Feb 22Liked by Dave Heatley

Interesting. It would be interesting to ask specific scenario questions - for example, suppose we enact policy X that would allow for an increase in building by Y. How much would you expect prices to drop/improvement in affordability? Or, how much densification would be needed to reduce house prices by X. Tough questions to answer for anyone, but would be interesting to see people's beliefs.

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I find it terribly depressing that after more than a century of evidence in evolving transport systems effect on urban land rent, and regulatory interferences with the process being imposed gradually in more and more regions from the 1950's onwards, "the economics profession" is still so clueless about the two very different paradigms under which urban land markets work.

The historical paradigm was what Marx, George and other economists had such vehement objections to - economic rent was "monopoly" in form; that is, the owners of resources could charge "rents" either for sale of the resource or for the products of land, which worked backwards from "what people could be gouged to pay for a necessity". This applied to food and clothing as well as housing.

The process by which this was eliminated for the benefit of humanity, and without which we would not have seen the systemic elimination of absolute poverty for millions, was simply that transport systems evolved that could enlarge the potential supply for "markets" to an extent where no resource owner had "monopoly rent" powers any longer. Refrigeration helped too, for food and other perishables. "Consumer surplus" was born; and I challenge any economist to disprove that consumer surplus is a useful sole metric for the magic of markets eliminating poverty and increasing human welfare - AND reducing wealth disparities.

The elimination of monopoly rent in land for housing, was later arriving than the elimination of monopoly rent in land for food production and resource extraction. The obvious means was automobility. All this was far better understood at the time it was happening - non-economists such as Henry Ford, Frank Lloyd Wright, and Charles Booth referred to it in their writing and lecturing as if it was common knowledge. Henry Ford, for example, understood that the cost of automobility would represent a net saving to households as monopoly economic rent in housing could be eliminated.

The decades of evidence is incontrovertible. Urban land prices fell some 95% in real terms over a few decades, and did not bounce back as would be expected if it was purely a cyclical economic phenomenon (eg Great Depression). This price fall occurred in different time frames in different parts of the world, coinciding with automobility reaching a critical mass. The third world largely missed this beneficial process for decades, and even now, a lot is owed by the people of those countries to the ubiquity of motor scooters (a much more affordable form of automobility) and increasingly large and well-appointed "informal housing" development on greenfields.

It is nonsense that "subsidies" in the form of highways created a new pernicious "automobile dependence"; the Model T Ford and other primitive automobiles were already flattening urban land rent before highways were proposed as a natural extension of the new and growing phenomenon. People will use whatever roads are there, to escape monopoly urban land rent; if there is nothing but primitive tracks, third-worlders will use off-road capable motorbikes.

The result for housing is also incontrovertible; houses at the very least remained static in their real cost relative to incomes, if not falling, as their size, quality and appointments exploded. The rental of a tenement prior to automobility easily cost 50% of household income, mostly comprised of monopoly rent, seeing the cost of construction of the most rudimentary and minimal space was not high. Ownership of separate houses became the norm, and home ownership was increasingly democratized.

It is also incontrovertible that the rationing of urban land supply by well-meaning Planners, and proxies for this rationing that have the same effect, tip the entire urban land market back into "monopoly rent" condition. Yes; the removal of the ultra-cheap rural land option for developers to provide for urban growth, has a consequence this severe, across all existing properties. New entrants to the market are gouged the maximum they can stand, for the minimum they can tolerate in a mix of each of space, inconvenience of location, and dilapidation. Many people are unconcerned, being already property owners, and selling and buying in the same market.

For decades we became used to a paradigm where all urban land prices were disciplined due to the existence of competitive potential exurban development - even if its rate of development was not particularly fast, it existence made the systemic difference. It was somewhat true that housing would be cheaper if sites were redeveloped more densely, because the site prices remained somewhat static, so that this static value could be divided between more units. But what we have now under the "monopoly rent" model that has been reinstated by our urban planning fads, is site values exponentially elastic to allowed density. This is why there is no example of a city where median multiples of 3 have been maintained or restored when automobile based development's effects were curtailed. It is why median multiples of around 7 to 14 are common, along with greater cyclical volatility - even as the new "homes" being provided have less and less floor area and are more and more stacked up. Grimes and Aitken in 2010 gave us the perfect phrase: "all the profit potential from redevelopment is impounded in rising site prices". Developers have to outlay greater and greater sums of capital for their sites and make their profit margins on an "improvements" sliver of the overall finished product price that is squeezed out more and more by the "land" component.

The evidence from Britain is perfectly understandable; attrition in the building and development industry, every cycle; an increasing shortage of housing as decades pass; ever-more aggressive upzoning doing nothing but increase site prices and contribute to the problem; floor space for average new units falling and falling; and median multiples remaining attached to a skyhook.

It is a new flash of signs of encouragement if one "controversial" Tim Helm actually convinced a Wellington Housing Policy Panel of all this. The ignorant can accuse Tim of "denying basic economics" but when shallow basic economics has underlain decades of policy failure, it is well overdue to analyze the wicked complex mechanisms by which this failure is occurring. If anything is "denying basic economics" it is that the removal from URBAN "land markets" of the potential supply of superabundant land in the next most-valuable use (actually orders of magnitude lower-value) will have no effect!

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