On Sale: Rental Housing, 25 to 50 Percent Off (Some Upzoning Required)
For years, housing advocates and policy experts have sought answers to a key question about land use reform: Does upzoning reduce housing costs? A new paper from Ryan Greenway-McGrevy at the University of Auckland Business School offers evidence that it does.
The paper evaluates the impact of citywide upzoning in Auckland, New Zealand. In 2016, the city introduced its Auckland Unitary Plan (AUP), which upzoned 75 percent of the city by making floor-area ratios (FAR) less restrictive. The AUP also simplified the zoning code and abolished minimum lot sizes in most of the city. There was a swift market response to the policy. Previous research by Greenway-McGrevy and Peter Phillips identified an increase in housing production in the upzoned areas. Six years after the introduction of the policy, this paper aims to discern the impact of AUP on housing costs, focusing on two-bedroom and three-bedroom rental units.
- The upzoning reduced rents for three-bedroom units in Auckland by 22 to 35 percent relative to what would be expected in the absence of the policy.
- Rents for two-bedroom units decreased by 21 to 22 percent, though this finding is weaker than that for three-bedroom units.
- Rents for three-bedroom units would be 53 percent higher in Auckland had the upzoning not occurred, and rents for two-bedroom units would be 27 percent higher.
Using data on rents from the New Zealand Ministry of Housing and Urban Development, Greenway-McGrevy compares observed increases in housing costs in Auckland and other urban areas in New Zealand. The average rent for a three-bedroom unit in Auckland increased by 11 percent from 2016 to 2022, while rents for the same type of unit increased by 41 to 45 percent in the other cities. For two-bedroom units, rents increased by 15 percent in Auckland and by 48 to 59 percent in the other cities. When presented as line graphs, rents in Auckland appear to plateau after 2016 while rents in the other metro areas continue to rise steeply.
Greenway-McGrevy then uses a synthetic control approach to estimate what 2022 housing costs in Auckland would be in the absence of the zoning reforms. The synthetic control is constructed by combining data from 51 commuting areas in New Zealand that are weighted based on their similarity to Auckland in the pre-intervention period. It serves as a strong predictor of what would have happened in Auckland without AUP.
Observed rents for three-bedroom units in Auckland are 22 to 35 percent lower than the synthetic control predicts. For two-bedroom units, rents are 14 to 21 percent lower than would be expected. The reduction in average rents of three-bedroom units is statistically significant at the five percent level, though the rent reduction for two-bedroom units is not.
To frame it differently, the model predicts that rents for three-bedroom units would be 53 percent higher in Auckland had the upzoning not occurred, and rents for two-bedroom units would be 27 percent higher. The author performs a series of robustness checks and demonstrates that the results hold, even when modifying the control pool or when taking into account Auckland’s population loss during the pandemic. Rents in Auckland continue to defy the trend observed in other metro areas.
These findings from Auckland provide major support that upzoning can reduce housing costs. The significant decline in housing costs in Auckland is likely driven by the expansiveness of the upzoning. Three-quarters of the city was upzoned which led to a wide dispersion of new housing developments. Notably, the findings suggest that upzoning had a more substantial impact on rents for three-bedroom units than smaller units. While Greenway-McGrevy does not offer a theory to explain this result, perhaps the increased FAR allowed developers to build larger units, resulting in an increase in the quantity of available three-bedroom units.
Photo of Auckland, New Zealand by Vishal Makwana