Connect the dots

The Canterbury District Health Board is starting to worry about the health consequences of overcrowded, damaged homes on the east side of town. The government's payouts in the red zone are generous - owners have the option of selling out to the government at the property's rateable value, or selling only the land to the government at its rateable value and settling with the insurance company for a repair or rebuild payout. But land values on the east side of town were never very high and new sections aren't cheap. Some on the east side can take out mortgages after using their red zone payout as down-payment, but that's a tougher option for the retired or for those who hadn't yet build up much equity.

What sections are going in are catering for folks a bit higher up the income distribution. Those wanting to move salvageable homes off of damaged land aren't having an easy time of it. David Haywood wanted to move his old Avonside villa to a new section but found covenants on most developments prevented it.

However, most Canterbury subdivisions forbid relocations among rules aimed at maintaining values.

Deane McKenzie, sales manager at Ngai Tahu Property, the city's biggest subdivision developer, said none of the iwi's sites allowed section buyers to bring in an existing home.

"You have to build with new materials, so relocating would be a breach of the covenant," he said.

"Ninety-nine per cent of subdivisions in Christchurch don't allow it, so for anybody wanting to shift their house, that could be a difficulty for them."

... 

Red-zoners David Haywood and Jenny Hay hunted unsuccessfully for a Christchurch section for their Edwardian Avonside villa, and will now shift it to Dunsandel instead. They found even small, private subdivisions in established neighbourhoods had restrictive rules.

"All the land is now stitched up in these covenants.

"The only land you can get has some weird problem, like high-voltage power lines or contamination, or was 50 minutes out of town," Haywood said.

Some subdivisions also restricted the size, weight and breeds of pets, banned cars more than 3 years old and dictated paint colours. He described them as an "outrageous intrusion on individual rights".

About a dozen others from their neighbourhood had wanted to shift houses out of Avonside but had given up, and their homes would now be demolished.

So when we'd expect Christchurch to be importing a pile of pre-fab housing, we're instead exporting perfectly liveable red-zone homes to Southland and Central Otago instead of putting them on sound land on sections near town.

So, why would developers put in covenants precluding people from moving in older houses?

Imagine that there are a few different tiers of buyers. The top tier couple of tiers are willing to spend an awful lot to make sure that they don't have any neighbours from the next tier down.* There's some risk that somebody from a lower tier will luck into a bit of wealth that might let them afford a house outside his tier but subsequently not be able to maintain it. Covenants that impose ongoing costs, like banning older cars, can help ensure the separating equilibrium holds. Restrictions requiring new construction of particular standard rather than moving in houses from elsewhere serve similar purpose. And neighbours willing to put up with a pile of seemingly arbitrary restrictions are probably also pretty good rule-followers on other margins, like noise ordinances.

In a well-functioning property market, this just means you wind up with rich neighbourhoods with expensive covenants, some middle-tier ones with weird restrictions, and other neighbourhoods of rather more mixed character. But when tight restrictions on how much land can be opened up for development at all are combined with a pretty big jump in demand for new sections, the marginal section can earn rents by putting in the kinds of restrictions that the richer tiers value. So we don't see many developments where David could move his house.

It's remarkable that Council has chosen to keep zoning sufficiently tight that we're exporting houses from Christchurch instead of moving them to new parts of town. I know a lot of folks get their backs up about the idea of sprawl. But, sprawl doesn't have to be as costly as people imagine. Municipal utility districts can help new section buyers bear the development costs over time. And congestion charges are a good idea regardless of zoning changes. But even if neither of those worked, is a bit of sprawl really worse than the current relevant alternative?

* This doesn't have to be true of all buyers. But so long as somebody with a subdivision can make more by putting on a covenant than by not, expect covenants.

Rent control remains a bad idea

The Christchurch Press provides daily updates of the mess at the bottom tail of the Christchurch rental property market.

I don't have relative numbers on net emigration from Christchurch and housing destruction, but the spike in rental prices suggests fewer people left Christchurch after the quakes than had their houses wrecked. At the same time, those lucky enough to be getting anywhere with EQC and who are getting repair work done are pushing into the market for temporary accommodation. And, demolition crews coming in from elsewhere also need places to live. So there isn't enough housing to go round. 

In a sane world, we'd already have a fair bit of new housing coming on-stream; it's been more than a year since February 2011. There was no shortage of builders looking for work after September and after February; nobody could get any repair work done until their EQC estimate. There are lots of big empty paddocks on the west side of town that could easily turn into subdivisions. But zoning regs prevented it. 

Building has finally started in a few spots, and some bare sections are coming available. And the government's starting to put higher priority on fixing state housing - government-owned houses rented to low-income tenants. But it would be remarkable if things eased much before winter.

So we've essentially a fixed stock of houses that's small relative to demand - at least for the near future. And, so far, the market has been clearing on prices. Christchurch East M.P. (Labour) Lianne Dalziel has been calling for rental price caps, noting a few cases of people forced out of their houses by very large rent increases. The visceral case for rent control seems strong - families pushed out of houses by weekly rents going up from $360 to $600, in the case cited by Dalziel. But rent control doesn't solve the underlying problem that there just aren't enough houses to go around. And, rent control can make things worse.

Let's set things up. Housing ranges in quality from great family homes on large sections to redone partially insulated garages with some plumbing. Tenants range in quality from reliable folks with secure incomes and who won't damage the property to far riskier tenants with bad payment histories. And, housing intensity varies from a single guy in a 10-bedroom place to a garage* serving a family. 

Now, imagine that rental prices are fixed. The single guy living in a 10-bedroom place pays no more than he did pre-earthquake, as does the family living in the garage. We get no stories about people being pushed out of their properties because of rental hikes. But lots of people whose rental housing was destroyed are out of luck, as are people who need a rental place for a few months while their houses are being repaired. When rental properties become available, landlords can't increase prices. But they have their pick of tenants. The risky tenants at the bottom of the distribution on month-to-month leases are pushed out when their landlords get a longer-term offer from a better-quality tenant. Some people are able to find rooms with friends and family, but welcomes wear thin after a while. 

When prices clear the market, we still don't get new housing. But we do get increases in housing intensity. Everybody's rent goes up and the single guy in a 10-bedroom place is going to have a hard time outbidding three families pooling their money. More renters in secure tenancies will be willing to take on flatmates to help pay higher rents. We do get stories about people being pushed out of their properties because of rental hikes, but fewer people wind up living in their cars. More people seeing high rental prices decide to fix up the back shed to take on tenants or rent out the spare room. The risky tenants at the bottom of the distribution on month-to-month leases are also the low income tenants; they're pushed out when landlords increase the rent. But they have a better chance at finding somebody willing to take on a partner to share the rent. 

There's another margin floating around that we also oughtn't forget: the disutility of being a landlord has to have gone up. Tenants expect things fixed; owners have to wait for EQC sign-offs and repayment. Christchurch has a lot of small-scale landlords - people with a rental property or two on the side who aren't always well placed to wear costs while waiting for insurance repayment for repairs. Rental price controls are likely to push some landlords to sell their rental properties, again forcing tenants out.

If the elasticity of housing intensity to rental prices is low, then the welfare effects of the rent hikes on poorer cohorts may dominate; rent control then isn't awful in the short term. But at the same time as Dalziel cited the rent hike from $360 to $600, she also cited a case of eleven people living in a two-bedroom house. This is not a desirable or laudable outcome. But it is likely a better outcome than one of the families from that house living in their car. 

None of this says the government shouldn't be doing something, just that rent controls aren't likely to be a very effective something and could easily be counterproductive. Better would be increasing availability at caravan parks to help fill the gap until state houses are fixed and more houses get built. And Council does need to move fairly quickly to make sure we're not stuck in the same spot again next winter. 

* I don't know any large families living in garages. But one neighbour has often had short-term tenants in the back shed, both before and after the quakes; another has had a tenant in the room behind their garage since we moved here. This way of increasing the intensity of housing use is hardly novel; it was just part of the zoning-induced high cost of housing relative to incomes in Christchurch. Sadly, more people doing this is part of the solution to the current bad situation.

Grinch

As nice as Seuss's Grinch story is, we can't forget that it's the story told by the victorious Whos a century after the event. And so I told Ira the real story over Christmas. He prefers my version. And so I thought I'd share it with you as well. It's not in Seussean verse; maybe someday.

Recall that in The Lorax, insecure and ill-defined property rights, combined with a rather stupid Onceler and with a Lorax who cared more about grandstanding than about saving the trees, produced an outcome that none of the protagonists would have chosen. If the Onceler weren't an idiot, he'd have scaled back his capital investments to be commensurate with the stock of Truffala trees available. If the Lorax weren't a moralizing jerk, he'd have pointed out to the Onceler that re-planting trees as he went would let him get a return from his physical plant for a much longer period. And if property rights had been secure, either the Lorax could have sued the Onceler for stealing trees or have subsidized a faster replanting rate. 

And so we can see that the Grinch story is a problem of insecure property rights as well: does the Grinch have the right to peace and quiet, or do the Whos down in Whoville have the right to make as much noise as they like? In a Coasean world, it wouldn't matter as they could bargain to a solution. This could even hold in a world of poorly-defined property rights. If the Grinch really valued peace and quiet more than the Whos enjoyed making noise, and nobody knew which party had rights, the Grinch could still be sensible and pay them to stop even if he thought he had the right to peace and quiet. But only if he thought his rights would then be enforced; Seuss doesn't really like letting his characters find the efficient solution anyway*. And so in How the Grinch Stole Christmas, the Grinch isn't able to convince the Whos to stop making noise despite their most likely having come to his nuisance. 

In my version, the Grinch leaves the big noisy city and, after a tedious search, finds the perfect place for his studies: he homesteads a mountain overlooking an empty valley. There, he's able to read and write without interruption. Until the Whos show up and start building a town. The Grinch welcomes them, and tells them how much they'll love the peace and quiet of the place, hoping that they'll take the hint. After the noisy construction finishes, they have a raucous party in celebration. And then another for every holiday after, from Arbor Day to Xylophone Appreciation Day. But the biggest party they saved for Christmas. The Grinch pleaded with them; he was there first, surely they could try to keep the noise down. But they wouldn't. In desperation, he tried to steal Christmas, thinking that might stop them. But it didn't. So he gave up. He returned all their toys and dined with them before packing up his things and going off to find a new quiet place to live. He was there first, and by rights they should have compensated him for his loss, but enforcing the claim was more difficult than just leaving. And so he finally did the efficient thing and left. 

I tell it with a bit more embellishment, but you can fill in your own details.

* In The Zax, the North and South-Going Zaxes surely could have played leap-frog to solve their conundrum; instead, they just stood there until the city grew around them. By contrast, in The Sneetches, Sylvester McMonkey McBean is an entrepreneurial hero who profits by the prejudice of the Sneetches with Stars Upon Thars and the lame mopiness of Those Who Had None Upon Thars - the latter of which ought just to have had their own frankfurter roasts. A pox, or a McMonkey McBean, on both houses.

Update: In Lorax, it's possible to get complete forest decimation as being optimal from the Onceler's point of view, if the Truffala trees grow slowly relative to discount rates. But clearly he erred here given the massive capital investments and his intentions of biggering and biggering and biggering even as he chopped down the last tree. And so I expect decimation here was based on idiocy rather than rational calculation.

Zoning costs

Delays in zoning more land for higher density residential use on Christchurch's fringes have very real human cost. Here's David Haywood's nightmare case, though it does have a happy ending.

Despite having total replacement cover for his house, his land having been "Red Zoned" meant the only way of not incurring substantial losses on his riverside Edwardian villa would be to move the house to a new section elsewhere. There is no shortage of land around Christchurch, but very little of it has zoning allowing for smaller section subdivision; consequently, there's been a boom in property prices near town.

And, sections available near town are encumbered. Here's David:

Fourthly, there’s the issue of ‘covenants’.

I’d never even heard of covenants before I started looking for a replacement section, but here’s how they work in New Zealand: when a landowner wants to subdivide rural land into residential sections they must obtain permission from their neighbours – and this usually involves the imposition of various ‘covenants’ that constrain the actions of any future owners of that land. These range from the permitted height of the hedges, to the permitted position of buildings, to the type of dog they’re allowed to own (I’m not kidding). The one covenant that invariably applies to any section within an hour’s drive of Christchurch is a prohibition against the relocation of old houses (no matter how nice), because neighbours fear that it might reduce the value of their own property.

I'd not heard of covenants either; I can't tell what proportion of covenants is demanded by neighbours as condition of a property's subdivision and what proportion is imposed by developers wanting to increase the overall value of the development.

He found an uncovenanted section through a bit of serendipity. But do read his whole article for the rather high costs that legal restrictions on subdivisions have had on his family.

Similar stories, with less happy endings, are surely playing out for lots of red zoned families.

The Productivity Commission rightly pointed to council plans and zoning as fuelling property price inflation, seconding very nice work by Arthur Grimes showing the effects of Auckland's restrictions.

Maybe Council was too busy in the earthquake's aftermath to think about redoing its zoning and subdivision regulations. All the more reason for other places to fix things now, so that property markets can adjust more quickly in case of emergency.