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Putting housing in its rightful place

19 August 2022

Author: David Norman, Executive Advisor | Infrastructure, Investment & Economics, GHD

A bipartisan announcement on new Medium Density Residential Standards (MDRS) brings forward and relaxes development rules across high growth cities in New Zealand. But how will the infrastructure needed for this denser development be funded? Should developers expect to pay more?

The Government and opposition have jointly announced a plan to accelerate increased housing density across a wide range of properties in high growth cities. This comes into effect this month.

The good news

The new rules must be applauded on several fronts.

Firstly, they will stimulate more development closer to jobs, existing public transport and amenities. We have already seen a remarkable shift toward brownfield (existing urban area) development and away from far-flung greenfield development as Auckland’s current zoning rules came into force.

Secondly, development in existing urban areas uses existing infrastructure more efficiently. While the increased density will trigger demand for more infrastructure, some latent capacity exists. Further, more development around town centres, rapid transit nodes and wherever land prices (the best indicator of demand) are high, adds to the vibrancy of those neighbourhoods.

Lastly, compact development means lower emissions and congestion per home delivered.

Still too much leeway?

The new rules still allow for broad qualifying matters (such as heritage sites and natural hazards) to prevent the relaxation of zoning rules. The exemption must be appropriate, but ‘appropriate’ is still left to the individual authority to define and defend.

In Auckland, two main qualifying matters that NIMBYs (Not in My Backyard) appeal to are special character and volcanic viewshafts. The special character rationale has also been applied in Wellington and will likely crop up elsewhere.

Auckland’s 2016 zoning rules left a lot of low-density zoning closest to the city centre. Around 30,000 mostly central dwellings (about one out of every 18 Auckland homes) were deemed to be of special character during that rezoning process. Because these rules restrict development closest to jobs, public transport, and amenities, they also force the city to develop in a more congested, car-oriented, higher emissions way.

Further, the city has limited development in highly desirable parts of the city where housing could be closer to jobs, public transport and other amenities because of over 80 volcanic viewshafts. Viewshafts are not about protecting access to these sites, which have cultural, environmental, and social value, but about where people should be able to see volcanoes.

As an economist, I help people evaluate trade-offs. In this instance, we must ask how much we want to limit people accessing homes closer to jobs, public transport and other amenities to protect these other things. Preserving best in class historical buildings and the most prominent volcanic views undeniably has value, but so does housing more people safely, and closer to jobs, public transport and amenities. What is the right mix?

A two-speed real estate market?

What do these legal changes mean for the real estate market? In Auckland at least, a two-speed market is emerging. Overall sales counts and prices have fallen since the peak in 2020 and 2021. But properties with enough land to be redevelopment opportunities still appear attractive.

We may see speculative buying of properties with large sections that developers believe will be up zoned to five storeys under the MDRS. Buyers will aim for properties they are confident will be up zoned, before the changes to get the windfall gain once the planning lever is pulled. We saw this in neighbourhoods such as Panmure and Mount Wellington in Auckland before the new zoning rules were introduced in 2016.

A warning

One detail that the MDRS and The National Policy Statement on Urban Development (NPS-UD) rules don’t tackle is where the money for the infrastructure to enable this density will come from. Infrastructure is expensive, and councils have traditionally not charged the full price of new infrastructure to the properties that benefit from it. Those who buy properties before the zoning rules change often do so on the assumption that the general ratepayer will pick up the tab for most of the cost of the new infrastructure. But this is bad economics, violates the beneficiary pays principle and is financially unsustainable for many councils. Encouraging signs have emerged from Hamilton and now Auckland of development contributions that come closer to the true cost of development infrastructure.

Expect councils to sharply increase development contributions and/or place targeted rates on properties that benefit from the windfall gains of a zoning change, and factor this into any price paid for land.