Friday, February 28, 2014

MUL's, RUB's, Zones and other Unearned Capital Gain drivers

The thing the Clueless Councils have never twigged to, is the economic effect of a zoning squiggle on a map.

The Productivity Commission Final Housing Affordability Report estimates the rural/urban price differential for Auckland at roughly 10 times - P9 - a direct quote follows:

"In Auckland the MUL is a binding constraint on the supply of land for urban growth and has increased section prices within the city. This is indicated by the large differential between land prices 2 kilometres inside and 2 kilometres outside the MUL (Figure 0.9), which suggests that Auckland Council’s proposed compact city approach, based on containment of the city, undermines the aspiration of affordable housing."

  • Instant CG handed to the landowners of 'urban zone', the moment the squiggle is put into effect. Rural land prices (say, top-end dairy) run around $50K/ha. Urban undeveloped land prices, using the PC's figures, start at around $500K/ha.
  • The Urban land price (thus inflated) transmits successively across the market for the adjacent area, the suburb, and the city. After all, if you owned a shack on a formerly rural plot, for which you paid $17,500 in the days of yore, whaddareya gonna sell it for now that it's Urban zoned, and the neighbours on a subdivision where average house/land prices are $750,000?
  • The price is also transmitted directly via the operation of land agents (recent sales), city valuations (entire areas, also based on sales and rules of thumb), and hearsay (did ya hear what ol' Bloggsie got for that darned Shack???)
  • Every such price increment is a minor CG (for the accounting types, a Revaluation rather than a Cost asset component), and added across all sites, this becomes a substantial sum.
  • Now, what do we expect our FHB to buy? Why, a Modern Shack, at Urban land prices which inevitably contain a massive CG component (as distinct to actual rural-land raw costt). And pay for that via a mortgage, delivered by bankstaz eager for the interest revenue stream on that inflated sum, whereupon as much will be expended in Interest as was paid in Principal.

So ignoring, as the Clueless Councils do, the economic effects of artificial squiggles on maps, nevertheless has real-world results, which in the way of this wicked old world, fall mostly heavily upon the young, the poor and the start-ups.

The accounting equation is startlingly simple.
Starting Position:  Raw per ha cost of rural land:
50K debit, asset.  Other side: 50K credit - Landowners equity.

Event 1:   Revalued once urban boundary moved: 
Debit 450K Asset Value      Credit    450K landowners equity Revaluation Reserve  (this is Unearned, just a book entry)

Event 2:  Owner sells the plot:
Debit Landowners Bank Account 500K (which for youse non accounting types is a Credit on der Bank Statement - yum yum), Credit Asset Value 500K

The Asset is now zero for the original landowner, because it's sold to someone else.
(That somone else (assume paid in cash) will then have a Starting Position of:
Debit Asset $500K, Credit Bank 500K.
Note that this new owner has had to account, and fork over cash, at the cost price - this is how CG crystallises).

Original Owner's equity is still 500K - it's now just in the form of Cash, not Fixed Asset. In effect, the $450K Revaluation Reserve has been cashed up.....hence my characterisation as Capital Gain (CG).

Unearned by the original owner.

Untaxed by the Benificent IRD (if the landowner is correctly structured...).

Placed there by a squiggle on a map caused by Planning Fads in a Clueless Council.

Multiply this small but perfectly formed example, by the number of land plots in Auckland, to form some opinion as to the extent of the Unearned Capital Gain which resides within the Cost of Housing.

Placed there, unasked for, by the Economic Cluelessness of Councils, and their Zonerating and Plannerising Teams of Earnest Drones.

And we call this 'Godzone'......

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