Monday 12 March 2012

Development constraints

Among Christchurch's larger ongoing post-earthquake problems is a lack of housing. Sections are only slowly coming on-stream and are expensive. Whatever Council or CERA says about how many years' worth of housing stock we're soon to have available, prices seem the better signal of real scarcity, though I'd look to selling prices rather than rental rates as better capturing fundamentals.

And so it was a bit surprising to see that Council's knocked back a developer's plan to build a new subdivision in Papanui. I lived around the corner from the proposed development for a year before we moved to South Brighton. It always seemed odd that somebody reckoned the land's highest value use was in market gardens rather than houses: more than 10 hectares of farmland sitting in the middle of residential sections and well serviced by Cranford Street and Main North Road, with lots of amenities nearby. But it was always an artefact of zoning and planning regs. From today's Press:
Cera chief executive Roger Sutton said the Cranford Basin land was excluded from the October announcement because at that time it was considered it would be faster to develop other areas, given the make-up of the land.
Christchurch City Council strategy and planning group general manager Mike Theelen said he believed the commissioners had identified the Cranford Basin as an area to investigate further, rather than one that should definitely be developed. The basin was a low-lying area and was getting lower, he said.
"There is a variety of constraints in there that suggest it shouldn't be residential, or that it's not suitable for urban development."
The Northern Arterial motorway extension was planned to go through the middle of the basin, he said, but it would not come close to Peebles' land.
The land had been flood-prone for decades and there was no pressing need to start development in areas that were difficult to work, he said.
"The last thing we want to create is something no one wants to live in because it's deemed to be an earthquake-prone suburb."
He believed no council would want to "abandon its principles" because of an earthquake.
The council was trying to ensure enough land was released into the market to meet demand without overextending the council's ability to provide infrastructure, which would raise costs and rates, he said.
"It's about sending signals to the market about where the councils intend to see development heading. A balance between giving a framework and allowing the market to operate within that framework."
The article also noted the land isn't subject to liquefaction.

I'd love The Press's eventual follow-up to let us know a few additional things:

  • Flood risk:
    • Is the developer willing to put in enhanced storm drainage to deal with this? If so, are there capacity constraints on the nearby sewer mains that would prevent privately provided drains from emptying?
    • Can we reconcile claims that the land is immune to liquefaction and Council's view that it would be earthquake prone?
    • If the section is "difficult to work", is there some differential difficulty falling on Council relative to the developer? It could be that it's easy to put houses on the land but that sewerage would require a pumping station, the burden of which would fall on Council. But it's otherwise hard to explain why a developer would want to develop a section that's "difficult to work". 
  • Speed of development:
    • Does anything prevent the developer putting in his own roading and sewerage so as not to burden council, perhaps in exchange for rates concessions for future residents? 
    • If the reason for banning the development is that Council hasn't the capacity to get the roading in in timely fashion, why not facilitate alternative arrangements allowing the developer to do it?
    • If the constraint is capacity in adjoining trunk line water and sewerage, that's more difficult to sort in the short term through developer levies. 
  • Sending signals
    • Council is currently sending a strong signal that it doesn't really want anybody putting in housing for the folks having to leave the Red Zone. That is likely not Council's intent, but successions of stories of people barred from building houses sends the signal regardless of intent.
    • Theelen says the last thing he wants is to set something up and have nobody want to live there. If Council's investing substantial infrastructure resources, then it does have some skin in the game. But surely the developer is reasonably placed to gauge whether there would be demand for the houses he'll build and wouldn't want to develop if nobody would want to live there. What does Theelen know about what consumers want that Peebles, the developer, doesn't? How does he know that he knows more than the developer about likely demand for the developer's sections?
Bottom line is that if development is being held up because of our current way of financing and installing infrastructure like residential roads and sewerage, we probably ought change models. It's completely believable that Council is at its production possibilities frontier on roading and sewerage; half of the east side of town needs new roads and sewers. Why not let developers push that frontier out by flying in more crews and kit to do the work? 

Hugh Pavletich recommends Municipal Utility Districts as a way of financing infrastructure. As brief refresher, MUDs basically let developers take on the up-front costs of infrastructure by issuing bonds backed by future tax streams from the new development. The developer sets up an initial Board, which is replaced in due course by election by those living in the district. The Board sets tax rates to pay off the bonds that financed the infrastructure in the development; presumably, if set up here, the MUD rates would offset some of the normal Council rates as the MUD would be providing services normally otherwise provided by Council. The section selling prices are then lower, partially because there's a future tax stream liability attached to them; if the MUD can finance things more cheaply than homeowner mortgages, it makes sense. Otherwise, you could just bundle everything into a higher selling price for the section and have folks take on higher mortgages in exchange for a lower stream of Council rates going forward.

This all works either if Council wouldn't face borrowing constraints in underwriting development bonds, or if bonds backed by future tax streams from homeowners in the MUD could find buyers at prices that didn't make the whole thing unaffordable, or if homeowners could take on sections with higher up-front costs and slightly lower ongoing rates.

The best academic summary I can find on MUDs, now a bit dated, says they do a lot to increase the supply of land for development by circumventing the Council-capacity bottleneck on infrastructure; they also consequently reduce the selling price of new sections. But they can come at the cost of less regional coordination on main trunk infrastructure - sewer mains and highways. 

If Council capacity in providing infrastructure for the new development is the real constraint in opening up sections like Peebles' proposed development, MUDs expand the production possibilities frontier. The developer could then finance the enhanced storm drains and pumping station that might be necessary for a low-lying area while not drawing away already overextended Council infrastructure resources. That doesn't help if the City's complementary infrastructure like sewerage and water mains in the area aren't up to handling another 169 houses' needs; it's hard to tell from what's been reported where the real constraint is. It would be useful to know just what the bottlenecks are.


  1. All the land in Christchurch has dropped by about two inches or more Eric.
    That means we are more flood prone, in certain areas.
    I agree we can assume anything coming from Christchurch Council is inept, and even stupid, but you can't drain from low level to high level Eric, you need pumps. Very big pumps.
    Christchurch is [ as we say colloquially] fucked.
    Investors have gone, People depressed, EQC refusing all claims, Fletchers incompetent builders of leaky homes, Mayor an idiot, CEO about to leave soon, fewer students, no brains here,capital flight, missionaries upside down,
    why would a brilliant Canadian be here?

    1. There aren't any brilliant Canadians here. But this Canadian still likes the beach, loves the random community-sponsored events that pop up like Saturday's pirate day at Corsair Bay (complete with pirate ship launching rowboat of pirates to battle the on-shore pirates, with cannon-fire on both sides)...

      Note too that it's not the level drop that matters so much for flooding but the change in gradient, if any. And I don't know whether the cost of pumps, if needed, could be fronted by the developer, or if he's even been asked. I'd love some future Press story to have more detail.

  2. I've been following the Hugh Pavletich land supply versus urban limits (and effect on house prices). The weak point in his argument seems to be: who will pay for the infrastructure? His alternative to funding infrastructure (MUD) suggests cheaper for now but higher on going costs for the buyer plus (no doubt)flow on costs for existing rate payers.
    At this point there's a song playing in my head: "you can't! always get! what you wa-a-a-nt..!"

    "He says developers are being made, by the regulations, to build developments with all the bells and whistles for a market that simply can't afford it."
    Bob Robertson- Infinity Group

    The Savings Working Group says that we have a low wage economy which finds itself put upon when large numbers of migrants arrive as new infrastructure has to be provided immediately; Hugh P calls that theory a "crock".

    1. I can buy a model where current capacity constraints in Council push to private provision of base infrastructure funded through MUDs and with a partial property tax offset as compensation. If the Council effectively backs the MUD bond issue and the MUD is able to compel tax payments to cover the bond, then the only reason for higher ongoing costs is if the private guys putting in the infrastructure do it at higher cost than Council would have, right? Bond interest ought be about the same as the rate available on Council borrowing.

      Further, moving to MUDs would be a nice part of taking a lot of planning decisions off Council's hands. There are costs to this in terms of burden on trunk infrastructure and perhaps less grand-scheme-of-things cohesiveness. But I'm not sure the costs of errors on that side are larger than the costs of errors we're currently experiencing.

  3. This paper seems to add a missing leg to the Demographia stool.
    The Geographic Determinants of Housing Supply

    1. Of course geography also matters. But where geography constrains building out, we expect folks to do more building up, right? If the amenities are desirable and folks want to live there, that is.

      Consider the area around the New Brighton Pier in Christchurch. Before the earthquake, it was basically a disaster. Why? Council regs banned anybody tearing down the crappy old houses and putting up apartment blocks or higher density housing. But all the property owners expected that, eventually, Council was going to have to fix the zoning. So they squatted the houses, waiting for the reg change, letting the houses deteriorate and attracting really really low tier tenants. The low decile types attracted by the crap buildings meant that businesses on the Mall were crap too.

      Council only just fixed the zoning before the earthquake. And the fix was still pretty restrictive - only some land could be put to denser use, so the owners of that land effectively won lotto. And now everything's on hold because of earthquakes.

      It's insane that Council set up the Brighton Mall to fail by restrictive zoning. Beautiful beach, gorgeous library, crappy falling-down old shacks.

      Why not let people build up AND build out?

      All the "oh, but the infrastructure cost" stuff would make more sense if Council didn't ban building up at the same time as banning building out.

    2. I think if owner occupiers lived along the waterfront they would be more likely to keep their houses nice. I live in a similar situation and rough, noisy tenants are good at clearing out the NIMBY's.

      I was having a drink with a bus driver who lives in Brighton and he said it was great adding: "imagine living in Hornby!" These are the people who object to high rises as odds are there will be no compensation for any shading effect, plus they will sit at the bottom of the social strata as they stroll along the esplanade.