Is Auckland at its tipping point?

23:46, Mar 31 2014

One of the principal arguments put forward for the development of Auckland into an international-sized city is that urban economies of scale generate better outcomes.

This is called an agglomeration benefit, or rather the economic advantage that firms and people get from being situated closer to markets, suppliers and places of work.

This makes sense when you consider that proximity reduces transport costs, gives employers access to a deeper pool of skills, and a higher rate of knowledge transfer among urban employees. Indeed, proof of the pudding can be found among firms in urban environments, which generally are more productive and pay higher wages than their rural counterparts.

But like all things, there is a balance, and for cities that comes in the form of urban costs, namely elevated land prices, congestion, a higher cost of living, and greater exposure to things like pollution and crime.

Again, this stacks up when you consider that congestion adds to transport costs, a higher land price and cost of living mean firms have to pay higher wages, and crime and pollution tend to drive skilled people from an area, not attract them.

The trick is to maximise the agglomeration benefits and minimise the urban costs.


The question for Auckland is, which side of the balance does it sit on? Certainly the economies of urban scale are reflected in the fact that the city produces 37 per cent of New Zealand's output, and labour productivity is anywhere between 30 and 50 per cent higher than in the regions.

But have urban costs risen to the point where these agglomeration benefits are starting to peter out? This is a more complicated point to make, one that will only emerge with the benefit of time and data, but certainly there are signs which are starting to raise a few eyebrows.

House prices are an obvious place to start. According to the Real Estate Institute, house prices rose 16.9 per cent in the February year, while the average weekly wage in the city rose at a more pedestrian pace of 1.3 per cent in the year ending June 2013.

Yes the figures are not entirely comparable in an apples-for-apples sense, and easy credit terms have played a part, but they do complement other signs that suggest urban costs are starting to drag on the city's economic performance.

One of these signs came from a recent press report which claimed more and more Auckland businesses are looking to relocate to Hamilton because commercial rents in New Zealand's biggest city have become too expensive.

That's largely related to supply. A 2006 report commissioned by Metropolitan Auckland Project Team stated that the city was running out of land for businesses, and had between nine to 11 years of supply left based on historical expansion rates, and another four to five years onto top of that under a planned development scheme.

Yet in the eight years since the report, no significant releases of commercial land have been made. Ultimately it will be Auckland consumers who will have to bear the burden of this as businesses are forced to pass these costs on.

Another is congestion. New Zealand was recently rated as the most congested country in the developed world according to the Tom Tom Index, with Auckland featuring on an ignoble list of top-10 most congested metros.

So is Auckland at the tipping point, where the urban costs consume the benefits of being a big, productive city? Probably not, but there is very little time to turn it around, and what time is left is running out fast.

If we want to establish Auckland as an international destination that is attractive to outside investment we need to stop getting mired in the trenches of ideology.

Yes, the city could benefit from a better transit system, and hopefully the $1.14 billion being spent on rail infrastructure upgrades will reap the hoped for benefits. But equally, upgrading the highway network would go a long to freeing up the roads (particularly the links between the transport corridors).

More land should be released for businesses and residential purposes, but Aucklanders also need to commit themselves to the transformation of the city and abandon their Nimby-ism - the attitude of 'not in my back yard'. Auckland's planners and economists are probably right when they say that draconian height restrictions have contributed as much to the city's housing affordability crisis as the metropolitan urban limit.

In short, we need all the options on the table. New Zealand is a small country, albeit one with a fantastic set of economic opportunities in front of it. If we want to leverage these for the benefit of all New Zealanders, we simply cannot afford to make the mistakes of Sydney and London that we have neither the time nor the resources to fix.

- Jason Krupp is a research fellow at the New Zealand Initiative.