around.
Some people argue that freeing up restrictions on intensification and ‘building up’ within the urban area would be a better way to cater for increased population. It could certainly help – if you can achieve it despite opposition from existing home owners and residents. But only if sufficient potential building opportunities are created for the supply to become competitive. Limited densification of selected suburbs won’t be enough to increase supply and lower house prices. It may lead to a modest number of additional houses being built but international experience is that they will be smaller and more expensive than if land at the periphery is developed. What is almost certain is that limited up-zoning will increase the value of the underlying land. That will further increase the difference between rates of return from holding land and the return on alternative investments and risk further suppressing development.
Of course it isn’t a case of either up or out. There is demand for high density housing near the city centre, just as there is demand for low density suburban houses. So we should try to find ways that both can be provided. What is needed is a relaxation of the planning rules to allow a greater range of development. That sounds simple, but people who have purchased houses on the basis of one set of planning rules have a valid grievance if the planning rules change. One way to address local opposition to changing the rules might be to permit experimentation with relaxation of local planning rules in the context of neighbourhood schemes where all property owners in a neighbourhood (a city block for example) band together and share in the development proceeds. Such voluntary neighbourhood schemes are discussed in the third part of this land contiguity article. The Economist has reviewed the economic literature on other methods to reduce the NIMBY effect here.
If affordable housing requires competitive access to rural land, how do we achieve this without imposing excessive costs for infrastructure and/or pubic transport services? One option is to abandon the mono-centric city. Deliberately build a grid of high capacity roads around which the future city can grow in a polycentric manner. Variations of this concept include the linear city and the development of sub-centres linked by high capacity road and public transport routes. Cities that have embraced and provided for expansion in this way have lower land and housing costs than cities that have pursued a compact city model.
But if the fundamental issue is under-priced infrastructure, why not address the problem? Roads in most parts of the world are under-priced (paid for by the tax payer rather than the user). Even in New Zealand, where money collected from motorists through petrol levies and road user charges for heavy vehicles and diesels pay a significant portion of road costs, there is a huge difference between what the motorist pays to travel on and the cost of providing big city CBD focussed roads. So right from the start, living away from the centre and commuting by car is heavily subsidised (albeit in New Zealand by other motorists). But it gets worse. In order to avoid the huge costs imposed by people availing themselves of these subsidised roads, we encourage people to travel by public transport by – you guessed it - subsidising that too.
If you let people make location decisions that weigh up the cost of subsidised transport against the savings from cheaper land, they are of course going to make socially inappropriate decisions. Part of the answer is to introduce efficient charges for transport infrastructure and services. Road pricing is being discussed in Auckland but in the context of raising revenue for big projects rather than as a means of managing the network.
If road prices are set to manage the network efficiently, they will reduce congestion and increase capacity – more people can travel quicker. But if the revenue is captured by AC or the government it is still likely to be opposed. To get buy-in from motorists and ratepayers the revenue needs to be recycled straight back. The most direct route would be through reduced petrol taxes and rates.
The most efficient charging system for roads is a charge that varies by time of day and location and is set such that the roads always flow freely. Five years ago that was a technological impossibility. Now it could be done with a smartphone app very similar to the Uber taxi app. Re-directing the discussion from what is seen in some circles as taxing motorists to pay for trains to road user charges to maximise network efficiency would make finding an accord with government easier. We will not need to fund alternatives to driving and can delay the construction of new road capacity – a road network without excessive congestion will carry more cars during the peaks than travel now and many more over the course of a day, while public transport operators will have the commercial incentive to invest. Buses, trams and trains can have a role depending on the price/service they can offer. Road pricing and public transport fares that increase the price for peak CBD trips but reduce the price for all others will discourage long commutes and thus affect location decisions for households and firms. Prices that encourage households to locate closer to jobs and services provide the sustainability benefits desired by advocates of compact city growth – and reduce the carbon footprint – without the coercion and unintended consequences for housing unaffordability of an urban growth limit.
Multiple infrastructure networks are under pressure from urban expansion. The three waters (fresh, storm and waste), electricity, and communications and possibly gas are also required. The capital cost of providing the three waters is often cited as a reason not to allow peripheral expansion – particularly not the sort of distributed development required if land supply is to be competitive. But why should such provision be the exclusive domain of the city authority? One option is to allow development of ex-urban communities that provide their own essential services. The concept – known in Texas as Municipal Utility Districts or MUDs, allows development to take place at no commercial risk or expense to the city.
MUDs can be thought of as geographically dispersed body corporates. Texas MUDs allow developers to transfer infrastructure such as the three waters to a body corporate type entity, these entities pay the developer using a debt instrument –a municipal bond, which is then paid off over time by the new residents’ rates. There are various audits and safeguards put in place to protect this process. The system encourages speedy developments so developers get compensated quickly and residents share costs over a greater number. Infrastructure costs for Texas MUD type systems are not absorbed into the section price as currently occurs in New Zealand. Like body corps, different MUDs can offer their residents different shared facilities such as swimming pools, sports grounds, neighbourhood heating or renewable power generating schemes etc., and compete on price and services. With more transparent infrastructure charging some MUDs might promote themselves as public transport hubs with features such as bike routes to and secure storage at interchanges, perhaps a driverless car pool for local transport, and a strategic partnership with public transport service providers for commuting to the CBD. Others might have a deliberate private car orientation. MUDs need not always be greenfield sites – neighbourhood redevelopments could also be undertaken using the MUD model -a variation on the earlier mentioned neighbourhood voluntary intensification concept.
MUDs offer a possible pathway to move from the current overheated property market to more rational land pricing without the collapse of house prices – the fear of which I believe is constraining some politicians from taking needed action. The city could adopt a programme of MUD license releases that start conservatively (thus holding up property prices in the short term) but which would become increasingly liberal. Unlike the ‘release’ of rural land, there would be some assurance that the land would be developed. Even without MUDs, councils could allow development outside the urban limit for a fee, with the fee reducing over time as the market stabilises.
Where the city provides infrastructure we need to ensure the charges reflect the cost of provision. The cost of operating and maintaining existing municipal infrastructure is largely determined by the size of the network, and that in turn is driven by the area covered. It is perhaps counter-intuitive, but rates on land value much more closely reflect the cost of providing municipal services than rates on capital value. (The cost of a sewer depends on its length, age and design capacity, not the number of connected pans). Rates on land value (for everyone, not just a tax on foreigners) have the added attraction of discouraging land banking and encouraging intensification. Rates on capital value have been favoured by some councils on ‘ability to pay’ arguments. Distressingly, they are mandated in the legislation establishing the Auckland City Council. The role of municipal councils should be service provision, not income redistribution.
In summary, the housing ‘crisis’ is but one of the problems that arises from failing to cater for the growth in demand for city living. Other problem include road congestion and finding the money for projects such as Waterview and CRL. Ask people what are the biggest problems facing Auckland and I suspect the answers will include housing unaffordability, road congestion and spiralling rates. What is the answer?
We do need cities, and cities need to grow. For efficient liveable cities we need planning rules that enable the city to meet people’s needs and respond to their desires. At the same time we need appropriate charges for infrastructure and services so the choices people make do not impose financial burdens on others.
In particular we need:
· to abolish the urban growth limit and relax restrictions on urban intensification,
· to introduce efficient road pricing to reduce congestion, help encourage sustainable growth and discourage long commutes,
· rates based on unimproved value to better reflect the cost of municipal service provision and encourage development of available land,
· to provide for self-sustained urban development areas to give new housing choice and mechanisms for funding other essential infrastructure.