Gordon Copeland: ARC's urban boundary to blame for evil of land banking

Members of the public talk with Auckland City councilors at an Auckland Regional Council Forum in 2012. Photo / Natalie Slade

Opinion

The evil which is land banking can be laid squarely at the feet of the now-defunct Auckland Regional Council. In 1999 the ARC introduced a "metropolitan urban limit", a line of demarcation between the residential, commercial and industrial limits of the city and the rural areas which surround it. This was done without any reference to basic economics.

The law of supply and demand dictates that if the supply of a commodity (in this case land for housing), is constrained when demand is increasing (as it is in Auckland), then its price will increase. That is exactly what happened.

In 2008, concerned that housing affordability in Auckland had reached a "severely unaffordable" level, Parliament's commerce committee held an inquiry and travelled to Auckland to hear submissions on the issue.

We were advised that, based on research carried out by economist Arthur Grimes' (then chairman of the Reserve Bank) Motu Research, the land just inside the metropolitan urban limit was 10 times the value of the land just outside it.

In other words, if a farm had been valued at $1 million before, it was now worth $10 million; a windfall of $9 million, just because an arbitrary urban boundary had been drawn.

Former Reserve Bank chief (and later MP) Don Brash told the committee the metropolitan urban limit should be outlawed by the Government forthwith. If that had been done the land in question would have reverted to close to its rural value. This was known to Parliament in 2008, but tragically nothing was done.

A further worrying submission informed the inquiry that, as a result of the rapid rise in house prices (due in the main to the unprecedented increase in the price of residential land), 60 per cent of all households in South Auckland would never own their own home.

I chaired that meeting of the committee and these two realities taken together saddened me greatly, since the financial consequences that flow from a lifetime of forced renting are negative for both the families involved and society as a whole.

But it gets worse. Many of the people whose land has increased in value by 1000 per cent because of the urban limit are not selling it for new housing because its value continues to rise year by year. It's called "land banking" and it can be an investment with returns like no other.

As if all of that was not tragic enough, when the land bankers owned their land before it was rezoned by the creation of the urban limit, the proceeds from its eventual sale will be tax free under New Zealand law.

The result of all this is that those who own the land just inside the line have become multi-millionaires overnight at the expense of the poorest people in Auckland. That was a fundamentally unjust policy blunder. It is undoubtedly the main reason for the increase in wealth inequality in New Zealand. I say land banking is evil, because the Government's failure to bring it to an end is contrary to the common good of our society and at the expense of the poor.

The lesson is surely that boundaries between urban and rural land should not be established years before they are needed. Rather growth should be incremental so that land supply matches actual demand. It is unacceptable that such arbitrary boundaries years in advance continue, since to do so is simply to repeat the failure of the past.

So it is an extraordinarily folly that, in its nearly completed Unitary Plan, the Auckland Council intends to simply move the residential urban boundary further out. You can bet that as a result the value of the land between the old boundary and the new one will rise exponentially and a whole new group of land bankers will be rubbing their hands with glee.

Human nature being what it is, you will understand that those who are involved in land banking are simply taking advantage of the opportunity which has come their way to become very rich.

The Government's role, on the other hand, is to advance the common good by ensuring that housing is available and affordable for all New Zealanders.

The injustice of all this is so grave that I pray the Government will take note of the advice of eminent economists Arthur Grimes and Don Brash and outlaw the creation of the new artificial boundaries in the Unitary Plan for Auckland.

Gordon Copeland was an MP from 2002 to 2008 and retired as the fixed interest investment manager for the Anglican Church Pension Board in 2014.