Glaeser on Christchurch

Ed Glaeser's Condliffe Memorial Lecture is now up at the University's "What If?" site. I've embedded it below.

 

I tell my students of the Pantheon of the Econ-Gods. Ed Glaeser is one of our Elder Gods - fueled not by the apples of the Hesperides but rather by Diet Coke.

Ed had a ridiculously busy day prior to his talk at Canterbury. He started with a tour of downtown with CERA, chipped in for a documentary somebody was making, lunched with a bunch of architects, provided a seminar for the Department, gave an interview for a freelancer for The Listener at the Staff Club, then the Condliffe. Then off for breakfast with Roger Sutton in the morning.

There are a lot of fans of Glaeser's approach to urbanism around the country. Let's hope it's done some good!

Council Debt for Dividends

My colleague Professor Glenn Boyle provided a few rather insightful comments on what's going on with Council-owned assets in Christchurch. I've hoisted them up from the comments section:

The first question to ask is: what are these increased dividends going to be used for? There are two possibilities - greater council spending or lower rates. It's hard to believe it couldn't be anything but the former.

That being the case, what really matters is the quality of the intended spending, i.e., is it covering its cost of capital? (which is more than just the cost of the borrowing used to finance the spending) Since we don't know what the increased spending is going to be on, it's impossible to say anything definite about this. But the quality of council spending over recent years, and the quality of the 'analysis' underpinning it (e.g., the $70m cycleway), means the most plausible assumption is to place 0% probability on these borrowed funds being spent wisely.

There are other interesting undercurrents in all this though. First, by getting CCHL to do the borrowing, the council is avoiding the need to reveal it on its own books, i.e., it's cunningly 'hiding' the extent of its indebtedness. Second, and more importantly, the council is effectively saying it can invest new capital more productively than CCHL. This is intriguing, given that we're repeatedly told what great investments the CCHL assets are, that they return 15% per annum, and how rates would be so much higher if we didn't have them. If all this were true, then the best strategy available to the council would be to reinvest the borrowed funds in the CCHL assets to provide for further growth. By implicitly saying it could do better than this, the council clearly doesn't believe its own spin.

This is hardly surprising. The arguments trotted out to justify the 'keep-the-CCHL-assets' line are so transparently flawed that the only plausible explanation for the council's behaviour is good old fashioned empire building (something that those of us who work at the University of Canterbury are familiar with).

But now the chickens are coming home to roost. As well as the disturbing announcement identified by Eric, this week we've also learnt that (i) Red Bus earned basically zero profit in the last financial year and will pay no dividend, and (ii) the council has sold one asset (Jet Engine Facility - what on earth was it doing owning it in the first place?) in order to prop up another loss-making subsidiary (VBase).

It's like living in an episode of Mad Men (without the fun parts).

Glenn is entirely right. Council drawing funds out of the Council-held firms is inconsistent with Council's repeated assertions that the rate of return on Council-held firms is very high.

Council should be in the business of providing decent roading infrastructure, working and reliable sewers and waterworks, and a few consumption amenities. They are not the best owners of things like ports. The temptation to tunnel assets out by deferring maintenance and loading the companies up with debt ... well, some perils are just too perilous.

Debt for Dividends

Christchurch City Council refuses to sell Council-owned assets to help pay for the earthquake rebuild. They should sell some of those assets, so long as it's to pay for roads and sewers rather than for stadiums. But, a lot of folks just hate the idea of selling off the assets, and so it isn't happening.

Instead, Council-owned companies look like they'll be taking on debt to pay a higher dividend to Council.

The Christchurch City Council's investment arm may have to borrow to meet higher dividend commitments of $140 million over three years to the council.

Christchurch City Holdings (CCHL), which oversees the council's trading companies such as Orion and Christchurch Airport, promised to step up dividends after the earthquakes.

Its new statement of intent for the next three years from July 1 this year to June 30, 2016, forecasts dividends of $46m, $46m and $48m to the council.

It is a significantly higher level of ordinary dividends than before the quakes, when dividends ranged from about $30m to $35m each year.

CCHL's profits for the three years are forecast to be $33.1 m, $37.6m and $43.1m. CCHL will need to borrow $26.2m to meet its commitment to the council, unless it receives more dividends from the council's seven trading companies, increasing its profits.

CCHL chairman Bruce Irvine confirmed CCHL would borrow to meet the gap between its forecast profits and the dividends if needed.

I'm not a corporate finance guy, but it seems a bit odd to be borrowing to pay dividends to current shareholders. It's not something I'd expect would typically be recommended. Borrowing money to finance projects that yield a longer term rate of return in excess of the borrowing costs - that tends to be recommended. If firm shareholders have short term financial issues that mean they've a strong preference for having cash now, sensible Boards, I'd have thought, would have reminded those shareholders that they could divest themselves of a few shares if they needed a short-term cash hit.

When companies instead are borrowing to make their big shareholder happy about the current dividend flows, I start worrying about a whole pile of other ugliness that could be going on. Like, whether the company is making adequate investments in the maintenance of its physical assets or whether it's deferring maintenance to make the dividend payments. But again, I'm not an accountant or a corporate finance guy, and I've certainly not cracked open the CCHL books. It just smells a bit off. When a company is taking the dividend as a constraint against which to optimise instead of as the residual of what's left over after they've paid the bills, I wonder whether they really ought to have different owners.

But maybe a finance type who reads the blog can set my mind at ease here. Or maybe this is just standard practice when the government owns NZ companies. I remember something about something involving Solid Energy doing something like this.

Update:

• Apple has borrowed to cover dividends and share buyback. Borrowing for a share buyback is different: the firm gets to own more of itself. And Apple had tax reasons to borrow rather than to bring its overseas cash back to the US.
• Weird stuff can happen such that companies can't make a scheduled dividend payment while all is fine, or where a profitable company hits a liquidity constraint and so has to borrow despite profits in excess of the dividend payment. But here CCHL deliberately lifted the dividend payment to transfer more money to Council post quake. If they're doing that, why not just sell some shares in it instead?

Bland by design

I could grok changed building rules in Christchurch post-quake. Earthquake and liquifaction changed what we might want from foundations.

But the percentage of building frontage that must be in windows, no matter what? That car parking be hidden?

For example, the rules requiring buildings facing a road or public space to be between 60 and 90 per cent windows would not suit many businesses.

"Such blanket provisioning ignores that such a percentage of glazing may be inappropriate for the retailer, who may need more security, such as a jeweller or a bank; whose security requirements must take a higher priority than urban design,'' the submission said.

"Furthermore, it ignores the needs of department stores or larger stores who may need to place stock on shelving attached to solid walls around the perimeter of building."

The Property Council said that, because glazing was so expensive, the rule would boost the cost of new shops.

"We are strongly opposed to any provisions in the plan change that call for an increase in development costs without sufficient justification."

The submission criticised the requirement for car parking to be hidden from view, saying visible parking was a principle marketing attraction for retailers.

"This is completely impractical for many retail activities, which rely on visible parking to attract sufficient customers in order to remain viable,'' it said.

Prescriptive zoning rules are what deliver boring, expensive cities. Get a long enough list of "every building must", and you'll get a pretty short menu of options that can fit the bill.

I just don't get why we have to be so prescriptive about things that are orthogonal to "risk this building causes to others that are avoidable at reasonable cost." Minimum engineering standards that keep buildings from falling onto passers-by make sense. Council failed to do anything about this prior to the quakes, and even hindered owners who had wanted to tear down buildings that wound up falling down and killing people in February's quake. Even if we take a hard econ line on that individuals should be free to live or work in a dodgy building and trade safety for money, risk imposed on passers by seem sufficient to require either strictly enforced minimum standards or liability rules with compulsory insurance.

I wonder how much intersection there is between the kinds of people who think prescriptive town planning rules are great things and the kinds of people who don't like the tilt-slab construction that's been the consequence of trying to tick all the planning boxes on a budget.

Meanwhile, in America, Matt Yglesias has taken up Donald Schoup's banner on the high cost of free parking. Parking minimums are pretty common in the States: developers then have to put in more parking than they'd like to. Other places have parking maxima, preventing developers from providing as much parking as they think appropriate.

What happens when you stop being so prescriptive around parking?

Michael Manville of UCLA studied a liberalization of parking regulations in one section of Los Angeles and found that deregulation leads to the construction of more housing units and fewer parking spaces. Conversely, tighter regulation leads to a lack of affordable housing and a surplus of parking spaces. That might make sense if parking spaces were a public good, like clean air. But they’re closer to being a public bad. When Chicago mandates the creation of ahigh number of parking spaces per square foot of downtown office building, it reduces the price of parking, but it has a number of negative consequences. Cheaper parking means more traffic congestion on the streets. It also means lower ridership for Chicago mass transit. Perversely, cheaper parking offers a subsidy to commuters from outside the city limits at the expense of Chicago residents living within walking or biking distance of the central business district. And, of course, it leads to dirtier air, not cleaner.

Yglesias recommends abolishing requirements that buildings have parking spaces; I'll also recommend abolishing requirements that they have maximum numbers of parking spaces. If the highest valued use of a piece of land, as seen by the person with skin in the game, is a parking space, why need Council get involved?

Maybe, just maybe, if Christchurch Council focused really hard on a small number of rules around building safety, and dropped the other stuff, they'd be able to competently administer a set of useful rules instead of, well, what we have instead.

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.

The Christchurch Problem

Want a single picture illustrating the problem with Christchurch's rental market? Thanks to a hard-working boffin at MBIE, here's a nice one. 

I'd wondered whether the reported drop in the number of affordable rentals reported by MBIE was simply due to reduced availability across the board or whether it reflected a rightwards-shift in all rents. And so I asked for the graph below.*
Those renting a property in New Zealand lodge a bond with the Tenancy Tribunal. The graph comes from their data, via MBIE. We see a massive drop in the number of new tenancies at lower weekly rentals and about as many higher-rent tenancies as there were pre-quake.

The graph above shows the absolute drop in lower-rent tenancies. We can also graph things cumulatively to show the change in the proportion of total rents at each rental band.* The rightward shift in bonds paid is rather pronounced. But without data linking addresses to bonds paid, it's pretty hard to distinguish between a few potential stories. The graph cannot tell us whether we simply had destruction of low-end properties and no change in the rest of the market or across-the-board destruction and then shifts in the price of lower-end properties such that the number of tenancies in the $400-500 per week range remained roughly constant. It seems almost certain that both were going on, but we can't really say much without address-bond-linked data.

Also, the bond data only captures new bonds lodged. Some of the decline in new bonds posted could be due to tenants being reluctant to shift where rental availability is thin. Some of the drop in bonds could also reflect a shift of rental properties into the short-term holiday home market. On the other hand, many long-term tenants may have been displaced where either the house needs to be repaired or where the owner wishes to live in the house while the owner's home undergoes repair work. Either way, the new-bonds-posted data gives a reasonable reflection of the going price of current rentals in Christchurch. Or, rentals as of 2012.

In 2010, there were 18,094 bonds posted. In 2012, 14,695. That's a 19% drop despite rather a few homeowners needing to rent a property.

Thanks to MBIE for providing useful data and discussion!


* Some browsers have problems with the embedded Google Docs graphs. SciBlog's WordPress implementation also usually gets cranky about it. So here are static image versions for those needing them.

Christchurch Housing

I'd missed the Ministry of Business, Innovation and Employment's summary report on Christchurch housing when it came out a couple of months ago.*

The highlights:

• Total housing stock dropped by a net 11,500, or 6.2% of the ex ante housing stock, from 2010Q4 to 2012Q4.


• The number of private rentals as measured by tenancy bond remained constant at 39,000 during 2011 and 2012; the prior trend had increases of 1500 per year prior to 2010. 
  Demand for rentals would have increased sharply with destruction of owner-occupied homes, temporary moves by those getting repairs, and incoming construction workers. The largest drops were in tenancies of 2 to 3 bedroom homes.


• House prices in Christchurch are well above their prior 2007 peak, though Auckland's prices have ramped up by even more. But Christchurch rental prices have increased by more than Auckland. From August 2010 through February 2013, the average Christchurch weekly rent measured by new bonds lodged** increased by 31%, from $293 to $384. Auckland rental prices increased by 13% over the same period. 
• While average weekly rents remain higher in Auckland and in Wellington, the 2012 Household Income Survey has household income in Auckland at $94k, Wellington at $93k, and Canterbury at $82k.


• Rental accommodation at the bottom end of the market have been particularly hit. MBIE notes that MSD reckons $180/week about what beneficiaries can pay in rent; the proportion of private new bonds lodged in that range has halved since the quake. 
• I'm following up with MBIE for a bit more data on the overall distribution.


• Social housing units, whether provided privately as bedsits and boarding houses or publicly as Council housing or Housing NZ units, have also dropped substantially. Housing NZ was down 6% as of December 2012; I understand that the government pushed pretty hard to get the Housing NZ units sorted despite some thorny insurance issues. Christchurch Council is down 17%. The low-income tenants here served would not have an easy time finding alternative accommodation. They're being outbid for private rentals by incoming construction workers and by people seeking temporary accommodation during earthquake repairs. 
• I note that measures that could increase supply at the lower end of the market, like making it legal for private homeowners to build secondary flats into their homes, would result in fewer vulnerable tenants being displaced. 


• Holiday parks, which sometimes provide overflow temporary accommodation rather than just catering to tourists, are also overflowing. 
• I note that Council staff came close to shutting down the South Brighton holiday park when its toilet block failed an engineering code assessment; they backed down when it hit the press and instead are letting it be strengthened.  

The report also warns of a huge increase in accommodation demand set to come in 2014-2016 when an estimated 15,000-25,000 construction workers will be looking for housing at the same time as tens of thousands of home repairs create demand for short-term accommodation.

There's no way that allowing secondary flats within peoples' houses would come close to meeting the demand that's yet to come. But neither is there any reasonable reason to continue banning one of the easiest ways of getting quick temporary accommodation to market.

It will be interesting to see what will happen in 2014-2016.

* I'd linked the report here, but hadn't gone through it in depth.

 ** This will provide a better indicator of current market prices than would a measure of all existing rents: it shows what prices are faced by those coming to market.

Is it May already? Asset sales edition

It must be May. The Christchurch Press is reporting that Council is considering selling some assets to pay for the quake.

May 2, 2011: The Press wondered the same thing. I put up the general conditions under which Council should sell assets.

May 21, 2012: Another round of speculation about Council asset sales. Labour was outraged by that the City might contemplate selling dividend-paying assets. I pointed out that, unless there are really serious problems in asset markets, dividend flows get capitalised into asset prices. I'd written:

Cosgrove can only be right where the asset is more efficiently owned by local council, or where there are serious problems in IPO markets, or where the Council has a particular kind of stupidity.

If the asset is best owned by government, then the selling price will be less than the discounted value of the dividend flow. Otherwise, local Councils can do better by selling off the asset and taking the cash.

If there are serious problems in IPO markets, then things sell for less than fundamental value at IPO. But there's no particular evidence of this.

The last one might be more of a worry. Imagine a guy who has a trust fund that pays him a modest annual income. He generally is foolish in how he spends it, but he's always able to pay his bills. If he is given the investment as a lump sum, he blows it all on pop rocks and bungee jumping and has no income flow for the next year. That guy is probably better off not being able to sell off the dividend-paying asset. Is Christchurch Council that guy? Hopefully not. But post-quake, unless they're dumb enough to blow it all on stadiums, there are tons of productive ways they could be spending the money - roads, sewers, turning Red Zone into useful parks.

And, if Council is dumb enough to blow any divestiture returns on pop rocks and stadiums, are they smart enough to handle the asset properly if they own it in the first place? Note that an asset like the Lyttelton Port of Christchurch isn't like a hands-off trust fund; it requires annual decisions about asset maintenance versus dividends. Cosgrove talks about how the revenue stream from assets helped kept rate rises in check; what reports I'd heard on maintenance standards at the Port as of a few years ago suggested that Council was putting a fair bit more weight on current dividend flow than on maintaining the assets. Divestiture may be a bad idea if Council is prudent enough to manage the asset properly while they own it, but profligate if they're handed a lump sum of cash; under the current circumstances, with plenty of really pressing financial needs, I'm less worried about this one.

And here we are, May 2013. In today's Press:

A Christchurch city councillor says the city could offload non-core assets, including its own offices, to help pay its share of big-ticket rebuild projects.

Cr Tim Carter said last night that less important assets were expendable if it helped ease the council's debt burden in funding anchor projects such as the new convention centre and roofed sports stadium.

...He was against selling strategic, money-earning assets such as Christchurch International Airport, Lyttelton Port, Orion, and Enable, which is installing ultra-fast broadband in Christchurch.

His comments come as Prime Minister John Key yesterday weighed into the council asset sales debate.

Key told Firstline it was up to the council to ask whether the people of Christchurch wanted "the nice-to-haves".

"Then they'll ask how are you going to pay? That could be through rates or asset sales," he said.

The case against selling the airport isn't that it's a money-earner. A money-earning airport will sell for a LOT of money at IPO. Rather, the case is that the local monopoly airport would be tempted to set fees to maximise its own profits without considering that reduced traffic into town might have some broader costs. It might even do things like charge really high fees to taxicab companies for the right to operate from the airport, increasing the costs of Christchurch as a travel or conference destination.

I still think that Council should fully divest assets that are managed at least as well by the private sector and don't have the kind of problem that the airport could have, partially divest other assets, and use the money for roads, sewerage, overbridges, and for topping up the costs of rebuilding and repairing Council facilities. But if John Key wants Council to sell off the Port to fund a big covered stadium or a huge convention centre, well, I discussed that case last year.

Convention Centre Business Cases

Does the SkyCity convention centre deal have any particular implications for whether Christchurch should have a big convention centre too? I think it's a bit tough to argue that it increases the optimal convention centre size here, but opinions vary. Here's what I told Marc Greenhill from the Christchurch Press when he asked.

"It's possible that Hon. Gerry Brownlee is right that a Christchurch Convention Centre could get a lot of overflow traffic from Auckland. Perhaps the new Auckland centre will generate a ton of international excitement about New Zealand as a convention destination, and conference organisers finding out that Auckland is fully booked will decide to stick with New Zealand and come to Christchurch instead. I'm not sure that I'd bet a lot of money on that happening, but it isn't impossible." 

"And, Minister Brownlee is also right that some parts of Convention Centre business do not cannibalise across different centres. Armageddon Expo visits each of the main centres, for example. And national organisations will often shift their annual conventions across different centres in rotation; again, a nicer Auckland centre doesn't cannibalise that kind of traffic. But whether expansive convention centres in both Auckland and Christchurch would tend to do more to build international demand for New Zealand in total or to split the "let's have our conference in New Zealand this year" market, well, it would be interesting to see the business case backing that call."

As best I'm aware, we as yet have no business case for the proposed Christchurch convention centre. I'd be interested in perusing the document when it comes into existence.

Stadium plans

Sam Richardson points out some problems with the proposed stadium-plus-office-towers combo for Christchurch:

It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.

If people are willing to pay more for office space overlooking a rugby field than for office space elsewhere, then that can make a case for the stadium/office combination. And I can believe that there are plenty of tenants who would be willing to pay more for stadium office space than for regular office space - it isn't implausible that the project is feasible. But if that complementarity comes from tenants expecting to watch games from their offices for which they'd otherwise have to pay, then it's a trade-off against ticket revenues for the stadium's tenants - sports clubs would then be willing to pay less for use of the facility.

Lunchtime discussion in the economics staff room wondered whether we mightn't instead have hotel towers and a stadium including conference facilities. But that does start getting awfully close to Danyl's proposal from last year:

Christchurch Mayor Bob Parker and Earthquake Recovery Minister Gerry Brownlee provided more details of the rebuild blueprints for the earthquake-devastated city today, including plans to build a second sports stadium inside the new convention center to be constructed on Cathedral square.

‘The sports stadium will be a core attraction for visitors to the convention center,’ said Brownlee. It will be fully covered, provide seating for up to 2000 spectators, and will also contain a state-of the art convention center.

The sports stadium inside the convention center will complement the services provided by the main convention center. It will include business hotels, retail outlets and a covered sports stadium with natural fixed turf, which will also contain a convention center to attract business tourists who want to attend sports events during their stay.

‘We have one or two exciting ideas for what to include in that last convention center, but I don’t want to give too much away,’ Brownlee told reporters. ‘Let’s just say Crusaders fans will be very excited.’ City Council insiders suggest the convention center’s sports stadium’s convention center might house a sports stadium.

I still wonder whether it might be best to let the Crusaders own the stadium and to gift them the insurance payout for the AMI stadium. Tell them to make the best go of it that they can while writing legislation that the Mayor, Council, City Manager, and both the General Manager and Coach of the Crusaders will be shot in the face have something very bad happen to them if Council ever provides any other subsidy ever to the stadium or its tenants.

Can I chip in?

City Councils face a few problems in assessing effective demand for Council services. Sure, lots of people will say how much they want that various amenities be provided, but everyone has incentive to overstate their true preferences. And while we have complicated Lindahl pricing mechanisms that might work in theory, I've never heard of their actually being used.

And so I was really pleased to have Citizen Investor pointed out to me.

As I drove down Brougham Street last night, I wished for an Android App where I could, at every stupid traffic snarl caused by the absence of a right-turn light and a consequently overflowing turn lane, contribute to a Kickstarter campaign where I could chip in to help fund the provision of right-turn lights.* Citizen Investor takes those projects that lag behind in the Council's approved-but-not-yet-funded queue, and lets contributors bump them up the queue. Neighbor.ly works similarly.

If Christchurch Council would let me chip in, here are the things for which I'd be willing to stump up some cash in addition to what I'm already paying in rates:

• Turn lights at Clyde & Creyke
• Turn lights on Blenheim
• Turn lights on Brougham south of downtown
• Probably a half dozen other turn lights
• Rebuilding the kid's play structure in the South New Brighton Park

Wouldn't it be great if there were an App that used GPS data to let you know about Kickstarter campaigns for proposed civic projects in the locale? Take the kids to a park that's a bit tired; the phone prompts you that somebody's proposed a nice new set of facilities; you pledge $20. Enough people do it and more cool stuff gets built. Have all the potential GapFiller projects in there too. Please make it so.

* When Council invested in traffic lights, the road rules said that the person turning across traffic had right of way against the person turning with traffic. So, in American terms, the guy turning left across traffic has the right of way over you if you're going the opposite direction and turning right. That means that the turning lanes for the difficult turns have a chance to clear without a turning light. It also meant a few accidents with confusion about the give way rule. We changed the give-way rule but didn't put in the now-required turning lights to let people make the difficult across-traffic turn.

Coming to the nuisance

John Walley has a point. He worries that commercial encroachment on industrial zones is not being treated as a coming to the nuisance but rather could push out the prior industrial firms.

The mobile Nimbys are motivated to perceive these residual problems as significant, using every opportunity to whip up opinion against any previously acceptable use as unacceptable.

In normal times this creates problems, in a disaster recovery situation it becomes a more serious issue. Industry and manufacturing has been a lifeline for our city through our disaster, the sector kept going and, through the efforts of many, maintained activity.

Our disaster has forced our city to become more diverse, more mixed. Different sensitivities have been pushed together and sadly, we have not seen an expansion in the tolerance of established use.

Minor problems become significant when more sensitive people are present to witness them. We all know that dealing with problems becomes all the more challenging when earthquake damage insurance difficulties and weather extremes are in the mix.

The reverse sensitivities in Woolston are not new; noise and smell have always been potential issues, however these existing uses need to be tolerated as many jobs are threatened, being replaced by a handful of hospitality and retail jobs. Does that make any sense? How would you feel if your job was threatened in this way?

The Woolston gelatine plant has generated a gawdawful stench for at least the decade I've lived here.* Rolling up the windows while driving past is pretty standard drill. And it's been worse since the earthquakes.

A few short months after the earthquakes, Cassels & Sons opened their excellent brewpub close to the Woolston plant. It is a glorious place to spend the afternoon when the sun is out and the wind is coming from the right direction; we were there on Sunday. But when the wind isn't right... well, they have a phone number displayed prominently for patrons to call Environment Canterbury with complaints. Cassels are expanding with a large section of retail shops soon to open beside the brewpub.

The gelatine plant clearly pre-dated the retail development. It's also very likely that the gelatine stench predated most of the current owners of the houses just up the road from the plant; they would have bought their properties at a substantial discount reflecting the disamenity. Anyone who bought a house there after the plant was established came to the nuisance as much as did Cassels.

So, it's almost a classic coming-to-the-nuisance case. And, it's also one where there's a strong residual claimant on most of the abatement benefits: the Cassels family. Their brewpub and assorted retail holdings will do rather better when the foul winds cease to blow. In this kind of case, we expect bargaining to efficiency: if it's cheaper for the gelatine plant to change their operations or to move than it is for Cassels to bear the stench, then they can pay the plant to do it. It might have been too hard for the dispersed homeowners to pay the gelatine plant for abatement, but Cassels could pretty easily coordinate things if they wanted a Coasean solution.

But it's a bit more complicated. The gelatin plant may have been breaching some of its emissions consents:

As one of the three air monitoring stations set up in Christchurch by Environment Canterbury (ECan) is directly across the river from Cassels, ECan is well aware of the problem too. As ECan monitoring officer Chris Elsmore explains, there is the odour from gelatine production and there have also been breaches from sulphuric acid production - that would account for the sulphur smell.

"It's at a difficult stage at the moment," Elsmore says.

"Gelita certainly comprehend the problem and are taking significant steps."

But Gelita is working at a different speed to Cassels and others in Woolston, Elsmore says.

But if Cassels aims to have his Tannery complex open in six months, which is his ambition, will the smell have been minimised by then?

"Most likely," Elsmore says. "We're pushing them all the time."

That said, Woolston has long been an industrial area and is where such businesses have traditionally been. Besides Gelita, there is Independent Fisheries, a tannery and, until recently, rubber curing.

"If it was smelling, it was in that area," Elsmore says. "Alasdair's right in that things needed to improve."

So if Gelita is emitting more noxious fumes than they have the right to emit, and if it is more expensive for them to abate down to Code than for Cassels to bear the stench, they could pay Cassels to stop complaining. Cassels is pushing their customers to notify ECan whenever things are too smelly; some of this will be a push for enforcement of existing code while some of it would be to build pressure for reducing the permissible amount of emission.

John Walley has a point where changed neighbouring uses lead to lobbying for changed rules in cases where it would be really simple for the aggrieved neighbours to buy abatement if abatement could efficiently be provided. But where they're instead lobbying for the enforcement of existing standards, and where you can make a pretty reasonable case that any de facto easement existed only because of strong coordination problems among the residential neighbours, perhaps Gelita should be the ones purchasing abatement from Cassels.

* If you're from Winnipeg, think about the Saint Boniface yards from two decades ago.

Oh Christchurch

It didn't have to be like this.

784 days after the February 22, 2011 earthquake. There's a draft plan for downtown, but nothing's yet certain except for that the CCDU and CERA are pursuing compulsory acquisition for some land where they think they're likely to build a convention centre and stadium. We don't know when access to downtown's Cathedral Square will be restored, we don't know whether Town Hall (a performing arts venue) will be restored, rebuilt, or scrapped; what an Arts Precinct will look like will depend on what happens with Town Hall, and continued uncertainty about the Arts Precinct is messing things up for those wanting there to rebuild. We don't know when they'll finalise the city plans for downtown living zones. We don't know whether land acquired by compulsory acquisition will be used for public purpose or flipped at a profit by some later government. We do know that a reasonable burden is being borne by those having land taken by compulsory acquisition.

We have a great big mess of interconnected problems. The root of most of them is a fundamental lack of respect for individual property rights. Why do we have a housing crisis? People can't do innovative things to increase housing supply. Why do we have downtown property owners deciding to cut their losses and escape? Because the planners are giving us the worst of all worlds: a determination to pursue a central plan and cast aside the plans that individual property owners might have, but a seeming inability to just set the darned thing so that individual property owners can re-optimise and get building. There are good arguments to be had about whether it's better to have a fixed city plan with a designed vision for the city or whether we should let the city's vision emerge more organically from the decentralised projects each owner might seek to undertake. I prefer the latter. But surely either of those has to be better than putting town on hold for this long while deciding just what the perfect city plan might be.

It's tragic that most people don't understand the term "leave well enough alone". "Well enough" isn't a compound adverb describing how thoroughly one ought to leave something along, it's a compound noun saying that if things are good enough, we shouldn't screw with it. Read it as "Leave alone that which is 'well-enough'." It's the better English translation of laissez-faire. We've made the quest for the best city plan the enemy of getting anything done.

Let's recap a bit.

January 2011 it was pretty clear that there were already substantial zoning rents built into Christchurch property prices.

March 2011: Businessmen with critical records behind the red zone cordon were still barred access. But if your wedding dress was on the other side of the line, you could likely convince a policeman to let you through. All kinds of other nonsense around the cordon. .

We could see that heritage rules were working in opposition to earthquake preparedness and that we needed to fix things if we wanted to keep and strengthen our best heritage amenities. There's now a pretty good chance we'll lose the old Trinity Congregational Church entirely, and the intransigence of the heritage board after the September 2010 quakes is largely to blame. I do appreciate how Council is simply putting up $1m towards the restoration for anybody who is willing to do it - it's an amenity that seems worth it. I wish that we could have protected it three years ago by paying the providers of heritage amenities for their provision rather than making it really hard for them to do any earthquake strengthening.

April 2011: Central government and Hon Gerry Brownlee get more power over the earthquake rebuild. I'd hoped he'd use his powers for good and help us to get an IKEA. But it looked like a high variance play: an appointed Czar might sweep aside the regs that were holding things back, or might impose a central plan heavy on expropriation. Meanwhile, the Greens push for an earthquake levy; optimal tax policy dictates instead a mix of spending cuts and future tax increases.

May 2011: We start hearing suggestions that Council sell assets to pay for reconstruction. There's an economic case for it, especially where some of those assets weren't great candidates for public ownership to begin with.

July 2011 we start seeing problems where the insurer says a property can be repaired and so will pay out based only on the repair cost, but the government declares that you can't rebuild on that land. This is the kind of thing where either Council or central government should have funded a test case or sought a declaratory judgement. We still don't know what a high court appeal would say about it.

August 2011: the first cut City Plan comes out. It's vaporware.

September 2011: I get more worried about downtown. RBNZ starts pushing back its expectations of when things might start happening in Christchurch. They then expected rebuilding of severely damaged properties might start happening mid-2012. The downtown demolition job remains unfinished as of April 2013.

October 2011: Downtown developers (rightly) start getting stroppy about Council's planning approach. RBNZ reveals what it was up to during the quakes and their preparations in case things go badly in a Wellington quake.

November 2011: Bomber Bradbury says that the Libertarianz paid political ad highlighting bureaucratic and regulatory failure in Christchurch was "intellectually skanky". Clearly he doesn't live here.

February 2012: Council is still very slow in approving new subdivisions outside of town; too many veto points for getting things done. We also start seeing how the combination of lax building codes, heritage regs against building strengthening, and the abolition of liability under ACC caused substantial problems; I suggest liability insurance might be appropriate.

March 2012: Outside of downtown, away from the bureaucrats, Christchurch is coming back.

April 2012: Rental prices are soaring; demands for price controls. Central government throws out the Council city plan, promises a new and feasible one. I'd hoped that the new agency would take a light touch on eminent domain and that it might fund some declaratory judgments on insurance issues. Alas. At least the light rail scheme hasn't resurfaced. Bill Kaye-Blake reckons Christchurch is screwed. Too much focus on shiny stadium dreams, too little attention to helping folks wade through insurance messes. The housing shortage gets messy; bureaucratic failure abounds.

May 2012: CERA head Roger Sutton demonstrates a surprising lack of familiarity with zoning issues. I had hoped that CERA's job was to have been sorting out the tangled bureaucratic mess facing homeowners. Yeah, no. More pressure for Council to sell assets; I worry they might sell things like the Port to buy things like stadiums. Meanwhile, people who aren't owners of the downtown Anglican cathedral start protesting that it be rebuilt; its owners, the Anglican Church, seemed less than keen. I suggested they try Kickstarter to show us whether the notional demand was effective demand. None of that's yet sorted out as of April 2013.

June 2012: consents and planning are still stuck in pre-quake mode: the grey men had to make sure that the wheelchair ramps for a new temporary bar had a 1:12 slope rather than a 1:10 and that the handrails were just right. In the midst of a housing shortage, Christchurch is exporting houses from condemned sections; our zoning rules ensure that they can't really be used in-town. And Christchurch City only approved 1271 new dwelling units from April 2011 through April 2012.

Meanwhile, John Fountain figures out a ridiculously simple move to start easing Christchurch's housing shortage: allow people to build flats inside their existing homes. City Council zoning rules don't allow it if the flat has a kitchen, though they make provision for flats of this sort under rules ensuring that few people will really do it. The only explanation I have ever heard as to why Council wants to ban this simple way of easing the housing shortage is that they're scared that the area around the University will turn into student flats of the Dunedin type. If that's the case, they could have banned it in the area around the University, or they could have considered that it just might also be important that we get some cheap student flats if we want to keep having a University.

Gerry Brownlee claims there's no housing crisis in Christchurch. I suggested he's missing what's going on at the bottom end of the market. Ahem.

I suggested scrapping plans for a big expensive convention centre and instead have Council coordinate with the big hotels for a smaller facility linked directly to the hotels. Regime uncertainty gets worse with warnings about forced acquisition for the new city plan.

July 2012: We get the new city plan. I didn't know then, and I think that nobody knows now, just how any of the proposed anchor projects are to be funded. EQC makes it harder to avoid using their preferred project manager. Pressure for a broader national push to relax land use planning builds; I point out that it's also good earthquake-preparedness.

August 2012: Seamus notes that the anchor projects in the city plan might not pass a normal cost-benefit analysis but could help anchor expectations around a good rather than a bad new equilibrium in a multiple-equilibrium world. I wondered whether the expensive stadium plan was a poison pill. We started getting hints about what the anchor projects might cost. As of April 2013, CCDU is getting tenders for a convention centre but I'm not sure they've sorted out who will pay for it; they're saying construction on a stadium might start in 2015. We don't know what's going on with Town Hall.

December 2012: It's looking like insurers are deliberately dragging their feet so that policy holders take lowballed indemnity payments. We still haven't had reasonable test cases. EQC is pushing everybody to their preferred contractor. Gerry Brownlee scales back a proposed insurance advocacy service, reckoning that it isn't much needed. The service was supposed to help people figure out when their homes might possibly be repaired. Turns out Brownlee was right - we didn't need the advocacy service. We just needed EQC to leak the big spreadsheet containing all the details on most of the repair jobs and for somebody to stick it up on the internet so that folks could find out where their claims stood.

And remember how the convention centre was an anchor project in the big central plan of July 2012? December they're shortlisting developers for the convention centre while hiring somebody to make a business case for it. Also, you probably can't finance the big shiny stadium on bake-sales.

January 2013: Christchurch Council's record on building consents remains full of fail.

February 2013: Continued regime uncertainty. That shiny city plan from July 2012? Yeah, we don't really know what's going on with that. And it's starting to matter for those with properties zoned into one of the special precincts. The Insurance Council says that it's not their fault that 70% of major claims have yet to be dealt with; I'm not so sure. Insurance here feels more and more like a scam.

March 2013: Regime uncertainty continues.

It's mid-April 2013, 784 days after the earthquake. My builder is still squabbling with EQC about the quote to get the job done at our house. AMI/SR has yet to come to our house to assess our out-of-scope claims. SCIRT is just about done with what I think is the fourth tear-up-and-rebuild on our street; they all blur into a single two-year-long project interspersed with a few two-month stretches where the street is in one piece. The barricades around downtown block off less than they did two years ago, but they're still there.

The CCDU decided that some downtown areas had to have a minimum project size; property owners now are scrapping with each other trying to accumulate titles to get to the minimum size rather than building on the land they own. The planners' grand visions may be nice, but they're driving out the investors who should be rebuilding town.

Contrary to Gerry Brownlee's claims of there being no housing shortage in Christchurch, we see a 60% drop in affordable rentals relative to pre-quake baseline. Now some of this will just be an artifact of the baseline chosen for affordable rentals, and Auckland remains more expensive. But as of last month, the price of the median 2-bedroom rental in Christchurch was $365 per week and the price at the 25th percentile was $300. And Christchurch Council still effectively bans building self-contained flats in houses - removing that ban remains the single simplest and cheapest thing they could do to increase low-end supply.

The University has hemorrhaged students as housing is expensive and town is rather less attractive than it once was. It will not be easy for the University to recover until Christchurch is a place that students again want to live; costs of student housing have to come down into line with the amenities here provided, or the amenities have to improve. Neither of those are easy given the current Christchurch bureaucratic regime.

Winter is coming.

EQC Redux

If EQC can mistakenly send out a spreadsheet containing most of the relevant details on most of the Christchurch earthquake claims, why are they unable to provide those same details to homeowners who request them?

News reports yesterday said that the EQC data breach included only addresses and claim numbers. I had a hard time thinking of potential exploits using that data until I started thinking of the homeowner as the mark instead of EQC. But non-instrumental privacy concerns seemed pretty trivial. 

Today we learned a bit more.

Here's The Press:

The row first erupted on Friday after an EQC senior staffer sent an email with the Excel data attachment to Christchurch businessman and persistent EQC critic Bryan Staples.

He deleted the information and signed a statutory declaration that he did not copy it.

Staples, who owns Earthquake Service Ltd, went public yesterday saying he wanted EQC to disclose the information to the individual householders.

"This is stuff everyone has a right to know," he said.

...

Staples said he was not the only person to see the email which listed the household's claim number, asbestos rating, EQC tolerance approval, which aspects of the claim were on hold, land information, whether the address was awaiting assessments, engineer's report, the EQC supervisor, the contractor's name and quote, and EQC's value of damage estimate.

...

Staples also said he looked up the information for one of his clients on the list for whom his company had done repair work, costing $55,000.

EQC had said $55,000 was too much and had cash settled for $30,000 with the homeowner. But the spreadsheet showed EQC has allocated $59,000 for repairs.

Now that's a bit different from addresses and claim numbers.

If this were released for our house, I still would have only instrumental privacy concerns rather than intrinsic ones: I'd worry that somebody might start sending in fraudulent claims on our number and try redirecting payment to their own account, but it wouldn't bother me otherwise. We're opt-out, so we're not in the .xls file.

I know other folks put more value on particular aspects of privacy and might have intrinsic privacy worries about these details being released. I go entirely the other way here: this stuff should have to be attached to the LIM for all houses in Christchurch so that future buyers can tell what repair work was ordered and what repair work was done. It'll harm those who take the cash settlement, don't undertake the repairs, and don't fully disclose to potential buyers. Boo-hoo.*

But if there's a single spreadsheet out there with all this information on it, why in seven hells does this happen:

Since the Christchurch earthquakes, EQC has been inundated with OIA requests, as homeowners have resorted to statutory mechanisms in the face of bullshit from officials. Their response? Don't answer anything for five months

Frustrated Cantabrians hunting for information on their broken homes have swamped EQC with thousands of Official Information Act requests, pushing the 20-day response deadline out to an unprecedented five months.

Christchurch homeowners say waiting almost half a year for crucial information on their properties is "inexcusable" and the chief ombudsman says the current waiting list is "not satisfactory".

[...]

[Andrea Laws] filed her first request in early August 2012 and said she received only part of the information in mid-September.

EQC refused to send Laws any more information for months until she complained to the ombudsman, she said.

"They really didn't want to do the OIA. I had to ask them two or three times where my response was and when it came through there was email correspondence that said: ‘Do not provide the claimant with information or time frames'," she said.

This is unlawful and it is unacceptable. On the first front, the OIA requires a response " as soon as reasonably practicable, and in any case not later than 20 working days" after the request is received. While the twenty-day limit can be extended, that cna only happen if it is for or requires searching a large volume of information, or if required by consultations with other agencies. Being flooded with requests and just not feeling like doing them is not an excuse. Any agency faced with such a situation should be hiring extra staff to cope, not ignoring requests.

It looks like answering at least some of these OIA requests would just require 5 minutes in an .xls file. Say five minutes to extract the data, five minutes to clip it into a reply email: one EQC agent could be answering 400 of these a day.

There are potentially innocuous explanations for the discrepancy between the cash settlement Bryan Staples cites and EQC's cost estimate: it's not implausible that EQC budgets include padding in case the repairs are more substantial than expected, and that the cash settlement did reflect the real damage. Or it could be that they're just screwing down costs.

Here's an interview with Bryan Staples.

What the heck is EQC doing if it can't get basic information out to homeowners, but has it all sitting in a darned Excel file?

At our little opt-out, EQC continues trying to screw down cost estimates provided by our builder. Hopefully they'll soon come to some agreement.

Update: Here's Chris Hutching at The NBR (gated) making a similar point.

As a government department, EQC simply is not accountable in the way a private company would be.

I agree. But the private insurers have hardly been providing stellar customer service either.

* You can get around this, for now, if you're an honest seller, by keeping all the files and making them available to potential buyers. But in 10 years time, there are going to be a lot of people on-selling earthquake-damaged homes that they purchased after the quakes and who will claim that the earthquake paperwork was lost. Get it on the LIM.

Day 757: Continued regime uncertainty

Just keep holding that pause button, guys. It'll all be fine. Just like in SimCity.

Christchurch is pretty short on hotel accommodation. A hotel wants to rebuild. The insurance is all sorted out. But, the government will not tell them whether the government will go ahead with its plan for an arts precinct, in which case their land could be taken from them by the government under compulsory acquisition, or whether they can start rebuilding their hotel on their own property without fear of expropriation. While the hotel chain hasn't yet demolished the old building, it takes a while to plan for a site and to get the appropriate consents even without the zoning uncertainty.

CCDU project delivery general manager Greg Wilson said the Copthorne hotel was situated in the area designated for the performing arts precinct, which was a work in progress.

The final makeup of the precinct would be linked to decisions made on the future of the Town Hall, he said.

For anything else to be built on the Copthorne Hotel site, written consent under the Resource Management Act was required from Earthquake Recovery Minister Gerry Brownlee, Wilson said.

"The test is whether the proposed use would prevent or hinder the public work - in this case the development of the performing arts precinct."

No hurry. Pause buttons are great. It's only been 757 days since the February 2011 quake.

Hopefully, delays mean good things in this case: Ng Gallery might survive the planned stadium and will not be put under compulsory acquisition.

Insurance delays and uncertainty continue. Campbell Live covered things well last night. The Insurance Council's Tim Grafton correctly notes that there are some complicated cases where it took a while to sort out whether you could rebuild on a property. Then there are the messes between the insurers and the reinsurers, between the insurers/reinsurers and EQC, and between the whole lot of them and the change in building code that ramped up repair costs. But there are other cases where no such uncertainty exists and where there hasn't really been much progress. And the length of time to resolve scraps between insurers, reinsurers, and EQC is endogenous to the legal regime.

757 days of regime uncertainty. Tick tick tick tick....

EQNZ Lesson 1 for Wellington: Fix EQC

It's too late for policy changes to do much for Christchurch. But the Alpine Fault's pointed straight at Wellington. The quake's hitting there will be bad enough; a few policy changes could avoid exacerbating the damage.

Lesson One from Christchurch should be that EQC really should never have had the job of assessing house damage. It should have no role in repairs, in project management, or, really, anything other than writing cheques.

When #EQNZ Wellington hits, from the homeowner's perspective, it should be as though EQC doesn't exist. Instead, the private insurer should simply send its assessment to EQC for coverage of the below-cap damages: EQC then effectively simply covering a high deductible. EQC could do some random audits to check if any of the private insurers were making a habit of getting all their clients a house tidy-up where there wasn't really any damage, but it really oughtn't otherwise be involved.

Here in Christchurch, because EQC and Fletchers are severely competence-constrained, they decided it was too complicated to let homeowners add at the homeowners' own cost insulation into the walls when the wall linings were already being torn out for repairs. In the last month they've reversed that decision, rightly outraging those homeowners lucky enough to have completed their repairs but who missed out on getting other repairs done.

Asbestos isn't uncommon* in houses of a particular age here. Where the quakes damaged the asbestos, the home repairs have it taken out as part of the insured claim. But where homeowners wish to have the rest removed at the homeowners' own cost, they're being barred from having it done with the rest of the repairs. EQC is right that while the material is undamaged, it is entirely harmless. But the marginal cost of removing this stuff is much lower while everything else is opened up, some future quake could release asbestos fibres, and having any asbestos in a house makes other home repairs more complicated - you don't particularly want to drill into an asbestos sheet by accident.

The constraint seems to be EQC's worry that asbestos contractors' taking an extra day or two on minor jobs holds them up from hitting other jobs. Alternatively, letting asbestos contractors' wages be bid up with demand induces more asbestos contractors' to move into town to get the job done.

This kind of nonsense was one reason we went for an opt-out builder; we're still hoping to get our work done in May-June.

It's much too late to get this part fixed for Christchurch. But hopefully somebody's doing it before Wellington gets its shake.

* I'm still hoping 3-d bioprinted lungs are available in 40 years' time. I'd be pretty surprised if there weren't an #eqnz mesothelioma hit waiting for folks who were here through the dusty times post-quake.

Spreading the burden

The Christchurch Earthquake has the government looking at earthquake standards for older buildings. This could all wind up being rather expensive.

A former adviser to the Reserve Bank and World Bank says the cost of bringing in tougher tests for earthquake-prone buildings would far outweigh the benefits.

Economic consultant Ian Harrison said he had analysed proposals put forward by the Ministry of Business, Innovation and Employment on building standards, and it showed the cost of the tougher regime would be 50 times the benefits.

In Auckland the cost was 1762 times the benefit.

So, how much strengthening is enough?

Let's start with an easy case: your own owned house set back in a yard. If you own the house and live in it, it should be your own business as you're bearing the risk. Maybe we can complicate it where we think that people are bad at thinking about these kinds of risks, but even then it's hard to make a case for doing anything beyond requiring engineering reports on the houses, putting the information on the LIM, and maybe putting a little warning sign at the door for houses found to be particularly risky so that visitors know what they're getting into.

Let's complicate it a bit. You have a two-story brick townhouse built abutting the sidewalk: if the facade comes down, your house will kill people. What standard should there apply? The people inside own the house and have come to their own assessment of the risk, but not so the people on the sidewalk. Or the people in buses traveling down the street beside it. Ideally, we'd want earthquake reinforcement up to the point where the cost of an additional unit of safety provided is equal to the expected cost of the risk imposed: the likelihood of the facade coming down multiplied by the damage done if it does. How can we set a rule that induces the appropriate cost internalisation? Here, I'd expect we do best by relying on insurance: require building owners imposing this kind of risk to carry liability insurance sufficient to pay the current value of a statistical life for each person killed by their building in case of earthquake. In a competitive insurance market, premiums for this policy will reflect the actual value of the risk imposed, and building owners will then have incentive to make improvements that are cost-effective. And given how insurers have behaved since the 2011 earthquakes, we'd likely need some very bright-line rules about which bits of sidewalk count as being which building's problem. We'd possibly also need stock and pillory for insurance officials wanting to spend years arguing the toss about whether a stone from one building is what pushed the victim into another building's zone.

Let's add a further complication: the house is heritage listed and the owners are prohibited from making improvements that would detract from the heritage amenity provided, or at least it's awfully hard. Upgrading these buildings isn't going to be cheap. Heritage amenities are real; there is a real case for local government subsidy of these amenities. But we really need to shift to having that amenity be guaranteed by annual on-budget payments going to those providing the heritage amenity rather than mandates around permissible building modifications.*

What about rental properties? There, I can see a decent case for requiring the engineering reports on suspect properties, along with mandates that a simple version of the report be made available to tenants about the property's real risks. It would certainly be the case that there would be some low-rent buildings that are pretty risky. But it would also be the case that the tenants there preferred living in the riskier building than paying the higher rent for an upgraded building: I'd be rather surprised if upgrading costs imposed on landlords through mandates didn't wind up being passed through as higher rents. It's easy to make the sad-story case of someone 'forced' by poverty to choose a lower quality rental building and how we need to consequently mandate tight standards, but solving that with building regs is just a form of trying to solve an income problem with a price control. If we cared about getting more lower-income rental properties to market, we'd be easing back on the zoning controls that inflate the price of land.

Commercial properties or those visited by the general public are a bit more complicated. The risks of entering any particular building are far from obvious. There are three basic potential approaches. We could mandate adherence to some standard. We could use a liability rule making the building owner liable for deaths caused by his building falling on those inside (requiring insurance sufficient to cover the liability, as suggested above for streetside homes). Or, we could inform those entering the building of the building's risk by way of "Earthquake Grade" signs mimicking the restaurant grades.

But standards are insufficiently sensitive to actual imposed risk.

And liability rules would prove really rather expensive for any building that often hosts a large number of people - it's very easy to imagine that many people would voluntarily, and in full knowledge of the risk, choose to enter a building that would have been demolished as too expensive to insure under a liability rule. We only want a liability rule where we think that people are incapable of making rational risk assessments when in possession of full information about the risks, or where it's exceedingly expensive to provide that information. But they should beat nation-wide regulation where different parts of the country have different actual earthquake risk.

Finally, I'd expect that locals would quickly figure out how much weight to put on Red/Yellow/Green-light earthquake risk signs. When I was up at a conference in Wellington last year, the building had a big "Earthquake risk" sticker on it. Had I known at the outset that the Law & Economics Association was choosing to host his event in such a place, I'd have declined to attend - I am rather disinclined to walk into any brick unreinforced building in Wellington barring very large side-payment. Online maps of earthquake building risks would quickly sort things out.

There's a good case for having liability rules or standards for buildings that the public is forced to attend by the state: courtrooms, prisons, public licensing offices and the like. We can't use a revealed preference argument around risk acceptance for those venues. But for other buildings where entry is voluntary, what's wrong with mandating signs advising the public that "Engineering assessment suggests this building has (very low, below average, average, above average, seriously high risk) of falling down in case of earthquake. Entry is at own risk."

I'd expect that optimal policy would mandate liability insurance for risks imposed on passers-by, regulation for buildings whose collapse would block essential traffic routes (or, equivalently, liability equal to the full actual cost imposed in such case, with insurance premia then doing the work), and warning signs for entry into buildings.

It would make me awfully sad if Oamaru's historic district had to be torn down to meet earthquake regs where Oamaru's actual risk perhaps isn't all that high. Competitive insurance quotes could sort that out more effectively than can nationwide regulation.

* And if you've not been following the utter madness in Christchurch, read this and weep. Because their destroyed house was in a heritage zone, all the heritage from which is now flattened and gone, this couple is banned from putting up the house they want on their property [article, editorial]. The planners won't revisit the heritage zone regs until 2014-2015. As for the dictatorship downtown...