New Zealand Goes Full “YIMBY” With Nationwide Upzoning

December 22, 2021

An independent cost-benefit analysis of the New Zealand government’s new legislation to allow three-story multifamily housing by-right, commissioned by the Ministry for the Environment, finds that it could have a major impact on housing affordability, gradually but increasingly delivering “a permanent shift in the responsiveness of housing supply to rising prices” if implemented. 

Key takeaways:

  1. New Zealand’s proposed upzoning through new default Medium Density Residential Standard (MDRS), with a policy to permit three stories by-right with fewer setback requirements on most residential parcels, would allow an estimated 75,000 new homes in the nation’s fastest-growing cities.
  2. The benefits would significantly outweigh the costs: lower housing prices and agglomeration effects would grow local economies with more jobs and more consumer spending. While new density will require new infrastructure, it will also reduce greenfield development, thus economizing on those costs even as they scale with the benefits.
  3. If enacted in 2022, the net benefit of the upzoning accruing by 2043 “is estimated at $14.5 billion in 2019 dollars, or about $11,800 per 2022 household in added disposable income over 21 years. The total cumulative value of long-term distributional impacts over the same period is about $198 billion.”

New Zealand’s parliament has proposed amendments to the Resource Management Act of 1991 (RMA) by upzoning and streamlining permits for residential development. The new Medium Density Residential Standard (MDRS) in their residential areas would allow for three stories and three units for the average-sized residential lot by-right, with greater flexibility for variances. Another policy, the National Policy Statement on Urban Development Capacity (NPS-UDC) would “require areas walking-distance from urban commercial centres and frequent public transport stops to allow at least six-storey building heights.” It would also require local governments to consider “wherever there is strong demand or good amenities.” Taken together, these amendments would be similar to previous upzoning bills proposed in California, SB-827 and SB-50.

The cost-benefit analysis by consulting firms PwC and Sense Partners uses newly available market data to estimate development potential and a range of financially feasible housing production. PwC and Sense Partners estimate this rating development quality by a parcel’s average “land ratio,” which “represents a lower cost of development as the improvement value is relatively low compared to the land value. Thus, the higher the land ratio, the higher the quality score.” In other words, a parking lot in an urban core would have less opportunity cost for redevelopment, and higher land value incentivizing improvements, relative to an existing apartment building. From this, the consultants are also able to estimate the “shock” to land values from upzoning that could spur new housing production, and the likelihood of new supply on each parcel.

The model also relies on continuing the robust recovery in construction jobs in New Zealand since the 2008 recession, particularly in Auckland. The analyst’s data suggests that the construction sector “can meet the expected increases in demand for construction but only by continuing the strong rates of growth experienced in recent years.” There is both a caveat and silver lining to this assumption: “Supply chain constraints in the building and construction sector, such as labour and materials, would be expected to become less binding over time.”

In Auckland, the nation’s largest city, the estimate of new housing construction over the next two decades within one standard deviation ranges from 24,000 to 56,000 new homes. Wellington, the second-largest, could see an estimated 7,000 to 14,000 new homes. Demand elasticity would also decrease in all impacted cities, meaning that decreases in the price of housing would not increase net demand for housing—in other words, increasing affordability would not crash the housing market, but it would stabilize the economy. 

By redistributing wealth from landlords to workers, lower housing costs would multiply the economic benefits. The increase in disposable income for households over time would also enable more New Zealanders to become first-time homebuyers, helping to reduce wealth inequality. By 2043, the direct net benefits to the economy from the proposed upzoning are estimated at $14 billion, but the total benefits accounting for redistribution add up to as much as $198 billion.