The value of Land

Property has attracted a lot of interest among New Zealanders. The main headlines are always talking about the movement of house prices: whether it is rising or how fast they are falling.

However, the real value of a house lies in its land value.

If you don’t believe it, pick a residential address (leaving out apartments) and search it on the Auckland’s Council webiste.

The majority of the CV is attributed to the land value.

According to one source, Since 1993, the price of an Auckland section has increased by at least three or four times.

So why have land values increased so substantially in the last 20 years?

It’s not like people earn so much more income compared to 1993. Immigration only explains some of that increase through increased demand.

The key reason is there is scarcity of land that meets all the requirements for the developer to make profit. At the same time, as supply is constrained while demand increases (due to population increasing due to immigration and natural growth), the prices have to increase. Furthermore, existing plots of land that have been rezoned to allow more intensive development exploded in value. Yet, at the same time, locals oppose any large scale projects in their neighbourhood (NIMBY backlash) particularly if it affects their traffic, quiet enjoyment and blocks their view.

This scarcity is partially due to local and central governments  constraining land available for developers to build which makes houses more expensive on existing land.

Councils routinely reject proposals to build high rise apartments in CBD fringe areas like Epsom, Remuera, citing the impact on traffic and locals. Even places like Orewa have locals opposing high rise projects.

However, if this continues, the value of land for inner city suburbs will continue increasing forcing those on lower incomes to go and live way out in the southern or western suburbs. Or even relocating to another city.

So what can you learn from this?

For investors, the key is to buy property that has a section of land near the central areas (avoid apartments if you are not an experienced investor).

For those who can’t afford inner city suburbs, you have no choice but to buy houses in the outer suburbs. This is unfortunate and makes Auckland less liveable for those on lower incomes (due to longer commuting distances) but it is not likely to change unless the local governments help bring down the cost of section and cost of land.

Will this change?

It can change. Look at Christchurch and areas of Canterbury after the earthquake. The central government stepped in and reduced planning bureaucracies at the council. Construction happened on a mass scale and made houses affordable. But look what happened to the housing market there? Prices have stagnated and declined in some places. During the same time, the other regions in NZ were still experiencing housing price growth. So rapidly opening up land supply for development does dampen the house prices (and if demand drops, that’s a double whammy).

For now, if you are in Auckland, your land will keep its value especially if you own properties in the inner city suburbs.

 

 

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