Medium density housing keeps rents lower

Auckland University associate professor of economics Ryan Greenaway-McGrevy, in a paper published last week, says if Auckland Council had not introduced zoning reforms through the Unitary Plan in 2016, rental costs for three-bedroom houses would be between 28-54% higher and for two-bedroom homes 16-28% more expensive.

The paper compared rents in Auckland to a weighted average of rents from other urban areas that were similar to the city prior to zoning reform.

The Unitary Plan precipitated a construction boom and gave Greenaway-McGrevy six years of data to examine the impact of the reforms on housing costs. The findings suggest large-scale zoning reforms in Auckland enhanced affordability of family-sized housing when evaluated by rents.

Rents over house prices

Greenaway-McGrevy chose rents for the paper rather than house prices, for two reasons.

First, rents are not directly affected by enhanced redevelopment rights from zoning reform.

The effects of upzoning on housing prices is mediated by the land cost of affected properties, particularly in  desirable locations and reflect the increased capacity of the land to hold additional floorspace and the right to redevelop the property into capital intensive dwellings.

Rents, on the other hand, are not affected by the enhanced development rights, which accrue to the landowner, Greenaway-McGrevy says.

Second, rents potentially capture housing costs across a wider socioeconomic demographic, given low income households are more likely to be tenants.

Among the most expensive

Housing has become increasingly expensive in many parts of the world, precipitating an affordability crisis.

In New Zealand, housing costs are among the most expensive in the developed world.

Among renters and owner-occupiers with a mortgage, the median proportion of disposable income spent on housing costs was 22% in 2021. For renters it was even higher at 28% of their disposable income. In Auckland, 40.6% of households rent.

A wide range of economists and urban planners attribute high house costs, at least in part, to restrictive zoning.

Reform to relax restrictions on housing density is consequently advocated to reduce prices by relaxing regulatory restrictions on housing supply, Greenaway-McGrevy says.  

Up until recently, few cities have pursued large-scale zoning reforms to enable affordability, meaning there is little empirical evidence to support the purported effects of zoning reforms.

He says the few studies that have been done have focused on localised upzonings, which typically show muted or no effects on housing supply, casting doubt on the ability of zoning reforms to meet intended objectives.

Greenaway-McGrevy says his findings that large-scale zoning reforms can reduce housing costs is important.

This has been shown by the Unitary Plan upzoning about three-quarters of the city’s residential land and introducing a standardised set of planning rules across the city. This includes four residential zone for medium density housing development. 

Results from the paper’s synthetic control approach indicate large-scale zoning reform undertaken as part of the Unitary Plan did enhance housing affordability, at least as measured by rents, suggesting that market-based responses can play a role in redressing unaffordable housing, Greenaway-McGrevy says.