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OPINIONPoliticsFebruary 15, 2024

Opinion: Wellington’s housing panel is out of step with the economic evidence

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The independent hearings panel for Wellington’s District Plan claims upzoning won’t enable more housing or improve affordability. Economist Stu Donovan takes a critical look at the evidence.

Little Wellington is facing big decisions about whether to embrace more apartments and townhouses. The hot question is: will upzoning lead to more houses and improve affordability? According to the independent hearings panel making recommendations on Wellington’s proposed District Plan, the answer is no. In its first report, the panel decided “enabling intensification does not, of itself, improve or even address affordability”.

These views are – to put it politely – wildly out of step with the economic evidence. To understand why, we only need to look at Auckland, where the Unitary Plan enabled widespread upzoning from circa 2013 onwards. 

The number of building consents issued per 1,000 people annually fell after downzoning in 2005 and remained low until the Auckland Unitary Plan began to be adopted from 2013 onwards – after which consents surged to all-time highs. 

In the eight years since Auckland upzoned, 112,000 new consents – one for every five existing homes – have been issued. Around 90% of these consents turn into new houses, so it’s fair to say housing supply in Auckland is booming.

That doesn’t necessarily prove that those new houses were built because of upzoning. To figure that out, we need to account for the hypothetical scenario (or, “counterfactual”) where Auckland hadn’t upzoned. Thankfully, researchers have been working hard on these gnarly questions. This study compares consents in upzoned residential areas to non-upzoned residential areas within Auckland and finds upzoning caused an extra 22,000 consents over five years. Another study compares consents in Auckland to other similar cities in New Zealand and finds that upzoning caused an additional 43,500 consents. These are big, chonky causal effects. 

What about prices? Well, a third study finds that rents for two- and three-bedroom dwellings in Auckland declined by around 20-30% in real terms after upzoning. Together, these three studies find upzoning in Auckland caused the supply of housing to increase and the price of housing to fall.

Submissions from several people and groups, like Generation Zero, pointed to the Auckland experience as evidence of the benefits of upzoning, but the panel was not convinced, writing that the submitters “provided no details or analysis that might have demonstrated either that there was a causal relationship between these changes or that the same result would likely follow in Wellington.” 

The most serious problem here is that the panel was directed to detailed economic evidence that analysed the effects of upzoning in Auckland. This evidence found that upzoning had increased supply and reduced prices in Auckland, and that the same could be expected to occur in Wellington. 

The panel is meant to be full of planning experts. That’s why they’re appointed to the role. Yet, they seemed unfamiliar with evidence on the AUP, which is surprising because the AUP is probably the biggest thing to happen to planning in New Zealand in recent decades. I’m very serious when I say that Auckland is home to the most rigorously studied upzoning the world has ever seen, and it’s right in the panel’s backyard. 

As far as I can find there exists no counter-evidence to the submitters’ claims. There are zero published economic studies (at least that I have found) that concluded upzoning has no causal effects on housing supply in Auckland. In fact, the best evidence the panel can muster is a submission that references a blog post.

Indeed, most of the panel’s positions and recommendations relied heavily on evidence submitted by Dr Tim Helm, who acted as an expert witness for the Newtown Residents Association. In his evidence, Dr Helm cited a blog post that he had co-authored (“published”), which critiqued one of the three studies on Auckland’s upzoning that we discussed above. To start, I’d suggest that a blog post is a fairly weak piece of evidence to rely too heavily on. Even more problematic, however, is Dr Helm’s failure to mention that the criticisms in his blog post and testimony have, themselves, been strongly critiqued – and in my view, comprehensively debunked – in a blog post written by another economist. I suggest the failure to provide a balanced view of this evidence raises serious questions about Dr Helm’s conduct as an expert witness and, by extension, the panel’s reliance on his testimony to inform its own positions.

That said, Dr Helm’s evidence does provide some useful theoretical insights into housing dynamics. The problem is, he uses this theory to draw an extreme conclusion: “zoning rules just shape where housing goes and what it looks like – not how much is built”. This is the opposite conclusion to the Auckland research, which shows clear causal links between upzoning and building. 

Now, Dr Helm might try to argue that differences in the rate of supply between cities over time are due to differences in demand, such as population growth. For this to be a strong argument, however, Dr Helm would need to provide empirical evidence to support his theoretical claims, but he does not – or, at least not to a level that I find convincing. When I do try and test the implications of his theory, for example, by comparing the rate of supply with the change in the population, like I start to do here, then I find the housing supply gap between Auckland and Wellington widens. So, Helm’s relatively extreme theory isn’t supported by evidence or data. And keep in mind it’s Dr Helm’s job to make that case, not mine. 

What about the second part of the IHP’s argument, which questions whether these effects are “likely to follow in Wellington”? This hot take is deeply problematic for four cold, hard reasons.

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First, the effects of upzoning on housing supply (higher) and prices (lower) follow directly from basic economic theories. While there certainly are some exceptions, submitters should not be expected to provide evidence that basic economic theory was likely to apply in Wellington. If the panel considers that this theory does not apply, then the onus and responsibility is on them to make the case. As it is the panel that is making the extraordinary claims, it is the panel that needs to supply the extraordinary evidence. In my view, the panel doesn’t make this case because it can’t: The vast majority of evidence doesn’t support the panel’s positions, even when one takes Dr Helm’s submission at face value.

Second, and building on this theme, the effects of upzoning have been documented in many studies and places globally. From Mumbai to California to Atlanta, Austin, Chicago, Denver, Los Angeles, New York City, Philadelphia, Portland, San Francisco, Seattle, and Washington DC, studies consistently find that upzoning boosts housing supply and reduces prices. Another recent study from renowned researchers went further and used global data to show taller buildings lead to lower rents, less sprawl, higher wages, and lower commuting costs. Given the voluminous evidence, I’d again suggest that the onus is on the panel to justify its position that upzoning wouldn’t have similar effects in Wellington to elsewhere.

Third, the panel’s implicit assumption that upzoning wouldn’t have similar effects in Wellington isn’t supported by data. Housing supply in Wellington has lagged behind Auckland for most of the last three decades, with the gap narrowing and widening following downzoning and upzoning, respectively – precisely as you would predict based on the economic evidence. 

Similarly, since 2016, rents in Wellington have increased faster than Auckland. Importantly, the detailed economic evidence submitted to the panel specifically modelled the effects of upzoning on Wellington and found it was of a similar magnitude to other cities in New Zealand. Just to the north, meanwhile, the small but mighty Hutt City has seen consents surge to record highs after upzoning. The panel’s unusual views on upzoning and its implicit, unsubstantiated assumption of Wellington exceptionalism sits horribly out-of-step with this evidence and the data.

The fact is that simple analyses of publicly-available data show that the rate of housing supply falls after downzoning and grows after upzoning. Boring old conventional economics carries the day again, pulling the rug out from under the panel’s recommendations.

So why do we care? Well, the panel’s position on the effects of upzoning and its relevance to Wellington have underpinned their many recommendations to reduce housing capacity. The panel concluded, again pointing to evidence from Dr Helm, that the proposed plan has “sufficient capacity” to meet “expected demand” – therefore, there was no problem with reducing housing capacity. This assumption that downzoning is costless does not stand up to economic scrutiny.

The panel does not consider, for example, whether the capacity that they recommend retaining is a substitute for the many locations where they recommend downzoning, such as the inner city character areas. Different locations can vary enormously in terms of their accessibility and amenities – even over relatively short distances. For this reason, policies that reduce supply in some locations but increase it in others can still have large and tangible economic costs.

Where to next? I suspect that both Wellington City Council and central government are taking legal advice on whether these apparent errors of economic fact constitute errors of law. Spicy!

Stepping back, however, this episode highlights deeper, more structural problems with the role of economic evidence in planning processes in New Zealand. The law that governs the District Plan process, the NPS-UD, has the objective to “improve housing affordability by supporting competitive land and development markets,” which in my view the panel does not take sufficiently seriously. 

The law also says that any move to restrict housing below that required by the NPS-UD and MDRS must “assess the costs and broader impacts of imposing those limits”. Wellington’s panel dismissed the latter requirement and recommended strict limits on development below those required by law without assessing their costs or quantifying their impacts. In New Zealand, our planning processes somehow manage to be both totally costless and yet extremely costly, all at the same time.

The good news for Wellington is the panel’s recommendations have been criticised by politicians of all stripes. Many people seem to clearly think that New Zealand would benefit from enabling more housing. And with some political leadership from central and local government, I get the sense that this is still possible to achieve. For its part, Wellington City Council now has the chance to reject the panel’s recommendations for downzoning, while ministers could also end up weighing in. In general, I remain optimistic that New Zealand will continue to adopt evidence-based housing policies that help more people get into better and more affordable homes. 

Stuart Donovan is a senior fellow for Motu Economic and Public Policy Research in Wellington. Stuart currently resides in Brisbane with his family and three worm farms. Stuart does not own property in Wellington, but he would consider doing so if prices were to fall.

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Image: Tina Tiller
Image: Tina Tiller

PoliticsFebruary 13, 2024

What is Local Water Done Well, the new not-quite-Three Waters?

Image: Tina Tiller
Image: Tina Tiller

As it moves to scrap the troubled Three Waters scheme, the government has announced its new plans for water infrastructure.

Over the past few years, water infrastructure has gone from something a few passionate planners and council representatives would speak about in the media to an issue that almost everyone has an opinion on. We’ve seen gallons of water pouring onto the streets of Wellington. We saw hundreds of tractor-driving farmers descend on main centres. In short: it became a key election talking point.

Under Jacinda Ardern’s government, much of the debate was around a proposal called Three Waters. That evolved into the more boringly named “affordable water reforms” under the stewardship of Chris Hipkins and Kieran McAnulty. Now, under Christopher Luxon and minister of local government Simeon Brown, we’ve finally got a new name to remember: Local Water Done Well. 

Announced in the lead-up to last year’s election as a National Party policy, it’s since been adopted by the coalition government and the first steps to its implementation are now known. But what actually is it? How does it differ from what came before? And will it fix the problem?

What’s all this then?

Local Water Done Well was the name given to National’s election year commitment to oversee an upgrade and overhaul of the country’s water infrastructure. At the time, then opposition leader Luxon said his party’s plan would include “strict water quality standards” and require councils to invest in the ongoing maintenance of their vital water infrastructure. 

This week, Brown laid out the path ahead, explaining that two pieces of legislation will be passed over the next year-or-so to push forward with the plan. The first, which will be in force by the middle of the year, will allow neighbouring councils to join forces and separate out their water services into “council-controlled organisations”. These will be allowed to access long-term borrowing to fund water infrastructure separately from the councils themselves.

“It will… provide streamlined requirements for establishing council-controlled organisations under the Local Government Act 2002, enabling councils to start shifting the delivery of water services into more financially sustainable configurations should they wish to do so,” explained Brown.

The second bill will provide for the “long-term replacement regime” and be introduced at the end of the year and passed by mid-2025. This will set out the requirements for long-term financial sustainability and introduce backstop powers that the government can activate “when required” – effectively to make sure the new organisations aren’t racking up too much debt.

“In addition, it will also make necessary amendments to the water regulator’s legislation to ensure the regulatory framework is fit for purpose and workable for drinking water suppliers,” said Brown.

So Three Waters/affordable water are dead?

Not quite, but very soon. In just 10 days’ time, in fact. “The government, as a commitment made in its 100-day plan, will soon repeal the legislation passed by Labour to progress Three Waters. This will happen by February 23,” said Brown. “This will restore continued local council ownership and control of water services, and responsibility for service delivery.” 

Who’s involved in the government’s plans?

There’s a brand spanking new working technical advisory group that will contribute “specialist and technical expertise” to the government.

It will be chaired by Andreas Heuser, the managing director at Castalia Limited (yes, the group responsible for National’s foreign buyer tax costings). “Andreas has a background in economic and policy projects specialising in energy sector strategy, water reform, and natural resource economics,” read a press release from the government.

As Richard Harmon writes for Politik, “Castalia and Heuser have… already been in the thick of the Three Waters debate, having developed an alternative proposal for the anti-Three Waters lobby group ‘Communities for Local Democracy’.” In the Herald late last year, Heuser touted this alternative proposal for Three Waters and noted that it was referenced in National’s plan.

OK but this is a working group, right?

Sure. Writing for Stuff, political correspondent Tova O’Brien noted that while National in opposition had criticised the former government for its overuse of “working groups”, it seemed to now be increasingly fond of them. “The technical advisory group it announced on Monday to help with water is the third such group it’s established in two months,” wrote O’Brien. The prime minister, speaking to reporters yesterday, pushed back on this, saying the Labour government had set up 230 working groups in a very short period of time. “We ain’t doing that.”

And how does it differ from Three Waters?

Remember co-governance? That was one of the primary objections from vocal protesters to the Three Waters plan (though Labour denied that the original proposal – under which responsibility for drinking water, wastewater and stormwater services would be transferred from 67 local councils to four, and later 10, regional entities, each of which would be overseen by a group made up equally of representatives from local iwi and councils – was actually co-governance). Unsurprisingly, it’s gone. As O’Brien writes, time will tell whether the new plan is enough to see the “stop Three Waters” signs that littered rural New Zealand be pulled down.

This time around, councils will be able to dictate the level of involvement that local iwi have. “We’ve opposed co-governance and mandated entities on those communities,” Brown said.

Under the new plan, there’s an increased level of council autonomy, and with great autonomy comes great (financial) responsibility. Under National, councils can choose whether they unify to form the “financially independent” council-controlled organisations, but they’re still council-controlled and therefore the cost will remain with councils. Brown said this was manageable. “If you’ve got a properly balance-sheet-separated CCO, they will be able to take on debt and borrowings separate from the council and ratepayers.”

National's Simeon Brown (L) and Chris Bishop (R) during the election campaign
National’s Simeon Brown and Chris Bishop during the election campaign (Photo: Getty Images)

This process will still involve water being owned by councils and not through private entities, finance minister Nicola Willis said this morning. “The advice that we have received so far is that it is possible to take these assets off council balance sheets into new entities, which still have a modicum of the public ownership occurring.”

The Act Party – which forms a third of the coalition government – is unsurprisingly pleased with the new proposals. “We all know status quo isn’t up to scratch, but Labour’s bureaucratic, co-governed regime was never the answer,” said the party’s infrastructure spokesperson Cameron Luxton. “Three Waters would have been great for middle-managers but a disaster for water users, with layers and layers of bureaucracy separating decision makers from the people.”

But remember, there is a backstop and the government can still intervene if the entities get into financial trouble.

Sounds rosy. Any concerns?

While Labour in opposition has been relatively subdued since the election, the party’s local government spokesperson Kieran McAnulty came out swinging against the government’s water plans. To be fair, these critiques are very similar to those McAnulty raised while still a minister. 

“The government’s confirmation [that] it will repeal the affordable water reforms will see higher rates for every ratepayer – up to 90% in some individual councils – in 30 years,” McAnulty said.

 “The cost of fixing our broken water infrastructure is estimated at $185 billion over just three decades. It is simply irresponsible of National to ignore the problem.”

Writing for his newsletter The Kākā today, Bernard Hickey said that the plan was effectively bumping the issue of water down the road. “The end result? The government and councils point fingers at each other for yet-more-years, the pipes keep failing, the beaches become more polluted and land prices keep escalating as fast as the rents for those not still in motels, tents and station wagons,” he said.

And how did the government respond to that?

Well, it does seem like maybe Hickey’s onto something. “That will be a decision for local councils and those CCO organisations,” Luxon told Newshub when pushed on potential rates rises. “But all I just say to you is, this is the most efficient way of doing it.”

What have councils had to say so far?

There hasn’t been a lot of comment as of yet, but Auckland mayor Wayne Brown was early to celebrate, saying the plan was “in line” with what he had asked for. He wants it established as soon as possible. “I’m working constructively with the government on that, and initial discussions are promising,” he said.

Manawatū mayor Helen Worboys – who was involved with the anti-Three Waters group Communities 4 Local Democracy – was also thrilled. “The good thing is this has been passed back to councils. We now need to pick that up and seriously come up with how this is going to work for our communities. That’s what we asked the previous government for, and this government has given us the opportunity,” she told RNZ.

Less convinced was Clutha District mayor Bryan Cadogan, who was a backer of the Labour government’s earlier proposals. He believed it made sense for the entire South Island to band together when it came to water – something that was now up to individual councils. “Without those efficiencies, nothing else that’s being offered is doing anything other than delaying the inevitable and exacerbating the situation.”

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