Earthquake-prone buildings

Owners of earthquake-prone buildings now have a bit more time to bring them up to spec. The owners are mad because they say it isn't long enough; people who experienced Christchurch are mad because buildings will still fall on people and kill them in another quake. They could both be right.

It is perfectly plausible that there are buildings that need never be compelled to be brought up to 33% of new building code. Imagine a building in the middle of nowhere, with no nearby pedestrian traffic, and occupied only by those who know about the risk or who are well-advised about it by a sign at the doorway. There is no reason for the government there to get involved, or at least no reason that comes from economics. People can trade off cost and beauty against risk - that's allowed. And so a national rule that forces the owner of such a building to make costly investments to bring it up to code imposes cost in excess of benefit. The owner either will sink money into the building where it isn't warranted, or he will demolish the building that he otherwise would prefer to keep.

On the other hand, imagine a building in downtown Wellington with an unreinforced masonry facade. Everyone in the building knows about the risk and accepts it in exchange for lower rental rates or enhanced amenities on other margins. And that's all fine. But passers-by on the sidewalk and buses driving by on the street have uncompensated risk forced upon them. While the owner will there rightly claim that it does not pass his cost-benefit analysis quickly to bring the building up to 33% of code, he is not accounting for the costs he is imposing, probabilistically, on every passer by. It can easily be the case that, when accounting for the risk of death he is imposing on each person walking past his building, upgrading the building or demolishing it would pass cost-benefit. But he does not care about the costs imposed on others. The new rule is too lax in this case.

What then is an optimal rule? We'd need some way of accounting for the true risk that a building imposes. That risk depends not only on structural features of the building but also on the building's surroundings. And it would be pretty hard for central government to be able to come up with a clean rule. As we saw in Christchurch after the September quake, City Council had a rule in place requiring the closure of footpaths adjacent to risky buildings; Council interpreted the rule in perverse ways. Instead of blocking busy Colombo Street, Council decided that the engineers must have meant that 605-613 Colombo imposed risk instead on tiny alleyway beside the building. And then the building fell on a bus and killed a bunch of people and left Ann Brower to work out the series of spectacular regulatory failures that led to her being the only survivor on that bus.

There's an easier way. Honestly, we do not know when another quake will come or which buildings will collapse. Engineers can put up widely varying assessments of the true structural risk imposed by a building. What do we do when faced with this kind of uncertainty? Impose a liability rule. Instead of giving building owners 15-20 years to get their buildings up to 33% of the new building code, give them five years to get an engineering assessment, to put a safety letter grade prominently at the door, and to get liability insurance. At the end of the five year period, have every building owner liable for damages for every person killed or injured if their building falls down on passers-by. There should not be liability for deaths and injuries incurred by persons inside the building: we can and do voluntarily assume some risks, and we should not prevent people from taking on those kinds of risks. But if your building falls down and squishes a bus, you should be liable for the deaths of each of the people inside of that bus.

The Ministry of Transport currently sets the Value of a Statistical Life in New Zealand at $3.77 million. That's arguably too low, but it's a great benchmark: arguing about $3.77 million versus the $5 million or so you'd get from a back-of-the-envelope application of revealed-preference measures from the United States to New Zealand, accounting for the income elasticity of safety preferences and differences in income across the two countries is second order. First order is getting a consistent benchmark across different regulatory and liability sectors.

A building owner potentially liable for $3.77 million in damages paid to the estates of those who his building kills will adequately take their interests into account in deciding whether to fix up his building. It would not be that hard to require that building owners carry insurance sufficient for paying such liability claims, or to prove assets sufficient for covering the potential liability. If you've got a building in the middle of nowhere with no passers-by, your insurance premiums will be very small. You then will make the optimal choice and not upgrade your building. If you've got a brick-facade building in downtown Wellington, you'll have to weigh up the costs of insurance against the cost of fixing the place up.

Right now, we are in the worst of all possible worlds. Building owners face neither liability for the risk their buildings impose on those outside their buildings, nor any sufficient regulatory regime to ensure that owners are making appropriate investments in ensuring that their buildings do not impose excessive risk on passers-by. This is why Wellington scares the hell out of me. It's pretty, and I love seeing the old buildings that we no longer have, but they terrify me. I have absolutely no confidence that even really rather dodgy buildings are getting the attention they deserve.

Were the Government to have any interest in implementing a regime such as that described above, I'd recommend one further change. Flip the heritage building regulations around such that heritage boards have zero regulatory power but instead get an annual budget. Owners of risky heritage buildings should be free to demolish them if that's what make sense, given the risk they impose and the cost of upgrading them. Heritage boards' main role should be the payment of annual stipends to owners of heritage buildings for the provision of heritage amenities. Give them a generous budget, funded partially by local Council, partially by central government, and with ample provision for voluntary donation from the public. Let them decide, within that budget, where they can do best by spending money. And then just let go of the rest.

I will absolutely hate saying "I freaking told you so" after Wellington gets a big quake in which unreinforced masonry winds up killing a bunch of people needlessly.

And, in anticipation of the likely critique: yes, I am here absolving building owners from liability for those who chose to be inside their buildings. But current policy absolves them of that liability for those both inside and outside.

Previously:

• In praise of liability
• Worst of both worlds
• VSL and earthquakes
• Heritage preservation