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Densification helps first-time homebuyers without hurting long-time homeowners
Empirical data from Auckland's 2016 upzoning
This figure is from a 2021 paper by Ryan Greenaway-McGrevy, Gail Pacheco, and Kade Sorensen, The effect of upzoning on house prices and redevelopment premiums in Auckland, New Zealand. Comparing upzoned areas to non-upzoned areas, they found that upzoning decreased the prices of high-density housing (because there’s more of it), while increasing the prices of moderate or low-density housing, e.g. a lot with a single-detached house (because the lot can be redeveloped).
A common argument is that building more housing would drive down home prices, and is therefore politically impossible. From Twitter:
In fact, the empirical data from Auckland shows that densification can help first-time homebuyers without hurting long-time homeowners.
There is a distinction between the price of a property [because of land] and the price of a dwelling. With increased density there will be an increase in new dwellings supplied to the market, putting downward pressure on dwelling prices. But this does not mean that the price of property has to fall. Property that can be redeveloped under the relaxed density restrictions will retain its value: You can always bulldoze the villa [single-detached house] and build two homes that make better use of the available space. That option to redevelop will be capitalised into the value of the property – and could in fact increase property values – provided that the unitary plan grants the right to redevelop.
… Increasing urban density is the only policy that ensures that both current and prospective home owners can win. Any other policy – including the status quo – will punish one of these groups. With increased urban density the average price of a dwelling will come down – allowing families to purchase a home at a reasonable cost – but the price of developable property will retain its value – ensuring that many current property owners won’t lose on their investment.
Why the status quo hurts first-time homebuyers:
In contrast, the stated policy target of our government is slower house price inflation. That is not good enough. If house prices do not come down, incomes must at least double to make housing affordable again. That is simply not going to happen anytime soon.
Let’s do a quick back-of-the-envelope calculation to understand why. Suppose that house prices stood still, and that nominal household incomes grew at 3% per year, which is slightly higher than the 2.7% average rate of general inflation since 2000. It would take about twenty-four years for nominal incomes to double. That would lock a generation out of the property market. (And that is with an optimistic inflation rate; there are significant deflationary pressures in the global economy that could be here for the long term.) Another way to look at it: If house prices stay at the levels they are at now, household incomes would have to grow at about 5.1% to hit the Council’s target by 2030. Unless we strike oil in the Hauraki Gulf, that is just not going to happen.
Takeaways for Canada:
By allowing more density, we can add more housing to help new homebuyers, without hurting long-time homeowners.
Condos are not a good investment, as opposed to being a place to live. They’re like cars: we can always build more. (Real estate also suffers from being completely undiversified. The Canadian Couch Potato approach is to invest in a diversified low-cost portfolio instead.)