Land rules deter competition

Published in The National Business Review (Auckland), 31 October 2014nbr31102014 (PDF)

One of the best additions to the policy landscape in recent years was the Productivity Commission, which started work in 2011.

In the short time it has been in operation, it has already produced important reports on issues ranging from regulatory institutions and practices, to services sector productivity, housing affordability and international freight transport services.

As it stands, the commission receives the bulk of its funding to work inquiries on topics referred to it by the government. This means the government provides the terms of reference and thus shapes the scope of the final reports and recommendations (but not their contents: the commission is an independent Crown entity).

The latest inquiry passed on to the commission just before the election asks it to investigate ways to improve the way local authorities regulate to make land available for housing.

This topic is not only intellectually interesting but it is bound to result in controversial recommendations. Few issues are as emotional as the ways cities are planned, neighbourhoods built and construction processed regulated. This may turn out to be the commission’s most provocative report yet.

Despite this, the remit of the inquiry seems too narrow in one crucial respect. The government has only asked the commission to look into the use and release of land for housing.

Housing, however, is only one way in which land can be used. Other potential uses have an equal impact on competitiveness and productivity, which is what the commission is all about. It would therefore be desirable to expand the terms of reference – or indeed to schedule the next inquiry on the use of land for commercial purposes.

By international standards, New Zealand is an expensive place to do business, not least due to high costs of land. A few figures from CB Richard Ellis, the global real estate group, illustrate the problem.

Prime office annual rents in Auckland are $US39/sq ft. This makes the Auckland office market more expensive than all US cities except Manhattan and San Francisco. Put differently, it is less expensive to run an office in places like Los Angeles, Boston or Seattle than in the City of Sails.

Industrial land here is not cheap, either. To rent space for a warehouse costs $US10.20/sq ft in Auckland and $US6.30 in Wellington. This compares unfavourably to, say, industrial space in Miami ($US5.82), Atlanta ($US3.47) or Chicago ($US4.41).

Not all data look bad for New Zealand, though. When it comes to prime retail rents, Auckland and Wellington are much cheaper than other cities in the Asia-Pacific. But then again, is it that surprising the rents in Lambton Quay ($US195) or Queen St ($US289) are lower than in the shopping nirvana of Hong Kong ($US4335)?

Talk to New Zealand business leaders whose companies are land intensive, and who do business abroad, and they will tell you the same story: The cost and availability of land in New Zealand is a real concern.

Regulations affecting the availability of land therefore have wider implications than just residential property. In economics, land is considered one of the three classic factors of production (the other two being labour and capital).

Even in an increasingly digital, virtual world, land still matters for a vast range of business activities. You cannot run a restaurant, a supermarket, a hotel, a school or a hospital without adding land to your production function. Conversely, the cost of land needs to be covered by prices charged in all industries that use land. Ultimately, it is consumers who have to pay the price for that.

Discussions about reform of the Resource Management Act (RMA) tend to focus on its effect on house prices. But there are implications for commercial land prices that need to be carefully examined as well. Indeed, it is not just the cost of land that should be analysed but land regulations’ effect on competition as well.

A few years ago, Swedish furniture chain Ikea tried to set up the first of its megastores here. Unfortunately, the Environment Court ruled Ikea would be too popular. Because the court noted “Ikea stores are known to have high traffic-generating characteristics,” it disallowed the company from renting a store in Redwood Group’s Mt Wellington shopping centre.

The decision came at the end of a four-year long search for a site and it ended IKEA’s plans to expand into the New Zealand market for the time being.

One can only wonder whether Ikea’s competitors in furniture retail were involved in lobbying against its market entry but it does seem quite unlikely. In any case, the RMA provides ample tools for any opposition to market newcomers. And who are the losers in this battle? Consumers, of course, because they miss out on greater choice, lower prices and more competition.

Consumer demand for Ikea’s products in New Zealand can be inferred from the Facebook group Bring Ikea to NZ, which has over 16,000 likes. There is even a website that specialises in importing Ikea furniture from other markets to New Zealand – at much higher prices. While you can buy Ikea’s famous Billy bookcase for $A69 in Sydney, it will set you back $189 through the grey-import website.

Land use regulations also drive up land prices. Their most pernicious effect is that they make it harder for newcomers to enter the market. However, as economics teaches us, barriers to market entry protect incumbents and reduce competition.

Markets should always be contestable so that new ideas, new products and new pricing strategies can be tried out. This is especially for an economy as small as New Zealand’s in which market size often delivers higher degrees of concentration.

Land regulations are a cost and concern to New Zealand businesses, and they are probably a factor affecting the cost of living through land prices and competition effects.

For all these reasons, this deserves a thorough investigation by the Productivity Commission. If it was an oversight not to include these issues in the terms of reference of the new inquiry, the government should insert them now. Better still, it should task the commission with a separate inquiry into the implications of land-use regulations for industrial, retail and office uses.

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