22nd December 2011

Straight Thinking Digest: And End of Year Launch Pad for the New Year .
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Contents which I hope will provide some food for thought over the break:
1. 2. 3. 4. 5. 6. 7. Background A Compact City or an Affordable City the Debate Begins.. Those Romantic Yearnings. The Compact City; a recipe for increase inequality and reduced economic efficiency. The Good Oil on Compact Cities and Greenhouse Gases. The Productivity Commission on Affordable Housing. ST NBR Column Why we must learn to Love Asset Sales Part 2.. Entertainment The Unexpected Journey.

1. Background A Compact City or an Affordable City the Debate Begins.

I am not sure whether the timing is good or bad. On the one hand the debate on the Spatial Plan for Auckland has finally gained some traction almost entirely as a result of the release of the Productivity Commissions Draft Report on Housing Affordability. But on the other hand this has coincided with the Christmas Season which has given the mainstream media a host of reasons to ignore it. However the debate rages on within numerous blogs such as Interest.co.nz. But at least there is a debate, and its not going to go away. So in this end of year wrap up it seems appropriate to present some papers which provide the ammunition to shoot down the walls of ignorance that dominate the Smart Growth ideology so beloved of our central planners, who claim to have the knowledge to plan our urban economies even though, as far as I can tell, their education does nothing to prepare them for the task. They are totally focused on how cities should look rather than on how they actually work. We shall develop this theme further during 2012.

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2.

Those Romantic Yearnings.

Many of the papers refuting the benefits of the Compact City, and of central planning in general, refer to Romantic Yearnings or to other expressions of Romantic ideals. My own paper on this topic, The Rise of Urban Romanticism the New Road to Serfdom dates back to 2005. A selection of some opening paragraphs follow: I have earlier argued that: Socialism is the dark side of the Enlightenment tradition. Socialists believe that, if we can use science to design a bridge, then we can use science to design society. The consequent argument is that to effect such total or holistic change, the state must own the means of production, distribution and exchange. Socialism focuses on economic theory. Fascism is the dark side of the Romantic tradition. Fascism favours feelings over reason, holds that truth is culturally constructed, looks to the racial wisdom of the volk and other primitive peoples, and promotes the need for great and charismatic leaders to tell the masses what truths are holistically true. Fascism, being descended from Romanticism, promotes an aesthetic model of how to organize society. Communism combines these two dark sides into an engineered or scientific utopia, which also promotes charismatic leaders who are charged with revealing the truth of the Marxist book and motivating the masses. All three belief systems claim the modern world is too complex to depend on spontaneous order, and must be planned if we are to avoid chaos, and that therefore a few wise men (Stalin, Hitler, Mao, Pol Pot and the late Kim Il sing come to mind) must direct and control our lives. There are many people who are happy to be planned and only too many who are happy to do the planning. The present generation of controllers has identified a new chaos or dystopia. They claim our population, wealth, technology, and consumption are combining to destroy the planet, or will do so in the future, unless, of course, environmental planners take control and sustainably manage our lives in order to save the planet. Their current response, within the framework of urban planning, is Smart Growth.

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In his seminal work, The Road to Serfdom, Hayek makes the point that the problem with central planning is that it attempts to form a universal view on matters on which there can be no universal agreement. Therefore any such plan necessarily coerces more people than those who willingly go along with it. Smart Growth is a classic example of this failing. It forces the majority to live where they would not choose to live if given the choice. All those people must be coerced into making second-best choices they lose their property rights and their liberty. Read the whole paper here. For a general discussion of Romanticism and its relation to the Enlightenment, see Isaiah Berlins collection of essays, The Roots of Romanticism, edited by Henry Hardy: Pimlico, 1999.

3.

Dave Seymour Compact Cities; A recipe for Increasing Inequality.

How can we improve our cities? Download a free chapter of David Seymours book Birth of a Boom and read his framework for Making Cities Work here: http://goo.gl/9VNqj Or if that doesnt work, try here for Chapter Seven. Save 30% when purchasing the book! USe code BIRTH30 when ordering at http://indieinkpublishing.com/presta All those Occupiers should read this chapter. A sample: The implications of unaffordable housing are twofold. The first, as has already been hinted at, is an equity problem. When housing moves beyond what a young couple starting out in the housing market with no external help can hope to buy into, housing becomes a division between the haves and the have-nots. This division is undesirable on a moral level, because it means that people are less socially mobile and more bound to the circumstances into which they are born (e.g. wealthy parents and/or significant earning ability). The second problem is a question of economic efficiency. High housing values mean that home owners are forced to borrow more money and pay more interest on that borrowing. In turn, industry in the region must pay employees more in order for them to service their mortgages. A region with high house prices typically ends up sending interest payments to lenders elsewhere so that locals can bid against each other to buy expensive houses. A society 3

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with affordable housing is, therefore, a society with equity of opportunity and economic efficiency; a society with unaffordable housing is an inequitable and inefficient one. The most mobile people tend to vote on housing affordability with their feet, moving from less affordable markets to more affordable ones. Expensive American states such as California and New England are losing population to fast-growing and affordable states such as Texas and Georgia. Closer to home, more affordable housing was a key driver in the return of many Saskatchewan residents from Alberta in the early stages of the boom. Affordable housing is a way to attract mobile people; unaffordable housing is a way to exclude them. An additional difficulty with losing housing affordability is that it is a very difficult process to reverse because housing is a commodity like no other. It is the only major commodity in the economy for which over two thirds of the population are potential vendors. None of this is radical right wing economics or the rants of developers wanting to make a quick buck. These comments reflect the standard logic of urban economics, in particular, and development economics, in general. So why are so many Councils determined to pursue goals which are contrary to the values that most New Zealanders take for granted? Why are our own urban planners determined to undermine both efficiency and equity and make the younger generation feel so much worse off than their seniors. At least the Auckland Occupiers camped outside the Town Hall so they got that right.

4.

The Good Oil on Urban Form and Greenhouse Gases.

One of the major reasons advanced for forcing us to live in Compact Cities, using public transport rather than continuing to enjoy our current personal mobility, is the claim that this combination of constrained urban form served by public transport will reduce Greenhouse Gases and Save the Planet. Even if one is firmly convinced of the contribution of Greenhouse Gases to supposed Anthopogenic Global Warming, its all tosh. In Reducing Greenhouse Gases from Personal Mobility Wendell Cox, (author) and Adrian Moore (Project Director) explain why. They compare the achievable outcomes from Behavioural Strategies (Compact Cities) with those achievable from Facilitative Strategies, and in particularly from the benefits of new technology and innovative transport solutions. 4

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Behavioural Strategies not only fail to achieve their claimed benefits they inevitably make things worth. Consider these arguments: Behavioral Strategies (Compact Development) Proponents of this approach argue that GHG reduction will require radical changes in lifestyles. Their solution is behavioral strategies (compact development) to increase urban densities and change the way people travel. The two most prominent reports on this approach (Driving and the Built Environment and Moving Cooler) predict that compact development could reduce GHGs from autos by between 1% and 9% between 2005 and 2050. Driving and the Built Environment acknowledges that there will still be significant increases in overall driving (vehicle miles traveled or VMT). Compact development raises various issues: Reasonable Expectations: Projected results from the most aggressive scenarios appear to be implausible based upon reservations stated in Driving and the Built Environment and broader criticisms of Moving Cooler. It is suggested that a range of 1% to 5% is more realistic for the maximum GHG emissions reductions from autos between 2005 and 2050 under compact development policies. Traffic Congestion and Compact Development: Even this modest level of GHG reduction could be further diminished by the GHG Traffic Congestion Penalty. The higher densities required under compact development would cause greater local traffic congestion. As traffic slows and moves more erratically, the GHG reductions from less driving are diminished. Further traffic congestion retards the quality of life of households and imposes economic costs on metropolitan areas. Housing Affordability and Compact Development: Compact development is associated with higher housing prices. This is burdensome to lower income households, which are disproportionately minority. Assessing the impact of compact development on house prices, a Latino (Hispanic) think-tank noted an increase is always the result. The increased household expenditures for 5

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mortgage interest and rents alone could amount to nearly $20,000 per GHG ton annually, nearly 400 times the IPCC $50 maximum expenditure by 2050 (2010$). This loss of housing affordability would represent a huge transfer of wealth from lower and middle-income households. Infrastructure Costs and Compact Development: Despite theoretical claims that suburban infrastructure is more expensive than in more dense areas, data for metropolitan areas indicates no such premium. Higher Densities: Compact development would require unprecedented increases in density, well beyond those envisioned by current compact development policies. This densification could require aggressive use of eminent domain and could be prevented by neighborhood resistance and public reaction. Compact development is incapable of reducing GHG emissions within the IPCC $50 maximum expenditure. Compact developments higher than necessary expenditures could reduce economic growth, increase congestion costs, and result in public resistance and greater social imbalances. Because of its detrimental impact on financial, economic and political sustainability, compact development is unsustainable as a strategy for reducing GHG emissions from autos. Read the whole report, solidly based on reason, rational analysis, and evidence rather than visionary ideologies with an unfortunate history, and wonder why we are even thinking about this total disruption to the ability of people and communities to provide for their economic, social and economic wellbeing, and their health and safety. (see Section 5 of the RMA.) The current cost of carbon in the EU-ETS market is only about US$6 per tonne, well below the IPCC assumed cap of US$ 50 per tonne. (38 EUR) After the detailed analysis of the Facilitative Strategies the authors conclude: Generally, existing and likely future technologies have a far greater potential to reduce GHG emissions than compact development. Based upon Driving and the Built Environment and Moving Cooler, compact development provides little possibility of achieving a reduction of more than 5% in auto GHGs by 2050.

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On the other hand, wider application of existing technologies could produce GHG emission reductions of up to 54% by 2050 with current hybrid technology. GHG reductions from new technologies, such as electric cars, could be even greater. These technologies are potentially sustainable financially, economically and politically, and thus environmentally. By contrast, imposing compact development would be enormously expensive, is likely to reduce economic growth substantially, and could stifle opportunity for lower income households, which are disproportionately African-American and Hispanic. These factors render compact development unsustainable financially, economically and politically, and thus environmentally. And finally: As governments consider policies intended to reduce GHG emissions from autos: Compact development strategies should be neither mandated nor encouraged. Technology strategies should receive priority.

At the same time, any such policies other than removing government-imposed barriers to new technology development and adoption should be implemented with great caution. It now behoves the advocates of Compact Cities to challenge these findings with real world evidence rather than slogans based on nothing more than cant. I do not recommend we all hold our breath. In case readers assume this research paper is totally American oriented and has no regard for the situation in Australia and New Zealand the following papers and commentaries are included in the footnotes, and support their general thesis. Donald Brash, Introduction to the 4th Annual Demographia International Housing Affordability Survey,
http://www.demographia.com/dhi.pdf.

Kate Barker, Review of Housing Supply: Delivering Stability: Securing Our Future HousingNeeds: Final ReportRecommendations (Norwich, England: Her Majesty's Stationery Office, 2004 and 2006).

http://www.hmtreasury.gov.uk/consultations_and_legislation/barker/consult_barker_index.cfm,

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Barker Review of Land Use Planning,

http://www.hmtreasury.gov.uk/media/4EB/AF/barker_finalreport051206.pdf.

Arthur C. Grimes, Housing Supply in the Auckland Region, Center for Housing Research, New Zealand (2007). Go to:
http://www.hnzc.co.nz/chr/pdfs/housing-supply-in-the-auckland-region-2000-2005.pdf.

Paul Myors, Rachel OLeary, and Rob Helstroom, Energy Australia. &. Rachel OLeary and Rob Helstroom, Multi Unit Residential Buildings Energy & Peak Demand Study, Go to:

https://www.basix.nsw.gov.au/information/common/pdf/alts_adds_req/energy_mu_study.pdf.

5.

The Productivity Commission Report on Affordable Housing.

The New Zealand Productivity Commission has published its Draft Report on Affordable Housing. The Press release reads: Have your say on the Commission's draft report findings by 10 February. You can find details on making a submission here. See Productivity Commission Chair Murray Sherwin talking about the draft report findings. Posted 16 December 2011 Home ownership will continue to elude many New Zealanders unless bold changes are made to New Zealands housing market, the Productivity Commission says. In its draft housing affordability report released today, the recently established Commission has made a number of recommendations aimed at improving housing affordability following extensive research, analysis and engagement. Commission Chair Murray Sherwin says, The 2001-2007 housing boom was unprecedented with house prices almost doubling over that period. Affordable quality housing is fundamental to successful communities. And its abundantly clear that for younger people and those on lower incomes there is a missing step on the property ladder, particularly in Auckland. The chances of them ever purchasing their first home are decreasing. The Commissions key recommendations include: 8

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The urgent need for more land to be opened up for housing, especially in urban areas, because sections now average about 40% to 60% of the cost of a house. Reconsideration of Aucklands draft spatial plan. Auckland faces significant housing affordability challenges and the Commission found its current plan, with a target of accommodating 75% of new homes within existing urban boundaries, will be difficult to reconcile with affordable housing.

Improved processes for consenting, to speed up the service and lower costs. Improving how local council development charges for infrastructure are calculated and applied, including making them reviewable. The Commission found the current model has too much regional variation and is not transparent.

The Commission considers that there is scope to improve productivity in the home construction sector and endorses the work of the Building and Construction Sector Productivity Partnership, established in 2010 as a joint industry-government initiative.

The Commission found that land prices now account for up to 60% of the cost of a house in Auckland.

That means new homes tend to be at the top-end of the market. No one is going to put a $150,000 home on a $300,000 section, Mr Sherwin said. The cost of building materials and house construction is also high in New Zealand compared to Australia, and the home construction sectors productivity is flat-lining. The high costs of building and land are constraining the supply of affordable new houses available for purchase. Yet, New Zealand faces a growing population. Projections are for around 400,000 new households over the next 20 years, with half of these in Auckland. We think its important to make urgent changes to accommodate whats coming down the line, Mr Sherwin said. The Commission has found that taxation was not a key driver of the recent housing boom. The Commission carefully considered the claims that housing is tax advantaged, but concluded that any tax-advantage is much smaller than often suggested. 9

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GST already applies to both rental and owner-occupied housing purchases; local body rates are also a tax; and capital gains on housing are already taxed when those buying and selling houses are in trade. The Commission invites further feedback on its findings in the draft report until 10 February. For a copy of the Draft Report, including information on making a submission, visit www.productivity.govt.nz The final report will be presented to the Government on 16 March 2012. There are no surprises in the reports findings and recommendations except for those with no understanding of property markets and urban economics, and of course those who are firmly committed to the ideologies behind Smart Growth and believe Compact Development is the Silver Bullet that will Save the Planet and create Nirvana in the South Pacific. Naturally, Councillor Mike Lee voiced his horror at the prospect of peripheral development from his house on Waiheke Island. Gary Taylor, of the Environmental Defense Society, voiced the same sentiments from his house at Bethels Beach. So it has always been since the Roman Aristocracy, from their country villas, insisted that the Plebs stay locked behind the city walls. Many supporters of the Compact City concept trotted out the old canard that while the land and buildings may be cheaper on the periphery, this apparent saving was overwhelmed by the cost of infrastructure, which for some reason has to be built to connect back into the central city. Hence, the argument for development contributions that are a fine on new house buyers and lead to a drastic shortfall in supply. Unfortunately, the Commission compared New Zealand housing markets only to the Australian markets and failed to explore the solutions and outcomes in the bubble-free States of America such as Texas and Georgia. There is no reason peripheral infrastructure should not be funded by the long term financing provided by the MUD schemes. Houston is famous for having no zoning other than private residents associations (rather like the Body Corporates that manage high rise apartments). But the infrastructure financing makes a large contribution to the fact that Houston residents can buy a section for about US$40,000 and a whole housing package for about US$150,000. The result is that Houston is now the best performing city in

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the US in terms of employment and economic growth. Californians are migrating to Houston in their thousands. The Mayor of Auckland Council would learn more about how to create a liveable city by visiting Houston rather than peering down tunnels in China. The battle between the Romantics and the Rationalists is about to begin in earnest.

7.

Straight Thinking NBR Column 16th December.

Why We Must Learn to Love Asset Sales Part Two

Governments new Cabinet reflects the determination to promote innovative enterprise and remove road-blocks to business growth and development. Stephen Joyce is now Minister for Economic Development, Science and Innovation, and Tertiary Education, Skills and Employment, and Associate Minister of Finance the portfolios that set the necessary high level strategies. John Banks is now Minister for Regulatory Reform and Small Business, and Associate Minister of Commerce and Education. As a former Minister of Local Government and former Mayor of Auckland, he should be well equipped to deal with the nonsensical regulations presently killing innovation at the local level. Hopefully, Metropolitan Urban Limits (a.k.a. Rural Urban Boundaries) will be among the first to go. Then new enterprises, similar to the Blue ice-cream caf at Matakana, will no longer have to waste time and money fighting repeats of ARCs objection that an ice cream store was an urban activity and must be quarantined behind the MUL. (The blue comes from the range of blue berries grown on the small farm behind the store.) Fortunately, the Rodney District Council came to Blues defense and the Blue caf has further enriched the Matakana experience. But who would defend them now? Fortunately, the Blue Ice Cream Caf may now be on course to become our own Ben and Jerrys ice cream chain, founded in Vermont in 1977, and now trading in 38 countries. The next task may be for the two of them to persuade the Maori Party to learn to love partial asset sales.

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Many Iwi want to participate in the real economy and grow their Treaty Settlement assets, rather than generate unproductive revenue from consulting fees, and exorcising taniwha. Maori traditionally settled around the coast and harbours the motorway networks of a canoe-based transport system. Sadly, District Plans, and Regional and Coastal Policy Statements effectively block all attempts to develop any property anywhere near the sea. So in the foreseeable future their major investment opportunity could well be partial asset sales of SOEs. Read the whole column here. For Part One go here.

7.

Entertainment: The Hobbit the Unexpected Journey.

The first trailer has been released for the highly anticipated Peter Jackson film The Hobbit: An Unexpected Journey. - - read full story Watch the video trailer here. Clearly, the Hobbits are not enthused by the prospect of high-rise high density living in a Compact City. Just the opposite, it seems. For them underground has nothing to do with trains.

8.

Assistance.

If you need assistance in challenging your Councils destructive planning policies, feel free to contact the Centre for Straight Thinking to discuss how we might be able to help. Or help us finance our own research and submissions by making a donation using the form attached to the email message.

9.

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