High Land Prices: A Feature or a Bug?
Societal reform is not genuine reform without land-use reform?
The 2.6 kilometer long Lyttelton rail tunnel, built in the 1860s, used to perplex me because I could not understand how a tiny New Zealand province, ten years after European settlement, could afford such a massive project. Researching this puzzle reveals a lot about New Zealand’s land-use policies. It reveals that land value capture mechanisms are an under appreciated part of governance and infrastructure provision. It reveals that a dysfunctional compact between centralisers and localisers is a significant cause of inadequate infrastructure funding in New Zealand. For Christchurch it also reveals an unexpected dualism between being a straight-laced English classist colony and a parochial place inclined to liberal rebellion.
The full story goes like this.
Largely forgotten and unknown to ordinary kiwis the current housing affordability crisis is not a new phenomenon. It is yet another incarnation of the land conflicts that has dominated New Zealand since the very beginning of European colonisation.
Inflated land prices are seen as a major driver of the nation’s current housing crisis.
Interestingly in New Zealand’s distant past the concern was the opposite. That the country had too low land prices.
The story about New Zealand land prices indicates a more complex link between land, its use, amenity and infrastructure than is commonly thought.
This paper explores the history that influenced New Zealand’s migration and land-use patterns and how its cities were built.
The author would contend that the history of how New Zealand’s urbanisation institutional framework developed should be known by the major urban local governments and by central government, especially by its major urban capital building agencies — NZTA and Kainga Ora. Hopefully, this background knowledge helps improve the current urbanisation framework.
Sufficient Land Price Theory
Two centuries ago Edward Gibbon Wakefield came up with a sufficient land price theory of colonisation. This being the belief that Great Britain was overcrowded and over-capitalised whilst the colonies suffered from insufficient division of labour (workforce specialisation) and too low land prices. He believed colonial land should initially be owned by the government and sold high (at a ‘sufficient price’), thus discouraging under capitalised workers from withdrawing their labour from the colonial economy to become self-sufficient landholders and the high land prices allowed for land sale revenue to fund free passage for more working class migrants.
Wakefield stated this scheme would improve the utilization of capital, improve labour productivity, and increase the prosperity of both England and the colonies. There was a political dimension to his arguments because although Wakefield came close to arguing for the public sale of land at a higher ‘sufficient’ value as a land value capturing mechanism to fund public good projects. A full reading of his works indicate he was actually arguing for the replication of English aristocratic class system in the colonies.
Wakefield’s ideas influenced theorists, such as, John Stuart Mill and Karl Marx. This being despite Wakefield not defining the method for calculating the sufficient price of land.
In British colonial government circles Wakefield’s ideas did not have universal acceptance. For instance, Governor George Grey believed in low land prices. Grey was another influential politician of the early New Zealand colonial period. Grey was a significant contributor to New Zealand’s 1852 constitution which gave the colony representative government and later on in his life he participated in New Zealand’s elected politics.
There is a suspicion that Wakefield’s beliefs about colonisation were influenced by his desire for greater social standing. In particular, his craving to be part of the aristocratic ruling class. That his writings were consciously or sub-consciously about reproducing the English class system in the colonies — with him and his family being in the top class.
Wakefield was a black sheep. He did dodgy stuff like marry an underage heiress (he effectively kidnapped her by deception) as he had ambitions of acquiring an estate large enough he could campaign to be a member of the Westminster Parliament. Instead Wakefield spent three years in Newgate prison from 1827. It was in prison where Wakefield first wrote about his colonisation theories.
Sufficient Land Price Theory in Practice
In New Zealand Canterbury was the most Wakefield colony in the sense land was being sold at £3/acre. Other Wakefield colonies were £2 or £1. Auckland not being a Wakefield colony was shillings per acre.
Wakefield in the 1850's migrated to New Zealand. Presumably to get the social standing he craved. He landed in Lyttelton but the Superintendent and leaders of Canterbury refused to meet him. Not for the last time would Canterbury take a parochial, independent-minded stance towards outside leadership. Wakefield went to Wellington where he achieved his life-time goal of becoming a Member of Parliament. Unfortunately for him it was relatively short-lived due to ill-health.
High Land Prices — A Feature?
Canterbury found it did not need outside help. It could use the revenue from land sales at the high ‘sufficient’ price to fund transport, infrastructure and cultural amenity. Canterbury’s experience was that if this revenue was expended judiciously it could make the province more productive.
Most famously Canterbury built a rail tunnel connecting its shipping port to its planned town of Christchurch and to the agricultural hinterland beyond.
In 1857 the province decided to construct the 2.6 km long Lyttelton rail tunnel. The Superintendent election of that year had the rail tunnel as its focus. The tunnel was opened in 1867. It cost £200,000 which was repaid by loan. In 1857 the Canterbury province only had 12,000 people. Land sales were the provinces best revenue source by far.
This practical application of Wakefield’s sufficient land price theory indicates how to calculate the sufficient price. Being the infrastructure and amenity added to the land must raise its commercial value above the sufficient land selling price. This ensures land sales can repay the infrastructure and amenity debt.
Canterbury had in effect created an infrastructure provision model involving a democratic governance structure, spatial planning, and an infrastructure funding mechanism.
Low Land Prices — A Bug?
The Canterbury sufficient land price infrastructure funding model contrasted at the time with Auckland’s private sector speculative model. Auckland had its own black sheep in the form of war profiteers, land speculators who were also political operators, such as, Thomas Russell (founded the BNZ, NZ Insurance Company, and and via his younger brother — John the Russel McVeigh law firm) and Frederick Whitaker (Attorney General). The speculation model privatised land-use gains while socialising the costs by using war to steal Maori land and build infrastructure. British troops built the Great South Road to Hamilton for example.
Many of New Zealand other provinces were not as successful as Canterbury. Some could not repay their debts. Central government restricted provincial government borrowing in the 1860s.
Colonial Government Takes Over (Imperfectly)
Julius Vogel first as the Colonial Treasurer and then the Premier attempted to use the Canterbury model on the national scale. He more than doubled public debt from £7.8 million in 1870 to £18.6 million in 1876. This allowed over 2000 km of rail to be laid by 1880. Record numbers of migrants arrived in the 1870s many of whom had their fares subsidised.
Vogel and the colonial politicians of the time wanted the rail and the migrants to swamp North Island Maori who through to the 1860s and early 1870s had fought against European colonisation. Yet that wasn’t the whole story, there was also a belief that New Zealand and the other colonies were young and virile. That they would form bigger and better ‘Britons’. That they could develop stronger industrial economies than the ‘old country’. Large-scale infrastructure investments were consistent with this vision.
Vogel wanted over 2 million hectares of waste land around his rail corridors as a Crown endowment. This would have allowed the Crown to own, then sell at high prices, land along the rail corridors. The Crown could have captured the uplift in land value that rail would have created to repay its significant government debt. Provincialist MPs defeated Vogel in Parliament in 1873. Probably because province supporting MPs would have considered it a revenue grab. Also a state land value capture model would have conflicted with the private sectors speculative land-use model that had considerable support with the parts of the business community that supported land speculation, which had been the driving force behind the Maori War of the 1860s.
The Canterbury model could not be fully implemented by Vogel. This resistance by the provincial governments perhaps contributed to their abolition in 1876. Abolishing the provinces meant Canterbury’s local infrastructure provision model was broken.
When the provinces were abolished only Canterbury and Otago were considered financially secure. It was politics not economics that ended Canterbury’s infrastructure model. The only surviving land-use infrastructure funding model was the private sector model which socialised the costs onto others.
In the 1880s, New Zealand along with much of trading world went into the Long Depression. These were economic hard times which the imperfect Vogelism infrastructure model could not counteract. Migration slowed. The bigger and better vision faded.
Local government targeted rates (property taxes) could be considered a type of ‘sufficient land pricing’, as the rate adds additional cost to the raw land price. But instead of a one-off cost there are annual/ongoing payments. If the targeted rate is used to provide infrastructure or cultural amenity which raises the productive or attractive value of the land to a greater degree than the taxation cost then this system of infrastructure funding is viable.
The most efficient property tax is land value taxes. It encourages land, whether it is urban or rural in nature, to be put to its most productive use. The urban side is discussed further in the paper Saving Christchurch’s CBD.
Ironically, Sir George Grey later in his life came round to the land value tax way of thinking. He met with Henry George and promoted meetings discussing Georgism.
In the 1890s, land value taxes in the rural environment helped break up the great wool estates. Which the government bought, then ‘burst up’ into many smaller farms, and balloted to prospective farming families. Refrigeration had made smaller units of farm land that focused on the intensive production of lamb or milk more productive.
The Liberal Party of New Zealand in its heyday, 1891–1912, promoted democratic agrarianism, as opposed to supporting a land owing aristocratic elite. It was during this period that New Zealand was considered on a per capita basis to be one of the richest countries in the world. Democratic agrarianism was a sustainable and successful economic model. It was from this period that New Zealand developed its reputation for experimental policy making and for being fair-minded and egalitarian.
Lessons for Today
In the following century the rural sector of New Zealand has been successful. Especially from an economic perspective (there are some concerns regarding environmental sustainability). Yet for the last century New Zealand has struggled to find a successful urban development model, despite its early experiments and successes.
The lack of an effective compact between centralisers and localisers is as evident today as it was 150 years ago. For example, economist Eric Crampton believes a significant cause of the housing crisis is the lack of incentives for the local government sector — that Councils need to be encouraged to accommodate growth, rather than look for ways to stymie it.
For decades, councils shouldered all of the costs of accommodating urban growth while central government took the increased tax revenue that came with economic growth.
As consequence, councils created rules and processes to make it difficult to get new housing built in a hurry. Is there a better explanation for why it takes a year for an Auckland developer to get new street names approved?
Also the same tensions, conflict, and contradictions of the last two centuries remain between those who advocate for more land and those that argue for the better use of land.
There is the argument that private sector competitive land speculation can bring down urban land and house prices, especially by opening up the rural/urban boundary.
While there is an second argument that using land more productively through better spatial planning, more infrastructure provision — especially more spatially efficient multi-modal transport infrastructure, and freeing up planning rules, so that cities can build up, is the answer.
For the second approach if the costs are added to land then its price will be higher on a per square metre basis, but by building much more floor space on a given plot of land, housing can still be affordable. This approach increases the number of people who can live near jobs, transport and other amenity. Which can make people better off.
The key concept to understand is that, much like with labour and capital, the amount that can be produce on land depends not just on its quantity but on its productivity, and the productivity of urban land depends on how much floor space can built on the land. Tokyo for instance because it uses urban land more productively has higher land prices yet lower house prices compared to London.
New Zealand has made efforts to use its urban land more productively and more competitively. In 2020 it has released a National Policy Statement on Urban Development that removes car parking minimums and raises the height limit to six-stories within walking distance of rapid transit among other requirements for local government to implement. The expected outcomes of these reforms have been described.
If New Zealand continues to experiment and innovate with urban development policies it could be highly beneficial to the country.
Further Reading
- Acknowledge No Frontier: The Creation and Demise of New Zealand’s Provinces, 1853–76, by André Brett, 2016
Re: “Provincialist MPs defeated Vogel in Parliament in 1873. Probably because they considered it a revenue grab...”
Chapter 13 — The provinces either earned significant income from their land, or expected they would in future. Any central government proposal that took any of their land income received loud opposition from provincialists in parliament.
2. Lost City: Forgotten Plans for an Alternative Auckland, by Chris Harris, from The Sustainability Conference 2007 papers
Chris Harris discusses urban Vogelism in the 20th century which the reader might find helpful to understand how the story progressed from the 19th century which this paper focuses on.
Chris Harris describing urban Vogelism as;
This union of ideas took place in 1925 with the passage of the Hutt Valley Lands Settlement Act. Under the Act, 2.7 square kilometres of land in the Hutt Valley north of Wellington was to be developed as a new town centre, rendered accessible by a new railway and with all development gains over the initial, rural value accruing to the state.
The essence of this new Vogelism was state suburban development for a profit, in defined railway corridors. As the economist Laurence Evans put it in 1972, the state under urban Vogelism was “suburban developer and public transport coordinator” rolled into one (Evans, 1972).
During the 1930s and 1940s the idea of primary state responsibility for suburban colonisation became progressively more entrenched. Nearly half of all housing subdivision at the end of the 1940s was on public land.
It was unfortunate that after World War 2 the urban Vogelism method of city development and transport provision was discontinued. Auckland and Christchurch, in particular, became cities developed by private speculators with roads and cars as the main mode of transportation.
3. High Land Prices: Added Value or Exploitation? by Philip Hayward in response to this Sufficient Land Price paper is an excellent examination of high land prices because of land owners exploiting market power rather than the honest cost of adding amenity and infrastructure. Philip also links his discussion very well into examining the success of overseas integrated rail and land use systems — such as Japans.
4. Housing affordability: Reform or Revolution? by Brendon Harre covers the same time period as this Sufficient Land Price paper. Reform or Revolution focuses on the 19th century from a UK and international perspective. The paper discusses the historic record of progressive social movements being successful against the cartel of landed gentry interests when productive capital is given a chance to defect from rentier capital.
5. War profiteer: the story of Thomas Russell, RNZ Black Sheep podcast
In this week’s episode, we learn about the worst kind of villain in New Zealand history… an Auckland property speculator.
Historian and author Vincent O’Malley tells the story of Thomas Russell and his victims, both Māori and Pakeha.
Today these baby boomer ‘bastards’ are accused of driving house prices through the roof but in the past they helped start and push along the Waikato War, one of the most unjust conflicts in our history.
Chief among this cabal was Russell, the founder of BNZ and many other important Auckland businesses.
