Why are economists up in arms about Wellington's housing report?

Saturday, 17 February 2024

Housing intensification is a hot topic in Wellington, and in economics at the moment. (File photo of houses in Newtown)

Uproar continues over the recommendations from the Independent Hearings Panel on intensification in Wellington, with pro-housing group City for People saying the report is collapsing under scrutiny, and councillors expressing confusion.

The panel was tasked with making recommendations on housing in Wellington, including which areas should allow housing intensification with apartments of at least six storeys. They recommended zoning for less housing in many inner-city suburbs, on the basis of economic evidence that restricting development would not make a difference to the amount of housing in the city.

Pro-housing advocacy group City for People was shocked at the conclusions, along with several economists. Spokesperson Luke Somervell said it was “like living in a topsy turvy world where up is down, where building more homes won’t affect supply and demand”.

“We were gobsmacked to learn that the panel made its recommendations based on a single economist hired by a residents’ association … In doing so, they rejected a mountain of published, peer reviewed evidence and common sense.”

City for People spokesperson Luke Somervell says the group is gobsmacked at the panel’s recommendations. (File photo)

The man behind the controversial economics evidence, Dr Tim Helm, gave this comment: 'I cannot respond meaningfully to such vague and unsubstantiated criticisms. However I stand behind the accuracy of each and every part of my evidence, and so would welcome the opportunity to defend it against any more specific challenge.'

This week chairperson Trevor Robinson made it clear the panel had preferred Helm’s economic evidence – given in support of the Newtown Residents’ Association, who were opposing intensification in much of their suburb – over the evidence of Mike Cullen, another economist who spoke for Kāinga Ora.

The central point of Helm’s evidence was that it did not matter whether the panel zoned for more housing, because zoning restrictions had no effect on the supply of housing. Because there was already enough housing capacity to meet projected demand, he told the panel, adding more possible housing sites would be like “pushing on a string” – it would not lead to more housing being built.

Dr Stuart Donovan, economist at Motu Research, said this was incorrect. “That’s just not supported by the evidence.”

Both Donovan and Dr Eric Crampton, New Zealand Initiative’s chief economist, pointed out that a study into the Auckland Unitary Plan, published in one of the top journals, showed that the rate of housing construction significantly increased following upzoning in 2016.

But Helm didn’t agree with that study – in his evidence to the panel he cited his own blog post and claimed there were “serious methodological flaws, and data that contradicts the findings”.

“I’m pretty scathing of him presenting that as being published. It wouldn’t have been hard to say ‘I’ve written a blog post,’ which would have been far more accurate,” said Donovan. In an academic context, published generally means in a peer-reviewed journal, not a blog.

Eric Crampton compares the claim that zoning does not affecting housing supply to a claim that water flows uphill. (File photo)

Donovan also pointed out that the concerns raised in Helm’s blog post had been addressed by the author of the original study, but had not changed the conclusion that upzoning had led to more housing.

But according to the panel it didn’t matter what the evidence showed about Auckland – Robinson, under questioning from councillors earlier this week, told them he viewed the study on Auckland as a “red herring” in the economic evidence.

The panel had preferred Helm’s evidence not because of footnoted research, but because his answers to the panel under questioning had appeared more credible, Robinson said.

“Balancing that evidence we gave more weight to Dr Helm’s opinion … I did not read every footnoted reference that was put to us if the witness did not say to us that it was important to their analysis.”

The economic evidence became important because if the panel decided there was already enough housing zoned for, it would not matter if they restricted housing capacity. Helm was telling them that even if they zoned for more housing, there wasn’t demand to get it built, so it would have no effect on the housing crisis.

Crampton used the analogy of a beef quota to explain the panel and Helm’s logic here.

If the United States set a quota for New Zealand beef that was twice as large as the amount of beef New Zealand was producing, increasing the quota would have no effect on the number of exports or the price of New Zealand beef.

“If it were truly the case that the city had already zoned for a superabundance of land for development in the places where people would like to live, then zoning more even more land would not have very much effect,” Crampton said.

Housing located in inner-city suburbs like Mt Victoria is more attractive because it is closer to where people work, says Stuart Donovan. (File photo of houses in Mt Victoria)

But it doesn’t seem like Wellington does have a superabundance of zoned land. If that were the case, Crampton said, there would not be much of a difference in price between land where you could build housing and land where you could not.

Instead, research from the Infrastructure Commission found there was a $300,000 value difference between land at the edge of the city zoned for housing and nearby rural land. “Zoning, all on its own, provided a sharp increase to that land’s value, suggesting there is a real scarcity of zoned land.”

Donovan pointed out that even if there was a lot of capacity for housing in the plan, it wasn’t necessarily located in the places where people want to live.

The inner-city areas like Mt Victoria – where the panel expanded character areas, preventing development – were more attractive suburbs than sites further out of the city, like Johnsonville, where the panel had recommended much of the housing capacity should come from.

“They haven’t considered the quality of locations at all in their analysis. They just assume that you can downzone some areas and all the development will shift to other areas.”

Location was particularly relevant in Wellington, where 40% of jobs around the region were in the city centre. In Auckland, the comparable figure was 15%. The inner-city of Wellington had a strong pull, with people wanting to live nearby.

Crampton compared the evidence accepted by the panel to a claim that water flows uphill.

“So the bulk of the local and international literature is consistent with water flowing downhill. Claims that it flows the other way ought to be viewed with some scepticism by hearings panels.”