This is the first part in an open-ended series on the economics and politics of zoning reform. The Unitary Plan decision means that Auckland’s urban planning framework is set for the short to medium term – albeit with inevitable appeals and changes. But the issues we’ve been grappling with over the past few years – i.e. how, where, and why to adjust the rulebook – will keep coming back. A growing city must also be a continually changing city, and zoning decisions can either help or hinder that.
A good starting point for thinking about the economics and politics of zoning reform is to ask: What are the costs and benefits of allowing more housing to be developed? And how are these costs and benefits distributed?
I investigated these questions in a conference paper at this year’s New Zealand Association of Economists. Without getting into the numbers, we can identify three main effects:
First, the benefits of new housing primarily accrue to people who are newly entering the housing market. For instance, young people trying to buy or rent a home benefit from there being more homes, as it means they can get better housing or cheaper housing. Equivalently, restrictions on new housing development mainly impose costs on people who don’t already own homes. When the supply of housing is restricted, then they face a choice between paying more for housing that meets their needs, living in substandard or crowded housing, or leaving the city entirely.
Second, the costs – adverse effects – of new development are location- and context-dependent. The distributional impacts – who is affected? – can also vary quite a lot. For instance, a new subdivision on the city fringe probably wouldn’t shade anyone’s home or block its view, but it might worsen water quality or biodiversity. And, given the dysfunctional way we build new suburbs, it will definitely increase traffic congestion.
By contrast, redevelopment and infill within the city will tend to have fewer environmental impacts – it’s already a city! – but there are more neighbours who may be affected by the various nuisances associated with development, like having new buildings casting shade on adjacent properties or more people parking on “their” street. People don’t like change very much… but they can easily adjust to different “status quo” scenarios.
For instance, consider Ponsonby. It would all be horribly illegal under today’s zoning codes. Lot sizes too small, buildings too close to each other and taking up too much of the lot, no parking, etc, etc. If you tried to get houses like these consented today, especially in an existing suburb, you’d be refused in about three seconds flat. But because they’ve been there for decades, people see them as something that should be protected – present-day zoning code be damned!
Third, enabling housing development can allow cities to grow larger and in a more economically efficient pattern – leading to enhanced agglomeration economies. The benefits of increased productivity and greater consumer choice accrue broadly to most people in the city, or potentially even to the entire country. (Taxes paid in Auckland pay for retirements in Tauranga!)
Conversely, evidence from overseas cities suggests that restricting housing supply can result in large economic costs as a result of the misallocation of workers throughout space. For instance:
- In the US, Chang-Tai Hsieh and Enrico Moretti found that high housing costs have discouraged people from getting jobs in high-productivity cities – in particular New York, San Francisco, and San Jose. If those cities had allowed more homes to be built over the past three decades – which would have entailed more intensive development – the US economy would now be 9.7% larger than it actually is, with commensurate gains in income.
- In the Netherlands, Wouter Vermeulen and Jos van Ommeren found that housing supply, not productivity or availability of jobs, has driven cities’ growth. Rather than moving to locations with abundant high-income jobs, people move to places with more homes – again, with a cost to overall economic outcomes.
As Matt Yglesias observed, agglomeration economies benefit workers with different skills… provided that they can afford to locate in high-productivity cities:
…just as factories served as economic anchors for regions, today’s big industries produce broader local prosperity.
Here are some examples from the San Francisco area:
- Pay for food service workers is 30 percent higher than the national average
- For accountants, it’s 20 percent more than average
- Auto mechanics make 40 percent more than average
The problem is that for most residents of these places, the higher cost of living erodes the benefits of higher pay.
So how does all this add up? There are two answers. The first is that the benefits of urban development tend to outweigh the costs… provided that it isn’t happening in a totally dysfunctional way, like paving over the habits of endangered birds or building astonishingly unredeemable eyesores. In other words, the benefits for people who are getting housed, plus increased agglomeration economies, outweigh the costs from negative social or environmental impacts. So from the perspective of long-run social wellbeing, zoning that enables more development seems like a good idea.
The second answer is that the distributional impacts tend to determine the politics of zoning. As economist William Fischel observed, local governments tend to be dominated by “homevoters” who are mainly worried about risks to their property values and quality of life. In this context, the fact that enabling urban development mostly has benefits for new entrants to the housing market – i.e. young people and people moving into the city from elsewhere – is pretty important.
As economists like to say, the incentives facing local government voters aren’t well aligned with long-run social wellbeing. To current voters, zoning reform isn’t necessarily an appealing proposition. It appears to create uncertainty for their neighbourhood and property values, while principally benefitting other people.
This is a very understandable view for individuals to hold, but it’s not awesome for society as a whole. If cities and economies don’t change, they wither and die, creating vast human misery in the process. In order to prevent that from happening – i.e. to keep people from crowding into unsanitary accommodation or going homeless – we need to be willing to reform our zoning policies.
In the subsequent posts in this series, I’m going to take a look at what that might look like. In the first instance, I want to focus on the institutional arrangements that enable reform, considering issues like:
- The trade-off between localised and centralised decision-making
- The good and bad in New Zealand’s legislative framework
- The role of analysis and evidence in planning decisions
- The role of social norms in encouraging (or discouraging) people to plan for future generations.
As always, leave your views in the comments.