Zoning regulations exist for several good reasons, but overzealous planners can forget that zoning comes at a cost.   When land is not allowed to migrate towards its best use, it can cause distortions in the market.   Restricting the supply of land available for residential housing inevitably causes house prices to rise, and it is one of the reasons why New Zealand has some of the most expensive houses in the world.

So why do governments and councils use zoning?   The strongest justification for having zoning laws is to prevent externalities, which is when land owner’s choices have a negative impact on other landowners.   No one wants to build a house only to have a pig farm or recycling station set up next totem.

Zoning is also used to reserve areas for the benefit of society as a whole, such as parks.   Because of the low direct pay-offs from creating parks, it is unlikely that developers would set aside sufficient land for such purposes, yet the societal benefits that communities receive from these facilities are important.   Planners have a role in incorporating requirements for green spaces in new developments.

Furthermore, zoning is often used to try and plan land use in advance and help with infrastructure development.   However, this is one of the weaker justifications for the use of zoning.   Even without the intervention of planners, similar land uses tend to group together because of the economic benefits.   And planners often don’t have the right level of foresight to determine whether an area will be best as housing, farming, a commercial district, or something else.   Zoning regimes that control development in this way need to have the flexibility to adapt over time as the property market changes.

A good case study of the effects of zoning at a regional level is the city of Hamilton.   Hamilton doesn’t suffer from the same physical development constraints as somewhere like Wellington.   Hamilton is surrounded by good quality, mostly flat land, which is largely used for intensive dairying and horticulture.   Planners have traditionally been protective of this land, due to criticism of the way new subdivisions and lifestyle blocks have been squeezing out "productive" activities.   The cost of protecting this land from development is that house prices in Hamilton’s suburbs are higher than they would otherwise have been had developers been given free rein.

In recent years, there has been criticism that zoning regulations have become too restrictive.   Concerns about urban sprawl have seen councils reluctant to open up some areas for development.   Local government, rather than the market, is determining the best use for these blocks of land, and the justification for this intervention is weak.

A house is an investment, just like a farm.   Farmers get monetary benefits by selling what they produce.   The homeowner gets intrinsic benefits from having a place to live and perhaps a garden to tend.   If a 100-acre farm in a particular location is providing less benefit to society than 400 quarter-acre sections would, the land price will rise to a point where farming is not economic and developers will move in.

By the same token, vast swaths of forestry land have been converted to farmland over the last few years as incomes from dairy farming have surged ahead of potential returns from forestry.   Increases in New Zealand’s agricultural output over the last few years have dwarfed the reductions that have come from farmland in some areas being developed for housing.   Land is migrating to its best use as determined by the market.

Restrictive zoning regulations appear to have created an artificial shortage of residential sections.   Consider that in some locations the difference between the price per acre for farmland and for neighbouring residential sections can be in the hundreds of thousands of dollars.   Even when you allow for the cost of developing infrastructure for residential sections, the difference still seems large.   This distortion creates winners and losers in the market depending on where lines are drawn on a map.   When a council decides to change zoning, their decisions have the potential to deliver a multi-million-dollar windfall to one farmer while their neighbour gets nothing.

Zoning is an important tool to prevent harm from uncontrolled development.   But the rationale for zoning has swung too far towards trying to impose more intensive housing on people even if that is not the type of housing they want.   Zoning constraints have been a contributing factor to the significant increases in residential land prices that have occurred.   If the government is serious about affordable housing, it should relax some of the current restrictions on residential development.