Housing crises and public choice

The worst is yet to come for Christchurch housing. As the rebuild picks up, we're going to have to house thousands* more construction workers, families in temporary housing while their houses are being repaired or replaced, and somehow find room for incoming students as fear-of-Christchurch eases.

Lois Cairns writes in the Press:

The Christchurch City Council and the Canterbury Earthquake Recovery Authority (Cera) have pledged to work together to tackle the city's housing problems.

Both organisations are promising more action to address the shortfall of housing in the city amid growing concerns the housing pinch, which has already pushed rents and house prices sky-high, will worsen between now and 2017.

"I would like to think this is a new start . . . that we can work together. There is so much at stake," council housing committee chairman Cr Glenn Livingstone said yesterday.

His comments came during a workshop on housing organised by the council and attended by representatives of Cera and the Ministry of Business, Innovation and Employment (MBIE).

MBIE senior analyst Dan Martin told councillors the loss of about 12,200 homes in the quakes had dramatically changed both the rental and home ownership market in the city.

It was estimated 7 per cent of the housing stock had been lost.

Shelley Robinson reports in the Herald:

The housing situation in Christchurch is now the worst it has ever been, forcing some families to squat in empty red zone houses.

People being forced out of rental accommodation because of earthquake repairs can now not afford alternative accommodation, welfare agencies say.

Said Christchurch City Missioner Michael Gorman: "I've never ever known it (housing situation) to be like this. It is the worst it has ever been. Usually there is always hope but now it feels as if there is no hope left out there.''

Mr Gorman said squatting in red-zoned houses was not unusual for the homeless - but he was now aware of families who were moving into abandoned houses.

Mr Gorman said a mother with two teenagers was squatting in a Bexley red-zoned house because they could not afford to rent a home.

They been previously been in a rented property but had to leave that for earthquake repairs and couldn't find anywhere else affordable.

Absolutely none of this is surprising. Many people have been very loudly suggesting that Council needed to open things up so that new housing could quickly come on-stream. Very simple fixes, like allowing people to put in a secondary flat inside their houses, could have been achieved at a penstroke a thousand days ago. And yet Council did nothing. Instead, we've had years of arguing about zoning and plans and building codes and stadiums and light rail.

I understand the standard public choice arguments around NIMBY regulations and housing. Long story short, homeowners like higher prices and hate having lower income neighbours and so push for regulations that keep minimum lot sizes large, prevent densification, and restrict development out to the suburbs. Similarly, property-owning developers want strong restrictions on the ability to develop - the regulations then enforce something of a cartel among those developers who can work the system. Sure, it's all couched in a nice veneer, but those are the basic incentives.

Some of the basic literature:

• Groves and Helland show that zoning is mostly a distributive enterprise: a way of allocating rents. 
• Clingermayer similarly provides evidence of zoning's being used both as a way of reducing externalities and as a way of distributing rents. 
• Evans despairs that urban planning takes pretty much no account of standard cost-benefit analysis and instead operates under a public choice model which, while helpful in understanding why things are as they are, does little to help us understand how to fix things. "Thus the economist who chooses his profession in the hope of advancing human welfare, and then chooses to study the economics of town planning, is likely to find his or her professional career frustrating, since their advice will be either ignored or unpopular."
• Webster summarises the basic approaches: Pigovean, Coasean, and Public Choice. 
• Pennington's book looks especially helpful; I need to order a copy. His paper here highlights planning failures and the cycle in which policy failures beget further failures. 

What I don't understand is why the basic economic theory of deregulation didn't kick in. Peltzman taught us that when the costs of regulation change, the equilibrium changes. All of the minor niggling regulations that propped up housing prices and increased building costs in Christchurch before the earthquakes became incredibly binding and restrictive and costly after the earthquakes.

Why didn't Council get out of the way?

I can understand worries about the long term and what the city should look like fifty years out. But very simple things that would have had little to no effect on long term character and that could have quickly brought at least some more supply onto the market immediately after the quake were also blocked.

Why did it take more than a thousand days to get to the point where Council starts taking seriously that we might just need to let people build more houses more easily? Why did it take the threat of central government imposing a plan?

Understanding why Christchurch screwed up so very badly might help in fixing Wellington's regulatory structures before their earthquakes come.

Potential explanations:

• Rent-seeking and political capture by homeowners, each of whom likes the idea of housing affordability in general, but particularly likes their own asset value increasing and dislikes their neighbour's attempt at subdividing.
• Legal risk to Councils where any easing up on building codes could expose them to "leaky-home" style liability. And while this can explain stuff around construction methods and dithering interminably over setting the building codes post-quake, it does nothing to explain council reticence to open up more land or to allow increased densification.
• RMA litigation risk: failing to allow increased density or to permit more development on the fringes causes homelessness; fixing the regulations might lead to somebody suing them for not having gotten all the processes right or not having consulted sufficiently or for failing to have properly considered amenity affects.
• Council fears of taking on infrastructure costs. However, MUDs do solve that problem rather nicely. 
• More psychological explanations: a disfunctional council (elected and/or bureaucrats) post quake just wants to hunker down and do exactly the same thing it's always done in exactly the same way it's always done it. Allow people to put flats into their houses? Bah, we've never allowed that. You just want to turn the area around the University into something like Dunedin, don't you? Well, we won't have that, not in our city. You say we're expecting another fifteen thousand construction workers? Well, [sticks fingers in ears, shouts la-la-la-la-la I can't hear you].

I haven't any great answers here but it's something worth thinking more about. 

* One estimate that was floating around was 15,000 additional workers in the next year.