The ripple effect – why we need new housing at all levels of the market.
“We just need affordable housing” is a frequent comment I see and hear about new housing developments, particularly more upmarket developments. This article discusses why its not that simple and new housing supply at all points in the market is good.
When I see a new luxury apartment block in central Auckland, it makes me happy. Not because I can afford it or likely ever will, but because new housing supply in a wealthy area, reduces the ripple effect of higher income people being pushed into lower income suburbs, and lower income people being forced out. The outcome of which is also known as gentrification.
To explain this a little more, using central Auckland (the Isthmus) as an example, imagine there being three rings of suburbs for simplicity’s sake.
The first ring is your city fringe suburbs, like Parnell and Ponsonby and the inner bays to the west and east, such as Herne Bay and Mission Bay. These are the most expensive suburbs to both buy and rent. The previous district plan and now the Auckland Unitary Plan (AUP) have restricted development and intensification in these areas. The lack of supply in these areas has contributed to prices growing, pricing out an income bracket who historically would have been able to afford the area.
These people then look to buy and rent in the second ring of suburbs, Sandringham, Mount Albert, and Royal Oak, which were previously much more affordable. Some development is possible but still relatively constrained. In combination with the pressure from inner suburbs, has priced out people who historically based on their income level would have been able to afford here.
This ripple effect continues, as people who were previously able to afford these areas, are pushed to suburbs like Onehunga and Avondale. These suburbs were historically were much more affordable than they are today. These areas are appropriately zoned for intensification under the Unitary plan and consequently is seeing the highest levels of consents across the central Auckland. This new housing is great! But it needs to be acknowledged that greater density in these areas is coming in part due to the lack of consents in inner suburbs. This is leading to existing community members, quite rightly, questioning where the investment is to support this change, who the new development serves and why other suburbs seeing the same change.
So, coming back to the first point on why new supply even at the high end of the market is important. While a $1,550,000 one bedroom + flexi room apartment in Ponsonby is not affordable housing for first home buyers or those on low incomes, it is relatively affordable in its location when compared to a $2,000,000 2-bedroom house in the same suburb. Most importantly, it is new supply in a high demand location. Whoever moves in whether renting or buying is prioritising the location and proximity to the city centre and other amenities, and not going further out reducing the ripple effect.
In summary, as we have a housing supply shortage, every new home is good to see. While ensuring new housing supply is possible in the most desirable suburbs will not stop gentrification, it can help slow the process. Continuing to restrict supply in the most desirable suburbs accelerates gentrification. Forcing people on lower incomes out further from the city, their existing neighbourhoods and communities.
Have you looked much into the difference in "ripple effect" between increased density, and outwards expansion? It is odd how few analysts spot that systemic "housing affordability" which was common for decades, and still exists in a few dozen US cities, was enabled by outwards expansion of sufficient freedom that developers could obtain sites at true rural prices, and compete with each other to provide value for money in the finished housing development. There was no "non value added cost" extracted by site owners. This was the enabling factor in historically normal "median multiple 3" housing markets. Furthermore, the inwards land price "ripple effect" kept the price of land disciplined right to the centre, and hence intensification did result in a low site price being divided up over whatever number of units were built, which represented an "even cheaper option" in the market.
What we see in US urban areas that allow both expansion and intensification, is a median multiple of around 3, and 70% of new home buyers option for the McMansions and 30% for the townhouses and apartments which are truly an even cheaper option. This is systemic affordability. One historical observation here: the rapid building "up" of a city like New York occurred at the same time that the urban area was sprawling rapidly in several directions, and land prices were being kept low by this. I argue that the upwards building at the centre would have been stymied otherwise, by the effects I will now describe if the sprawl had been disallowed.
When this freedom for developers is removed, by growth boundaries or proxies for them, it seems to not matter how "liberal" the planners "years of supply of land" is, site owners expect "extractive" prices for their sites, which is easily tens or hundreds of times higher than the true rural price. The "extractive" price is based on "the maximum that end consumers of housing can be gouged to pay for the minimum tolerable space and quality". Developers do indeed do the calculations, but it is the vendors of sites who reap the zero-sum gains, developers are merely in a bidding war with each other to secure supply from a de facto land oligarchy. And this applies to ALL sites inwards to the city centre. This is why there is no example to be found, of a "ripple effect" on PRICES, of housing supply by way of increased density. Developers are trapped between paying site vendors "extractive" prices, and attempting to make an honest profit on the "value added" part of the project, which is swamped and squeezed by the dead site purchase and holding costs, which make up 70, 80, 90 percent or more of the price of the finished housing. Under these conditions, the rate of attrition in developers is high, and a worsening shortage of housing accrues from cycle to cycle. This is why Britain's cities, after decades of this, with ever more upzoning every cycle, are twice the density of German cities and six time the density of US cities, and yet there is a perennial shortage of housing, and median multiples from 7 to 10 even though the median home is a fraction of the size of the US one in cities with a median multiple of 3. The price of urban land is literally 300 to 1000 times higher. Paul Cheshire is the British expert on this.
Another sad unintended consequence of upzoning, is that even though only a small proportion of properties in the zone might be redeveloped, the way site prices are worked backwards "extractively" means that every property in the zone inflates to the price that developers are paying, meaning that "house prices" are pushed upwards. Every house buyer must outbid the developers, or be forced to accept the crammed product from redevelopment, which is still never "affordable" in systemic terms (or accept more inefficient locations and/or dilapidated old properties).