Migration, amenities, and median multipliers

In the standard spatial urban economics model, the marginal person has to be indifferent between living in different cities. That doesn't mean that all cities have to be identical but rather that, from the perspective of the marginal resident, the downsides and upsides of different alternatives come to a similar balance. 

Because Detroit has fewer amenities than, say, San Francisco, its housing prices have to be lower than those in places with better amenities and stronger opportunities. If that weren't true, people would move out of Detroit until housing became sufficiently cheap that there were no longer reason to move from one to the other.

One reason for this is that houses are durable goods. Detroit built up a large stock of housing when the city's industry could support a much larger population. If people took their houses with them when they moved, housing costs wouldn't adjust downwards as much when there were substantial out-migration. 

Another reason can be time-to-build in high-amenity locations. Incoming migrants push up the price of the existing stock of housing; that provides a signal to developers to convert more houses into higher density uses and to expand on the fringes of town. High housing costs relative to incomes are then a disequilibrium phenomenon - they're something that happens in the interim until developers are able to get new housing on-stream. And you get a nice price gradient in the standard simple model where housing close to downtown amenities is very expensive to housing farther away, with the slope of the gradient depending on things like the ease of commuting and the desirability of the amenities. At the edges of the city, the cost of a house should be the cost of building it, plus the cost of providing basic infrastructure, plus the underlying base value of land in its next best alternative use.

So median house prices relative to incomes can tell us a few different things. High prices would be associated with strong amenity values. But if there are also very high prices at the city fringes, or if the very high prices persist for a long time, there's also something else going on - something related to building new houses and apartments. You don't get sharp drop-offs in land values at metropolitan urban limits, or apartment buildings built to only 10 stories when another 5 stories would cost less to build than the apartments' sale prices, unless something else is up.

What else can be up? Well, you could be in a place like Hong Kong or Singapore where there is little land available, and where much of the land that can be turned into high-rise apartments already has been. In places with hard physical constraints against further building, benefits of productivity increases or stronger agglomeration effects get capitalised into the price of existing land. Why? Spatial equilibrium: if people are just more productive in those places, that draws in more workers, which bids up the price of housing, which can't really draw in more housing supply, and then confers rents on the holders of existing land.

In other places, it's zoning constraints. Both the metropolitan urban limit and the city height limits seem binding: Arthur Grimes showed strong discontinuities in prices at the MUL, and that apartment buildings are being constrained by height restrictions. Yes, Auckland has physical constraints on land supply too, but there are plenty of places that could be upzoned (and haven't) and land at the boundaries that could be brought into use as suburbs were it not forbidden.

Peter Nunns really doesn't like Hugh Paveltich's median multiplier measure of housing affordability. Nunns says that because it ignores differences in amenities, it's worthless as a measure.

Maybe I'm an easier grader than Peter, but I do find good value in Hugh's measure. Cities that persistently have high median multiplier measures and no particular physical constraints on further building likely have issues in regulations around land supply. 

If Detroit implemented strong restrictions against upzoning or new suburbs, it wouldn't show up in a median multiplier measure because the regulations wouldn't be binding - there's a large stock of housing available relative to demand. A high median multiplier does not necessarily follow from bad regulations, nor does a low median multiplier necessarily follow from good regulations in places with binding physical constraints. But a persistently low median multiplier in a city with a growing population likely signals accommodative regulations and a persistently high one in a city without strong physical constraints likely signals regulatory issues.

The measure simultaneously tells us that places like Auckland have highly desirable amenities, and that they have pretty binding regulatory constraints against new building. 

The Rent is Really Rather High: Christchurch edition

The median two-bedroom property available for rent in Christchurch today, listed on TradeMe, is going for $395 per week. There are 173 2-bedroom properties available. There are fifty properties listed at $340 per week or less; that's also the price at the 25th percentile. When I'd checked this back in March, the median Christchurch price was $365 and the 25th percentile price was $300 per week. So the median is up by 8.2% since March and the 25th percentile is up by 13.3%. 

The Christchurch Press continues to report on the rather substantial consequent problems.

Christchurch economist Robin Clements said it would ''take a long time to relieve the issue'' of the shortage.
''It's still going to take years to increase the supply, even if action is taken now."
Even the slowness of the cental city rebuild was affecting the housing market, Clements said.
There's a shortage of hotels, so visiting businesspeople have to stay in motels. Then people having their homes repaired can't get a motel, so they're taking up rental homes.
"Every section of housing has got some sort of pressure, and it's all linked to the pace of the rebuild.'' 

Every homeowner with temporary accommodation coverage in his home insurance policy is pretty price inelastic in demand for the duration of repairs. Inelastic and increased demand meets fairly inelastic supply and results are pretty predictable.

Everybody knew or had to have known this was going to happen. There was even talk about doing something about it. Here's Roger Sutton from June 2011:

Speaking to about 50 mostly red and orange-zone residents yesterday at a community meeting in New Brighton, Sutton said the region's land prices were a "real concern".

The authority's extraordinary powers could be used to reduce the cost of development land, he said.

A "common theme" from the meetings was that many properties in the red zone, where land cannot be rebuilt on, had a rateable value under $100,000.

"There's very little land on the market for those prices at the moment," Sutton said. "We have to move as quickly as possible to give an assurance that there is actually going to be land and house packages, or at least land packages, to begin with, at prices you feel you can afford."

Residents told yesterday's meeting that some developers had increased land prices after last week's Government announcement.

Sutton said supply-and-demand problems were expected, but cutting red-tape costs, such as planning and resource consents, was possible.

"I have quite extraordinary powers to actually bypass those planning laws, but my preference would be for the normal legal processes to work," he said.

For the next two years we instead stuck with Council's normal legal processes, which turned out to be so incompetently administered that we don't even know how many recently consented buildings actually meet Code. It's not as though Council weren't putting lots of hoop-jumping in the way of those trying to build: it seems rather that they were enforcing a random-draw set of rules often orthogonal to actual building safety. The resulting potential liability has had Council's credit rating downgraded. Council had planned on substantial borrowing to finance its share of the rebuild costs, and sensibly so. But this will now be more expensive.

Central government could be tempted to take over more of Council's functions; it would be hard to blame them, given Council's rather substantial demonstrated failure and the importance of getting this mess sorted out quickly. I don't know Douglas Martin, who has been appointed by central government to fix Council's consenting issues, but I don't share the engineers' worries about his not being an engineer. Council needs somebody who can sort out their processes and who can listen to engineers.

But perhaps we might instead pay some attention to what our very own Cassandra, Hugh Paveltich, recommended shortly after the earthquakes. Instead of abolishing local government, perhaps instead decentralise further. Instead of running everything out of Council's offices, and out of Earthquake Minister Brownlee's offices, devolve building consenting down to a far more local level. Paveltich then recommended:

1. COUNCIL REFORM REQUIRED: Dealing expeditiously with the systemic problems of the Christchurch City Council, in moving quickly to a “One City – Many Communities” approach. Thankfully there is a strong core majority of sound Councillors (as your article “A shaky future” explained). The current CEO needs to be replaced with someone having engineering training and a proven track record of project management. I am most impressed with the performance of Orion's CEO Roger Sutton – a person I hold in the highest regard.
   There need to be about 8 Community Service Centres – Akaroa, Lyttleton and about 6 in the city, which again need to be led by people at the staff level with engineering training and a proven track record of project management.
   After all, local government's primary responsibilities are infrastructure and buildings.
   These Community Service Centres need to be supported by building and environment regulators with enabling attitudes and the capacity to solve problems. It does not appear many within the current centralized structure have these skills. There would need to be constant monitoring of the performances of these building and environmental officers, so that those lacking the required skills are replaced quickly.
   The Central Office should be a small one, fulfilling a coordinating role where required (and importantly not, when it’s not required), responsible also for the central area within the four avenues.
   The highest polling elected representative should be the local chair and city councilor. The mayor should be elected on a city wide basis.

Spreading consenting across a lot of local units builds robustness. Failures get contained to that unit.

It would be interesting if Paveltich were to run for mayor. At least we'd get substantive discussion about urban planning and how it might facilitate rather than hinder recovery.

Housing, with a bit of English

Deputy Prime Minister and Finance Minister Hon. Bill English weighs in on New Zealand's housing affordability problem in the latest edition of Demographia's international housing affordability survey.

He writes:

In its response to the Productivity Commission, the Government agreed with the Commission’s analysis that supply side factors explain the deterioration in New Zealand’s housing affordability. The Government’s response to the Commission’s report concentrated on land supply, infrastructure provision, costs and delays due to regulatory processes, and improving construction sector productivity.

Housing affordability is complex in the detail – governments intervene in many ways – but is conceptually simple. It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses. It simply takes too long to make new land available for development.

We may be seeing the beginning of a repeat of the mid-2000s demand shock. As interest rates stay below historic norms, expectations are shifting that these rates are here to stay. As a result, demand for real assets has increased, observed in booming equities markets in 2012. Demand for real estate is also increasing, with the median house price in Auckland recently exceeding the highs of 2007.

Costs of other housing inputs contribute to New Zealand’s affordability problem. Building materials cost more in New Zealand than neighbouring Australia. The structure of infrastructure financing, and the timing levies are to be paid, raises the market price for housing. Appeals under the Resource Management Act, New Zealand’s land use regulation, can hold up developments and city planning for a decade or more in some cases. Time is money because development is risky.
...

From the Government’s perspective, worsening housing affordability creates a number of problems. Fiscal pressures increase because financial assistance for housing is tied to its market price. Home ownership provides financial security and a form of savings and lowers dependence on public assistance later in life. Worsening affordability increases demands for direct intervention through rent controls and public housing. We are aware of the results of these sorts of interventions overseas and must avoid them.

New Zealand is not alone in its housing affordability problem and there seems to be increasing awareness around the world that the planning pendulum may have swung too far. Land use regulations and intrusive development rules have consequences.

The first step is admitting we have a problem. And I expect that English has a rather good idea of the things that need to be done. But many of them are outside his portfolio, and more of them wouldn't make Councils happy.

It is especially heartening to see English providing this statement as foreward to Hugh Pavletich's survey. Hugh has been the country's most tireless campaigner for fixing the regulatory mess that keeps housing prices up; he's also been a strong and public critic of Christchurch Council rules that have stultified post-earthquake development. This year's report puts Christchurch as worse than Los Angeles, San Diego, and Adelaide but better than Abbotsford, BC or the London ex-urbs.

File this under "Good Omens".

Christchurch Costs

The NBR's NZ Property Investor magazine has what may be a leak on estimated costs of some of the big ticket items in the proposed Christchurch plan. It's not online; I thank Hugh Pavletich for the tip. [Update: Hugh's been keeping track of all this kind of stuff at Cantabrians Unite].

But NBR NZPI has been supplied with figures by a reliable source who cannot be identified due to possible repercussions. The covered rugby stadium is tipped to cost  $506 million, the convention centre $460 million and the metro sports arena $227 million. Other elements of the plan make up the balance of the $1.6 billion.

By contrast the recent parallel city plan based on the "Share An Idea" programme with residents allocated about $200 million for a rugby centre, $150 million for a convention centre and $120 million for a metro arena.

According to NBR NZPI informant, the government has indicated it would come up with roughly half the money for the Rolls Royce plan. But subsequently there have been calls for the city sell assets to pay a greater share.

A community leader Reverend Mike Coleman described the scale of the plan as "bizarre."

"It's emporer's clothes stuff. To even talk seriously about a rugby stadium or convention centre at these prices is absurd. We are not a big city in the scheme of things, we are a large town of about 300,000 people. We don't want to end up stuck with millstones like the Dunedin stadium."

Pick up a copy at your local newsagent.

A city of a few more than 300,000 people is planning on building a stadium with capacity to seat about 10% of the city's population.

The Christchurch Star called last week asking for comment on how the cost for these sorts of things might be borne, and whether amalgamating the local councils might be a way of spreading the costs [yikes!]. I'd sent them this, but only got their voicemail requesting a shorter version after they'd hit the press deadline. So I'll put it here instead.

“It makes sense that Christchurch ratepayers, one way or another, contribute to the cost of enhancing facilities over what we had before the earthquake. Those costs should be met by a mix of longer term rates increases, debt issuance, and sales of existing assets that would have more value in the private sector than in the public sector. Trying to meet it all through current rate increases would unnecessarily penalize households, many of which are under reasonable fiscal distress where insurance is not enough to cover damages suffered. There are about 133,000 households in Christchurch; if Council is to be on the hook for $787 million [number the Star cited to me], the per-household cost is then just under $6,000; average rate increases on individual households would be less than that as rates paid by businesses would also increase substantially, but we should note that many of those businesses are also owned by local households.” 

“What is less clear is whether Council should really be spending large amounts of money on things like the planned Convention Centre or Stadium. The economic literature does not provide any strong support for that either kind of investment really provides any great benefit to a city, though you could make the case that that literature doesn’t typically look at cases where cities are trying to rebuild from earthquakes. I would hope that Council and the government might scale back their ambitions on both fronts. The plans for the Stadium depend on forced acquisition of property from people like the owners of Ng Gallery, who have been working very hard in their own way towards the Christchurch rebuild. When I take off my economist hat, I worry about the foundations of a city whose rebuild is based on something that’s awfully close to theft. And, when not hosting conventions, Convention Centres tend to be dead spaces. Wouldn’t it make more sense for Council to fund some overhead walkways connecting hotels that would want to be able to collaboratively host larger conferences than for Council to spend rather a large sum of money on a dedicated facility likely to be too large to meet typical future needs?” 

“I would also be very nervous about planned amalgamations of the local councils. Differences in regulations across the Councils seemed to help a lot in getting new residential construction going  after the earthquakes. Where Christchurch Council was too busy with other things to move particularly quickly to release more land for housing, Rolleston and Kaipoi were able to start expanding. Smothering that kind of ability for different areas to respond differently in the face of disasters removes some of our institutional robustness. Further, it only makes sense to spread any burden to Waimakariri and Selwyn to the extent that residents of both of those districts disproportionately make use of Christchurch-funded facilities; otherwise, any burden-spreading should come from the national government’s contribution to the rebuild. I would expect that simply having a higher fee-for-service in some of the new facilities for those not normally resident in Christchurch would make more sense than amalgamating the Councils.”

Take-over

Central government has taken over responsibility for fixing downtown Christchurch. Here's Chris Hutching's take:

No more $500 million light rail schemes or reverting one-way streets to two-way at a cost of $91 million.

Today, Canterbury Earthquake Recovery Minister Gerry Brownlee ditched the Christchurch City Council’s recovery plan.

Mayor Bob Parker put a brave face on things at the media conference today, even claiming the city plan’s “visionary” Volume 1 themes had been enshrined.

The new arrangement would be a “true partnership”, he said.

But the reality is that the actual proposals contained in Volume 2 have been thrown out of the recovery scenario.

They included the mayor’s pet light rail project that would have soaked up $500m of the $2 billion recovery plan.

I'm more than happy to see the back of the woollier Council proposals; I hope Hutching's right that we're binning both the changes in the one-way system and the light rail scheme.

I don't think Hugh Pavletich is far off the mark in pushing for substantial devolution to local boards to help get things done; I'd have leaned that way rather than to a new centralized control body.

But at least the new board's talking some of the right talk for downtown. The new team's emphasis on quickly establishing the sites for major public infrastructure pieces like the convention centre is important - the hotels won't want to move until they know where these kinds of facilities will be placed. And restaurants will want to know where the hotels are going to be.

I really hope that, when they talk about land amalgamation, they give some thought to Tabarrok's dominant assurance contracts rather than compulsory acquisition. Applying Tabarrok's model to land acquisition, Councils effectively buy options to purchase a lot of properties, then exercise those options on the best set of properties for the development.

We invoke eminent domain to avoid hold-out problems where the last owner to sign on for a major development can extract a good part of the project's surplus. Buying options across a lot of potential sites can be more expensive, but eliminates the hold-out problem where different bundles of properties could serve similar purpose. So long as the strike price is a fair one, you've a dominant strategy in selling the option to the government. If the government doesn't exercise the option on your property, you're up by the option payment; if they do, you're no worse off.

See also Bruce Benson's work on solutions to land amalgamation problems that do not do violence to existing ownership rights.

I hope that whatever aesthetic vision the planners might want to impose is done by setting examples in the design of the new public facilities rather than by mandating standards. I'd be really happy to hear an announcement that they're planning structures designed around innovative wooden laminates. U Canterbury is doing some work in the area if they're looking for people with expertise.

A final hope is that the new agency pushes hard to get insurance issues sorted. Does full replacement cover mean coverage to the ex ante or ex post building code? Getting a few declaratory judgements on issues facing a lot of property owners could help get things moving.

Perhaps the best thing about the take-over is that it's now very clear what voters need to do come the next election if Christchurch remains buggered. Parker's already toast, at least according to iPredict. If Christchurch is back on track come the next election, vote National. Otherwise, don't. At least for Canterbury, the next election ought now to wind up being a referendum on how they've handled Christchurch.

NZIER reports on the latest economic indicators for post-quake Christchurch.

Here's the latest on building consents. See also Bill Kaye-Blake.

More building consents than elsewhere in the country, but we're not even meeting the numbers of consents issued through most of the 2000s. National hasn't long to get things moving.

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.