How land prices shape development patterns

Land values are an underdiscussed (outside of a small corner of economists and nerds) but important topic we should want more planners, policy analysts, politicians and the general public to understand. By land values, I am referring specifically to the value of land within a property, not capital improvements like buildings.

This article is inspired by a tweet from late last year, which said “I’ve heard that Christchurch needs higher land values to make high density developments (Simplicity Living) feasible. Where’s the sweet spot?” Inversely, another comment I frequently hear is that “developers go where the land is cheap”.

I will unpack the answers to these questions/statements at the end of this article, but I want to cover a few fundamentals first.

Why are land values important for discussions about urban planning and housing?

In many towns and cities, land values can make up the majority of the overall value of a typical residential property. This means when you purchase a property, you are paying mostly for the land, rather than the house itself. It also means you have less to spend on the actual house, or completing renovations to add value. From an affordability perspective, lower land values would improve affordability. But what drives land values up or down?

What drives land values?

Land values, as with almost everything you can purchase, are fundamentally a reflection of supply and demand.

Demand can be shaped by:

1. Location: Central and accessible locations with proximity to amenities such as schools, parks, shops, and employment hubs tend to have higher land prices. Central and accessible locations tend to have higher land prices.

2. Zoning and Land Use Regulations: Government policies and zoning laws, and land use regulations determine what can be built on a piece of land and what activities can operate, shaping its value to the market.

3. Infrastructure and Accessibility: The availability and quality of infrastructure, including roads, public transportation, and utilities (water, electricity, sewage), can increase land value.

4. Environmental Factors: Natural features such as water bodies, terrain, soil quality, climate, and presence of natural hazards (e.g., floodplains, earthquake zones) can shape land prices. Pleasant environments and scenic views can add value, while areas prone to natural disasters may see reduced prices.

5. Economic Conditions: The overall economic environment, including factors like interest rates, inflation, and economic growth, affects land prices. Low interest rates can make borrowing cheaper, increasing the demand for land and driving up prices.

6. Development Potential: The potential for future development, including rezoning possibilities or new infrastructure projects (e.g., a new highway or train line), can drive up land prices as speculators and developers anticipate higher future returns.

So, what about supply? Land itself is of course generally a finite resource, with the exceptions being when geological gods intervene or we undertake land reclamation. Nonetheless, central and local government regulation drives the availability of land for different uses and the scale of development that can occur. In turn, this impacts the overall supply of land, be it for agriculture, housing, retail, offices or industrial activity.

One example is the Rural Urban Boundary (RUB) in Auckland, which several studies have found to be driving higher land prices within the urban area compared to the rural land, once controlling for infrastructure. The most recent analysis from Treasury found that “restrictions are estimated to have added $378.4 per square metre to the price of urban land immediately inside the Rural Urban Boundary line in Auckland in 2021”.¹ For the median Auckland section of 647m2, this equates to almost $245,000 in additional costs!

The RUB is a well intended policy, designed to manage outward growth, which has high costs on transport and water networks, and protect productive farmland. However, it comes at a high cost to housing affordability.

There is a strong argument that by better enabling housing growth in the existing urban area, ensuring greenfield development pays the full cost of growth² and using more targeted tools to protect land we do not want developed, we could better manage outwards growth with less impact to housing affordability.

The relationship between land values and urban development patterns

All else being equal, development patterns, by which I mean the use and scale of urban development, should follow land values. You would expect to see reasonably flexible commercial activities with lower returns, like car yards and storage units, be located in areas of low land values. Higher land values are where you would see higher density developments (assuming zoning allows). This is because high land values typically make it economically necessary to maximise the use of available space to make a return on the cost of the land by generating more revenue per square metre.

Now this is a general rule. Land-use regulations (zoning) can restrict activities and scales of development, making development infeasible. Homes can also have different values to different people for sentimental reasons, like a family home which the owner refuses to sell no matter what price is offered.³ Other policies, including the approach take for council rates, can shape whether under-developed land is held for longer or redeveloped.

Some key framing statements for considering land values in your city

1. Policies that constrain land supply, in turn driving higher land prices, are harming your city.

   Our planning system is filled with restrictions on what activities can occur where and what scale of development is permitted. Special character overlays, for instance, which apply to 41% of residential land within 5km of the Auckland City Centre, generally limiting development to one house per section.

   Land in these central locations is some of the most expensive in Auckland outside of the City Centre⁴. By only allowing one home per section, that home must reflect the entire land value in the overall price. For many centrally located properties, this is over $2,000,000. By upzoning to enable more homes on each site, the land cost can be spread across more people and improve affordability.

   

   Land values across the central Auckland isthmus. Dark orange and red are the most expensive areas (Auckland Council GeoMaps)

2. Investments that drive higher land values are generally positive, when paired with the right complementary actions.

Large transport infrastructure investments that provide additional access to jobs, education and other opportunities can provide great economic and social benefits, and be extremely positive for our cities. For example, Auckland’s City Rail Link (CRL). However, this project will drive higher land values around railway stations both in the CRL and along the existing rail lines.

The first action in these areas to promote affordability is to upzone ensuring that those higher land costs can be spread across more homes. This also has co-benefits in enabling people to locate close to transport choices, more jobs, and have access to more housing supply and choices.

The second action is to have some sort of value capture mechanism to tax the land value uplift from the public (government) investment in the infrastructure. In New Zealand, the lack of a property tax in the format typically seen overseas makes this challenging. For this reason, the government recently announced an expansion of the Infrastructure Funding and Financing Act, to allow Crown agencies like NZTA to levy properties in a project area, to help fund it.⁵ This is cost recovery, as the money is generally collected after the project is complete, but is a close proxy for value capture proper.

Through these two complementary actions, we can mitigate the effects of higher land values.

Coming back to the opening provocations

1. Higher land values would likely make apartment developments more viable in Christchurch. However, wanting or seeking higher land values for this purpose would likely have some consequences of negative impact, particularly if this relies on policies which constrain land supply.

2. Developers are unlikely to simply go where land is cheapest, as it will likely be difficult to sell or rent brand new homes in those locations and make a return. Rather, developers undertake feasibility studies across a wide variety of sites to identify what housing typologies, size and number of homes would likely offer a return based on market conditions where they can borrow the funds to proceed. Where land is cheaper, you are more likely to find developers building detached and cheaper homes. Where land is more expensive, you are more likely to find high end and higher density homes.

Conclusion

Understanding land values is critical for effective urban planning and housing affordability. The value of land directly impacts affordability and shapes development patterns in cities. Our planning system needs to be responsive to changing land values to ensure the planning system enables development and activities of a scale that reflects the land value.

Major infrastructure projects like the CRL will (and likely already is) drive higher land values. To mitigate these effects, it is essential to pair investments in infrastructure with policies that allow higher density developments and mechanisms to capture the increased land value. By doing so, cities can improve housing supply and affordability, maximise the utility of valuable land, and ensure better overall urban development.

1. Analysis of availability of land supply in Auckland | The Treasury New Zealand https://www.treasury.govt.nz/publications/jp/analysis-availability-land-supply-auckland

2. Can we afford greenfield growth in our cities?

3. Up (2009). IMDb. https://www.imdb.com/title/tt1049413/

4. Matt L (2018). Auckland Land Values. Greater Auckland. https://www.greaterauckland.org.nz/2018/07/16/auckland-land-values/

5. Chris Bishop (2025). Going for Housing Growth: New and improved Infrastructure Funding and Financing. https://www.beehive.govt.nz/speech/going-housing-growth-new-and-improved-infrastructure-funding-and-financing