The Myth of Affordable Intensification

Auckland is not the only city where planners and advocates and politicians and even economists, are making an assumption that urban intensification is a potential route to housing affordability. The assumption involves changing zoning so that “X number of housing units” can be constructed in existing urban locations “instead of X number of housing units” on pristine ex-urban land. The latter is assumed to be an evil to be avoided, and that the former is a perfect substitute in terms of “sufficient housing supply to enable affordability”.

Common sense tells us that there are quite a few potential problems with this assumption. For example, NIMBYs will obstruct the intensification and reduce the rate of housing supply so the policy will fail. Therefore, what we need is the removal of NIMBY rights of protest and appeal, and the policy will then work. However, there is no evidence that any city anywhere in the world has "freed up intensification processes" enough to result in floor space being built faster than site values inflate. There is literature that states "site values are elastic to allowed density".

Hong Kong is 2.5 times as built "up" as Manhattan is, yet Hong Kong is even more expensive per unit than Manhattan. And generally, the data runs in that direction - not only does intensification within a regulatory boundary "not restore affordability", it seems that the more density you “allow”, the higher your average housing unit price gets. The correlation runs the opposite way to the assumption. At the other end of the data set for cities globally, are very rapidly-sprawling cities like Atlanta where the density is around 1/40th of Hong Kong and the average section size is 2/3 of an acre; yet the real per-unit housing price on average is 1/5 of Hong Kong. Obviously.

Paul Cheshire and colleagues at the London School of Economics believe this is due to the "bidding war" at the margins of each income-level cohort of society, for "slightly more space". The less the average space per household, the more intense the bidding-war effect. In the history of housing, this can be seen in the pre-automobile era, as cities were growing, and “the market” was creating tighter and tighter "housing" - tenements - of more and more disgraceful standard, with land value growing and growing, until there was a public outcry and regulations were passed against such extreme "density".

I believe this pre-automobile era was an instructive era, historically, where there were not yet regulations against height and density, but there was certainly severe problems with "affordability" and bubble volatility. Would things be any different today if we re-ran the experiment? Advocates of intensification “to bring about affordability” might keep saying forever, that “we just haven’t made the processes free enough and fast-track enough yet”. But the faster-track they make it, the higher the prices will probably go, based on the evidence. “Site development potential” in an urban land market with a regulatory limit on land supply, seems to capitalize instantly into site values even without any redevelopment actually happening.

But when a market is allowing people to consume "as much space as they want", which has only really occurred in the automobile era, the “bidding war” effect is absent. The evidence supports this, with most median-multiple-3 cities being from 600 to 2500 people per square km. Another interesting case study would be Liverpool; it lost approximately 50% of its population from the 1950's to the 2000's (similar to Detroit) - yet its median multiple is over 7. And its density is still 4,400 per square km (presumably it would have been double this, or more, in 1950). This is prima facie evidence that 4,400 people per square km within a growth boundary, are still going to be dissatisfied with their living space, to the extent that they will be engaging in an unwitting bidding war against each other for a little more of it. Of course under these conditions, the lowest socio-economic cohort is denied all options other than crowding tighter and tighter in rented accommodation or even illegal “living space”. In UK cities, rental advertisements include options like a ¼ share in 2 rooms, with communal access to kitchen and bathroom shared by even more tenants in further rooms. In median-multiple-3 housing cities, the same real rent would apply to a whole house of reasonable size and standard.

Another outlier case study, would be Boston - super low density, due to zoning mandates; and with a median multiple around 6 in contrast to similar low density Atlanta around 3. The difference is that Boston has de facto growth boundaries / green belts while Atlanta does not. The ironic implication is that fringe growth containment pushes median multiples up less, when there are severe restrictions against density – otherwise Boston should be the most expensive city in the data, not Hong Kong. The evidence suggests that this is because there is a total absence of “bidding war for slightly more space” - everyone has "more than they want" already. The median multiple of 6 rather than 3, represents the effect of demand for "living in Boston", period, and they simply don't provide enough houses to keep the median multiple down like Atlanta does (in the face of staggering population growth in Atlanta, by the way). But once you have got in to the Boston housing market, there is no "more space to be bidded for". The evidence is that the "bidding war for more space" effect is far stronger than the "desirability of the city as a migration destination". Yet planners, advocates, politicians and even most economists, have nil understanding of this highly significant factor.

Going back to the historical evidence, the famous boom of the 1920’s was followed by a crash that certainly made prices “affordable” for a long time. This might be the only way in which building “up” achieves affordability – there is a famous “skyscraper index” that claims to find a strong correlation between a mania for building “up” and a subsequent crash. However, there was a period of several decades, following WW2, where in most of the first world, urban land values remained flat and the house price median multiple stabilized at around 3 even as housing units gained significantly in spaciousness, quality, fitments, front and back yard size, and other attributes. Ironically, during this era, exceptional local economies such as New York’s did build large amounts of tall-building housing units at prices that were unprecedentedly affordable by historic standards. It seems that there is an effect of competitive restraint in housing unit prices, that runs from “affordable suburban family homes” inwards towards the city center. Decades of this effect seems to have led to a mistaken assumption that “low cost high density housing” of the kind that was available (but unpopular in most cities without New York uniqueness) during the second half of the 20th century will remain available as a substitutable option to suburban family housing even if the latter is forced up in price deliberately by central planner's policies. The lesson that needs to be learned urgently, is that this is impossible; the two things are inter-related.

There might be other policy mixes by which housing supply within a growth boundary could be made the means of keeping housing affordable, but publicly and politically, the debate is nowhere near tackling the complexities involved. For example, there is evidence that in the USA in the 1920’s – 30’s, the cities that had the most property taxation weighting on land rather than structures, had less price volatility both up and down. However, it does not appear from this that taxes on land are a total stabilizer akin to a liberal regulatory ability for developers to be able to convert exurban land to urban use.