Information failures and risky buildings

There's a trade-off when government agencies disclose known risks. Take, for example, AIDS disclosure laws. Some US states require that partners or others likely to be at risk from a patient testing positive for HIV;  others fear that the effect of such disclosure laws is to induce those at risk to avoid being tested. I've certainly not seen any data sufficient for running that cost-benefit analysis,* but it's plausible that either regime could be the correct one.

Wellington Council has a list of buildings sharing the same design flaw as the collapsed CTV building in Christchurch. But they won't tell anybody which buildings are on that list. Is this likely to be efficient? It depends on how Council knows and what they do with the information. If these kinds of flaws get found when Council officers dig back through the old building plans, then there's little risk that disclosure induces building owners to hide flaws. If they're found instead when owners inform Council, then disclosure could induce owners to keep quiet. So, in the former case, disclosure makes sense. In the latter case, it's a trade-off. Whether it makes sense to keep things quiet then depends on the number of owners who would likely be deterred from revealing risks in the disclosure regime and on whether Councils actually do anything to ensure that risky buildings are made safe. If buildings of that sort fall under the usual "you have 30 years to fix it" rule, then it seems unlikely that we're doing much good by keeping things quiet. If they're working towards much quicker repairs of disclosed faults, and if we think that tenants would overreact to the risk disclosure, and if we think that building owners would hide faults in a disclosure regime, then perhaps non-disclosure makes sense.

I'm inclined to agree with NoRightTurn that the case for disclosure seems strong - and especially since the justification seems to be to avoid imposing losses on the owners of risky buildings rather than to avoid that other owners notify Council of building deficiencies. But I'd reverse that call if it turned out that Council were really pushing to get this fixed and if there were substantial risk from unknown building flaws that would fail to be notified under a disclosure regime.

* This state-by-state variation seems eminent fodder for empirical work on the effects of disclosure laws on testing rates. File under "future honours projects" if it's not already been done.

Broken Windows, Part II: Will a Disaster Rebuild Increase Capacity Utilisation?

Following on from yesterday’s post on the broken-windows fallacy, Miguel’s second point is that the broken windows fallacy rests on an assumption of full utilisation of resources (so that resources devoted to repairing damage from a natural disaster have an opportunity cost somewhere else). He notes:

We're clearly not in full employment now, and we weren't before the quakes, so what basis do we have for claiming that "all the resources now devoted to cleaning up and rebuilding would have been employed elsewhere"? My point is that economists are too content to simply make this assertion without actually demonstrating it.

I will concede that it will be extremely difficult to provide evidence, but that is not a cop out. Note that market economies are very good at utilising their resources. We tend to look at unemployment and see the cup as being 5%-10% empty, but it is also 90%-95% full. Employment is less than 1/6^th the size in New Zealand as it is in Australia, but that has nothing to do with the tendency for natural disasters there compared to here. They have more population and so the market economy creates more jobs. We understand pretty well how coordination through price signals achieves this matching of jobs to available workers. What we don’t understand well is why capacity utilisation consistently falls short of 100% and why the utilisation rates fluctuate. We have plenty of plausible stories involving frictions, asymmetric information, expectations, monopoly power, sticky prices, etc. but it is likely that the relative importance of these factors is very dependent on time and place.

So yes, we know that we employment was not at 100% before or since the earthquakes, and that following the GFC, unemployment rates have been higher than before; but we don’t know exactly what determines those rates. We also know that the Reserve Bank monitors economic activity and adjusts policy to try to keep activity at the level consistent with stable inflation; we further know that New Zealand is not close to being in a low-interest-rate liquidity trap, the story often advanced for why monetary policy might not be effective.

With this backdrop, we can’t be sure that the rebuild from a disaster wouldn't result in a greater utilisation rate of resources, but nor can we be sure that it wouldn't result in a lower rate. The best guess, however, would be that rebuilds would be unrelated to whatever it is that results in utilisation rates of less than 100%, and so would have no effect.

Broken Windows, Part I: Measured GDP Versus Welfare

Shamubeel posted here on Monday on whether natural disasters can be beneficial for an economy. In the comments, Miguel Sanchez and I discussed a bit whether economists are too quick to shout “broken windows fallacy” in such cases. There are a couple of interesting issues here, each of which is worth a separate post. 

Miguel points to this paper from the BIS (with a great title up to the colon, pity they felt obliged to add the post-colon clarification). The paper makes the claim that insured events, while not necessarily beneficial are “inconsequential in terms of foregone (sic) output”. A quick skim of the paper suggests that there are two separate aspects to this result. There can be a degree of over-insurance when a natural disaster destroys productive capital, since replacing that capital will typically result in newer and possibly more advanced capital. If the insurance liability falls outside of the region (for instance, as a result of reinsurance), then this improvement to the capital stock will have been financed from outside the region, and it is easy to see that this can generate a situation where a disaster leads to greater output (naturally, to be weighed against any direct human costs of the disaster). A fair amount of the insurance liability in New Zealand, however, fell inside New Zealand. In this case, the resulting improvement in the capital stock can still lead to an increase in the discounted flow of current and future GDP, but only because of a flaw in the way GDP is measured, and not because of any actual benefit.

To explain, consider how intermediate goods are treated in the measurement of GDP. If a household buys foodstuffs to make meals, the expenditure on that food is considered a final good and measured in GDP. If a restaurant buys those same ingredients, however, to prepare meals for customers, the sale of the meals is measured in GDP, but the expenditure on ingredients is not, as their value is already included in the price of the meal. To do otherwise would be double counting. Let’s imagine that, contrary to this normal practice, we were to change the definition of GDP and count both the food sold to restaurants and the meals sold to customers in GDP. In that world, if there was a preference shift and people chose to eat out more, we would see a big increase in measured GDP, but not one that reflected a comparable increase in welfare. Even worse, imagine that the government, under pressure to improve the data on GDP growth were to pass a law requiring people to eat in restaurants rather than at home. Measured GDP would have grown, but welfare would have fallen as people were forced to spend their income in ways different from what they would like.

This is obviously silly, and we would never make such a change to the way GDP is measured. It is, however, exactly analogous to the way we treat investment in GDP. Just as people can choose whether to spend their income on ingredients or eating out, based on relative costs and their own preferences, people can choose whether to consume to today, or save and consume in the future, with the interest they earn from their saving derived in large part from the return that can be obtained from the saving when used to invest. In other words, investment today is just an intermediate good that generates consumption in the future. By including investment in the measure of GDP today and then the flow of output from that investment in the measure of GDP in the future, we are double counting, just we would be if we counted both food sold to restaurants and the meals produced from it. And if a natural disaster leads to an increase in investment, funded not from outside, and not from a decrease in investment elsewhere, but from reduced consumption by those holding the insurance liability, then the flow of measured GDP will rise, but only because of the increased double counting not because of any increase in welfare, just as in the fanciful case where the government required eating out. As best I can see, the result presented by the authors of the BIS paper  rests on this double counting convention. 

I will follow up on Miguel's second point tomorrow. 

Earthquake-prone buildings

Owners of earthquake-prone buildings now have a bit more time to bring them up to spec. The owners are mad because they say it isn't long enough; people who experienced Christchurch are mad because buildings will still fall on people and kill them in another quake. They could both be right.

It is perfectly plausible that there are buildings that need never be compelled to be brought up to 33% of new building code. Imagine a building in the middle of nowhere, with no nearby pedestrian traffic, and occupied only by those who know about the risk or who are well-advised about it by a sign at the doorway. There is no reason for the government there to get involved, or at least no reason that comes from economics. People can trade off cost and beauty against risk - that's allowed. And so a national rule that forces the owner of such a building to make costly investments to bring it up to code imposes cost in excess of benefit. The owner either will sink money into the building where it isn't warranted, or he will demolish the building that he otherwise would prefer to keep.

On the other hand, imagine a building in downtown Wellington with an unreinforced masonry facade. Everyone in the building knows about the risk and accepts it in exchange for lower rental rates or enhanced amenities on other margins. And that's all fine. But passers-by on the sidewalk and buses driving by on the street have uncompensated risk forced upon them. While the owner will there rightly claim that it does not pass his cost-benefit analysis quickly to bring the building up to 33% of code, he is not accounting for the costs he is imposing, probabilistically, on every passer by. It can easily be the case that, when accounting for the risk of death he is imposing on each person walking past his building, upgrading the building or demolishing it would pass cost-benefit. But he does not care about the costs imposed on others. The new rule is too lax in this case.

What then is an optimal rule? We'd need some way of accounting for the true risk that a building imposes. That risk depends not only on structural features of the building but also on the building's surroundings. And it would be pretty hard for central government to be able to come up with a clean rule. As we saw in Christchurch after the September quake, City Council had a rule in place requiring the closure of footpaths adjacent to risky buildings; Council interpreted the rule in perverse ways. Instead of blocking busy Colombo Street, Council decided that the engineers must have meant that 605-613 Colombo imposed risk instead on tiny alleyway beside the building. And then the building fell on a bus and killed a bunch of people and left Ann Brower to work out the series of spectacular regulatory failures that led to her being the only survivor on that bus.

There's an easier way. Honestly, we do not know when another quake will come or which buildings will collapse. Engineers can put up widely varying assessments of the true structural risk imposed by a building. What do we do when faced with this kind of uncertainty? Impose a liability rule. Instead of giving building owners 15-20 years to get their buildings up to 33% of the new building code, give them five years to get an engineering assessment, to put a safety letter grade prominently at the door, and to get liability insurance. At the end of the five year period, have every building owner liable for damages for every person killed or injured if their building falls down on passers-by. There should not be liability for deaths and injuries incurred by persons inside the building: we can and do voluntarily assume some risks, and we should not prevent people from taking on those kinds of risks. But if your building falls down and squishes a bus, you should be liable for the deaths of each of the people inside of that bus.

The Ministry of Transport currently sets the Value of a Statistical Life in New Zealand at $3.77 million. That's arguably too low, but it's a great benchmark: arguing about $3.77 million versus the $5 million or so you'd get from a back-of-the-envelope application of revealed-preference measures from the United States to New Zealand, accounting for the income elasticity of safety preferences and differences in income across the two countries is second order. First order is getting a consistent benchmark across different regulatory and liability sectors.

A building owner potentially liable for $3.77 million in damages paid to the estates of those who his building kills will adequately take their interests into account in deciding whether to fix up his building. It would not be that hard to require that building owners carry insurance sufficient for paying such liability claims, or to prove assets sufficient for covering the potential liability. If you've got a building in the middle of nowhere with no passers-by, your insurance premiums will be very small. You then will make the optimal choice and not upgrade your building. If you've got a brick-facade building in downtown Wellington, you'll have to weigh up the costs of insurance against the cost of fixing the place up.

Right now, we are in the worst of all possible worlds. Building owners face neither liability for the risk their buildings impose on those outside their buildings, nor any sufficient regulatory regime to ensure that owners are making appropriate investments in ensuring that their buildings do not impose excessive risk on passers-by. This is why Wellington scares the hell out of me. It's pretty, and I love seeing the old buildings that we no longer have, but they terrify me. I have absolutely no confidence that even really rather dodgy buildings are getting the attention they deserve.

Were the Government to have any interest in implementing a regime such as that described above, I'd recommend one further change. Flip the heritage building regulations around such that heritage boards have zero regulatory power but instead get an annual budget. Owners of risky heritage buildings should be free to demolish them if that's what make sense, given the risk they impose and the cost of upgrading them. Heritage boards' main role should be the payment of annual stipends to owners of heritage buildings for the provision of heritage amenities. Give them a generous budget, funded partially by local Council, partially by central government, and with ample provision for voluntary donation from the public. Let them decide, within that budget, where they can do best by spending money. And then just let go of the rest.

I will absolutely hate saying "I freaking told you so" after Wellington gets a big quake in which unreinforced masonry winds up killing a bunch of people needlessly.

And, in anticipation of the likely critique: yes, I am here absolving building owners from liability for those who chose to be inside their buildings. But current policy absolves them of that liability for those both inside and outside.

Previously:

• In praise of liability
• Worst of both worlds
• VSL and earthquakes
• Heritage preservation

Disincentives

My but CERA and CCDU are building a big bucket of bad incentives here. From the front page of yesterday's Christchurch Mail, unfortunately unlinkable.

HIGH STREET business owners Nicky and Joe Arts have watched their livelihood slowly die in front of them.

Almost three years on from the first earthquake, their heritage shopfront and factory remain suspended in time, as if the February 2011 earthquake were only yesterday.

A year ago, they were told their business was scheduled to become part of the Southern Frame in the central city blueprint. Since that first notification, they have not been told anything further.

They own one of many titles dividing up the 1905 heritage Duncan’s Building into shopfronts. Arts the Printers and Card Makers has been a family business since the 1960s.

After three years’ fighting to save the building, the street and their business, they say they feel like broken records.

‘‘It’s basically a nightmare for us,’’ Joe said. ‘‘ But it wasn’t the earthquakes that were nightmares, it was what came after.’’

Their frustration with the Government-run clean-up and rebuild is at tipping point.

Having been locked out of their business for two years by Cera, they have lost a lot of their customers.

While much of High St is now open and accessible, the block between Tuam and St Asaph St remains closed off. Parts of their neighbour’s shopfronts remain on the street.

‘‘We’ve become very angry these last few years,’’ Nicky said. ‘‘ What’s frustrating is the complete lack of progress.’’

Attempts to get any information out of Cera have simply fallen on deaf ears.

The owners of the adjoining shopfronts in the same building have contributed nothing to try to prop the building up.

One of them is uninsured, and the other has little hope of recovering insurance payouts.

The Arts repaired the two adjoining walls to save their shop.

‘‘We went into massive debt to stabilise those brick walls, without either of them paying a sodding cent,’’ Nicky said.

Between the September and February earthquakes, the Arts had more than $150,000 of reinforcing steel installed, meaning they now meet 73 per cent of the building code.

However, because they adjoin unstable shopfronts, they have very little hope of opening theirs.

‘‘In hindsight, we’d have been better off not to do it. We could have just walked away, but it did save lives,’’ Joe said.

Nicky is simply anxious to get some answers. She does not believe a Government offer would allow them to walk away without significant financial burden.

‘‘Cera and CCDU just do not know what they’re doing,’’ she said. ‘‘We just want to know, are they going to purchase us for the frame or not? If yes, get on with it . . . If not, hurry up and open the street. For God’s sake, they need to make a decision.’’

Does CERA really want everyone in Wellington to get the idea that it's better to make zero investments in their heritage buildings? Because that is what they're doing.

If you own a yellow-stickered Wellington building that's next door to another yellow-stickered building, you can invest in making the property safe and save lives. But if the neighbour doesn't, then you won't be allowed back in the building for three years after a quake and you will probably be bankrupted because of your investment in making the building safe. Is this REALLY the lesson that CERA wants Wellington to take? Really?

It's been darn near three years. "Oh it's complicated and these things take time" starts wearing awfully thin.

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.

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.

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...

Excuses

It's been two years. And Christchurch insurers might just start getting around to sorting out peoples' claims.

The Insurance Council says insurers are about to ramp up the earthquake recovery process in Christchurch.

About 70% of residential insurance claims from the 2011 February earthquake, requiring major repairs or a rebuild, still need to be dealt with.

Insurance Council chief executive Tim Grafton said insurers have been able to start dealing with a majority of claims only in the last six months.

He said the hold-up was due to technical land damage assessments being available just nine months ago and ongoing earthquakes.

A progress report issued on Wednesday shows insurers have distributed $6.7 billion in commercial and residential claims in Canterbury.

Some insurers have set deadlines which will see most homes rebuilt or repaired by the end of 2015.

I'm calling BS. Sure, there are some major repairs that couldn't be undertaken without a land assessment, and others where the risk of ongoing aftershocks meant it wasn't worth starting out. But that's hardly been the binding constraint in at least a few cases.

We were insured with AMI before the earthquakes, now Southern Response.* We filed a claim with them immediately after the February 2011 event for damage to sidewalks, driveway, a wall and the pool. The kind of stuff that doesn't require anything tough to sort out: re-set the stone wall by the driveway, dig out the sidewalk where it's cracked and heaved up 4 inches, remove cracked cement paths and re-pour (or repair), re-do the swimming pool liner, severely twisted in the quake, and seal up some cracks in the driveway.

All of these count as "out-of-scope" claims - things not covered by EQC. No complicated "what part belongs to EQC, what part belongs to the private insurer". And no complicated land stuff to deal with.

When last I talked with Southern Response in October 2012, they said somebody would come to see me within the next two years.

If it takes two to four years to sort out repairs after an insured event, are you running an insurance company or a confidence scam?

We've not been on the phone hounding them every day which seems the only way to get any claim progressed through the system. The stuff we need done is pretty minor in the grand scheme of things and we don't want to displace people who have holes in their roofs. But there is absolutely positively zero chance that anything involving our claim is held up due to technical land assessments and ongoing aftershocks. They've just put everything out-of-scope to the back of the queue while dealing with the claims where they're having to sort stuff out with EQC. Fair enough (although they would have done better to hire more staff to process things more quickly).

But if everything were held up because of land assessments and aftershocks, they would have sorted out the simple stuff where that wasn't an issue and they haven't. I can't tell if it's incompetence, if they're deliberately delaying hoping that people give up, or if they're managing their cash flow.

On the positive side, AMI / Southern Response dealt quickly and reasonably with our claim for rental coverage when we spent a bit over a month in Wigram after the February quake.

Insurance in Christchurch feels like a huge scam. Minor stuff like dinging your car - that's all fine. But any serious systemic shock will always wind up bringing changes in government regs around building codes and the like that make eminently unclear just what was insured and tie things up in the courts for a couple years. I can sympathise with the insurers on some of this: they weren't writing policies on the risk of Council requiring more expensive building methods. And I like that they're consequently moving to capped total value contracts rather than full replacement cover - it should reduce, but not eliminate, post-event shenanigans. But even where that's completely not an issue, like at our place, they have utterly failed to get their act together.

Update: our EQC opt-out case sits where it has since before Christmas... waiting for EQC to sign off on our builder's costings. But at least we've had our meeting at the house with EQC and the builder.

* Quake claims are being dealt with by Southern Response, spun out of AMI when AMI was sold on to IAG.

Regional heterogeneity

You can hide a lot in an aggregate.

David Farrar rightly notes that the recent CERA / Nielsen survey weighted survey responses by district populations across Christchurch City, Greater Christchurch, Selwyn and Waimakiriri. So some reports suggesting the report masked things by weighting each of Christchurch, Selwyn and Waimak equally were wrong.

But there's a potentially much bigger masking of heterogeneity.

After the earthquakes, Christchurch turned quickly into three cities, as Peter Hyde put it:

When we got power back on a week after the February earthquake, I sent out an electronic plea for more direct support and attention for the worst-affected suburbs of Christchurch.

This was in response to the "three cities" I saw developing - Rescue City in the photogenicly-ruined CBD, Shower City in the areas which had their services largely intact, and Refugee City where tens of thousands huddled amongst broken houses, rockfall and liquefaction.

When we bugged out from South Brighton for a house in Wigram on the Friday morning after the quake, it was like moving to another world. There was power. There were supermarkets. People were watering their lawns despite the sewerage system being in disarray. It was as though nothing had ever happened, barring a few chimneys. A lot of the East remains a rather thorough mess two years later.

I remember answering the CERA survey. I don't think I counted as a satisfied customer.

If you look at Appendix 2, every respondent was mailed the survey along with a username and unique survey code. So each response was tied to an address, unless they chose to blind the back-end so they wouldn't be able to tie respondents to addresses. They also had a question in there asking what address you were at prior to 4 September if you'd moved since the quake. That question says

"Please note: this information will only be used to see if there are differences between different areas. Your individual information will not be looked at separately."

Maybe they only ever wanted to aggregate up to Christchurch City, Greater Christchurch, Selwyn District, Waimakariri District level. But the data should be there for doing a within-Christchurch disaggregation. I'd be very surprised if there were not exceptionally strong heterogeneity between Shower City and Refugee City. Maybe nobody ever ran the borough-level analysis. Or maybe not - I really don't know.

If Lianne Dalziel is on her game, she'll already have an OIA request in for the data aggregated by borough. And if it shows that residents in the East - those most affected by the quakes - have reported utter dissatisfaction with quality of life, quality of government response, and pretty much everything else, I'd be pretty surprised if she weren't very vocal about it.

Happy two year anniversary, #eqnz.

An offer you can't refuse

Earthquakes can cause uninsurable losses. In Christchurch, a decent proportion of those losses are being borne by those who owned vacant sections at the time of the Canterbury earthquakes. When you purchase insurance on a house, it's coupled with a mandatory payment to EQC, who provide coverage against earthquakes, landslips, floods and the like, up to $100,000 per event. But EQC doesn't cover vacant sections, and figuring out arrangements with an insurance company for getting insurance on vacant land didn't seem obvious to most owners of vacant sections.*

In theory, this shouldn't matter a ton. Because there's a potential for an uninsured loss, everyone pays a bit less for the property because of it and takes their risks. 

But suppose that, after the earthquake, the government comes in and tells you that your land is unremediable even if you think otherwise. They offer to pay you half its value as compensation. And there are hints that you'll be compelled to sell on worse terms if you refuse the offer. 

Suppose that you decided to hold out: you don't want to take the offer and want to live on your land. Council would likely stop providing services to the property even if you offered to pay more for service provision, but you could always dig a well, put in a septic tank, hire a rubbish service, and put in some solar panels: off-grid in-town. But it was a vacant section: it may be impossible to get Council permission to build anything there, even if you build a one-story wooden place on screw piles that go down a few dozen meters and pay for extensive land strengthening. But suppose you get that sorted out, somehow. Council still could forbid access to the land: the street by your house will be reclaimed for some other purpose, all the neighbours have sold out, and you may be forbidden from using government-owned land for an access lane (or from purchasing an easement for such use). If the neighbors across the street are on TC-3 land [allowed to live there, but any new building has to be on much stronger foundations], it's harder for Council to force you out by preventing access because the road will still be in use. But it seems awfully likely that they'd simply refuse to allow you to build on it, even if you had a sound engineering design. Council doesn't like things that don't fit the plan.

The earthquake imposed a lot of damage on the land. But much of the subsequent loss is consequent to policy decisions. If you don't take the red zone offer, you may well be stuck with a piece of land that policy has made unusable. And because of that risk, and the veiled threats of expropriation if you don't take the red zone offer, it's not really an offer that can be refused.

CERA maintains a land status map. A static image is below. The red zones are the ones where the government says that land repair would be prolonged and uneconomic. This is different from the downtown Red Zone where access remains forbidden due to demolition work.

The government has never quite said what it's planning on doing with the red-zoned properties it acquires. There's been talk of a park running along the banks of the Avon; it would be a wonderful amenity if provided. But I'm not sure that anyone quite believes that reasonable parts of the red zone won't eventually be fixed up and sold back for development, albeit likely with substantial constraints on foundation types and construction method. The potential value of the land if fixed up and sold off could remain fairly high, even with the LIM restrictions; that locked-up value will be awfully tempting for future governments. 

Imagine that you bought a section for your retirement home. You followed all the rules, but you didn't think to get insurance on a vacant section. You are happy to bear your own quake-losses. Post-quake, you're red-zoned and the government offers you half the land's value. You'd still prefer to stay on the section and build a redesigned house. The neighbours across the street are TC-3, so the street will continue to exist and services aren't hard. But you're very likely not allowed to do it with your own property that you still own. And then Aucklanders insult you because you didn't have insurance on a vacant section and begrudge the half-value payment offered by the government on terms that effectively cannot be refused. 

I see little compelling reason that government should be insurer of last resort for those who failed to get insurance. But what proportion of the subsequent losses have really been due to changes in permitted land use rather than the direct effects of the earthquake? The half-value offer would be more than fair if the owners could still have the reversion option of making do on their own. But what's going on feels an awful lot more like forced purchase at well below the owners' willingness to accept.

And, if the land really is unbuildable, then it's costless to offer those selling first option to repurchase should the government ever decide that the land really could be sold - at the price at which they were compelled to sell to the government plus their apportioned share of the improvements. This still has problems: suppose that you're on the side of the street used as park while those on the other side of the street get the option to repurchase and subsequently on-sell at a profit. Perhaps a more clever scheme would then pay a dividend later on based on average comparable price increases. It's not an easy thing to set up, but we're really imposing a pretty substantial potential taking on many owners of vacant sections.

Take-away note for the Aucklanders: this isn't simply the government coming in and compensating people who hadn't bought insurance. This is the government coming in, telling you your land is unusable because they have deemed it to be so (the red zone has incurred substantial damage - true, but you're also kinda forbidden from making it usable at your own cost), and telling you that they'll give you half its prior value. Sure, there's been a real reduction in the land's value because of the earthquakes. And sure, some of those wanting full compensation are likely just rent-seeking: where the real reduction in land value is more than half of its prior assessed value. But there are some folks who really seem to be undergoing a forced and poorly compensated taking here.

* Newspaper reports keep claiming it was impossible, but I see conflicting reports from Kiwiblog commenters who claim to have sorted out such insurance on their own.

Regime uncertainty: Christchurch edition (continued)

Suppose you owned an earthquake-damaged Christchurch hotel. Suppose further that you're trying to decide whether to rebuild in place, rebuild elsewhere in Christchurch, or take the money and run. If you're inclined to stay here, do you rebuild now or later?

Hotels like being next to convention centres. The big central plan has a big convention centre in it. But nobody has said anything about who will own it or quite who will pay for it. In the absence of concrete funding arrangements, it would be pretty hard for our hypothetical hotelier to know what to do:

• Rebuild now and hope that the Convention Centre goes ahead in the spot they've designated?
• But what if nobody agrees to stump up the money and they go ahead with a smaller center someplace else?
• And what if the somewhere else is just where you've already started building your hotel and compulsory purchase is an option?
• You'll get some rents in the interval before the other players move - there seem to be serious capacity constraints in accommodation. But the risks are pretty big too. 
• Rebuild later when you can be certain about whether the Convention Centre goes ahead?
• You lose out on the rents you could have had in the interval, but hotels last a long time and getting the location wrong can be costly in the longer term. 

Central and city government dithering over the convention centre can be pretty costly. It isn't hard to imagine worlds where it's better to have certainty that it won't go ahead than uncertainty for another couple of years, even if we assume that convention centres are a good thing for governments to spend money on. 

Previously:

• What am I missing? 
• SkyCity
• The Plan
• Anchor Projects
• Poison Pill
• Christchurch Costs
• Long Term Financing

One block of Estuary Road

We're a month from the two year anniversary of the February 2011 earthquake. SCIRT, the road infrastructure repair agency, endeavors to repair each street in one go, when it's able to. Here is the story of our 500-metre block of Estuary Road since February 2011. Some roads on the east side of town are far worse; others have fared better.

April 2011, work started for replacing a pumping station. We were very glad to be able to use our toilets again.

They closed up the roads and traffic was back to normal. For about three weeks if I recall correctly. Then, they opened everything up again to replace the sewer line. We thought they were done, then they opened it up again because they'd installed at the incorrect depth. The project ran from early July 2011 until June 2012: they were just shy of the one-year mark. Our road enjoyed very limited access for the duration. For a good part of that winter, it was a one-way cul-de-sac with a Jersey wall at the end. We raced toy wooden boats in the sump water that ran along the side of the road.

Work began again late November 2012 to replace the storm water drains. I'm sure there's some good reason why this wasn't done in the prior round. They closed the road up for the Christmas break, then opened it up again to continue the job after Christmas, for which I thank them. The notice here says work began 7 January; that was when work resumed after a month of works before Christmas. I'm not sure why the pre-Christmas works are not noted. They hope to be done late March.

On a rough count, this five hundred metre section of road has been in normal service for about 8 of the last 24 months. We are grateful that at all times we have been able to access our driveway. But we also wonder whether one guy with a single shovel, and a bit of forward planning and determination (and maybe a hoist to get the heavier pipes in and out), couldn't have had the whole thing finished by now.

Repairs to the Bridge Street Bridge began in August 2012 - shortly after repairs to Estuary Road took a hiatus. The bridge's current one-way flow adds 10 minutes to our evening commute. It will be like this for a year. Pages Road through Bexley, the recommended alternative as it provides the next river crossing to the north, is in very poor shape and is also under ongoing repair. When repairs to Bridge Street Bridge began, simultaneous work on Pages Road made for a minor disaster. That has eased, but repair work on Pages still seems to be necessary. I had expected that more might have been done to make this road serviceable before a detour doubled its traffic load.

SCIRT rejected alternatives of:

1. One-way outbound in the morning; one-way inbound in the afternoon (sensibly - it's an evacuation route for tsunami).
2. Placing temporary traffic lights so that cars could take turns. I'm sure they had a good reason for it, but I have not seen it adequately explained. This would be especially appropriate on evenings and weekends when traffic is exceedingly unlikely to back up to Dyer's Road.

The diverted commute up Pages Road through Bexley continues to take us past abandoned, boarded up, and heavily tagged former homes, and some that are still occupied. The old retirement apartments on Anzac Drive are gutted and exceptionally heavily tagged. I hope that they are soon demolished. Eyesores appear in the east faster than they are torn down. We stopped on our way home a fortnight ago to call the fire department about a (hopefully abandoned) house on Admiral's Way where flames were licking through the roof. I expect that the gutted shell will be there for a while. 

The kid's play fort at the South Brighton park that was hit by arson last Christmas has recently been replaced by a Flying Fox. I am glad they replaced that part of the former park. Large sections of the park remain fenced off due to trees in danger of falling over. A pleasant walking trail through it has re-opened; the pier remains fenced off. The community centre that once housed the neighbourhood toy library is currently under demolition. There's a big sign warning against site entry because of asbestos. There are no noticeable tarps covering anything on the site; dust blows, depending on the wind, into the playground of the South Brighton Elementary School, across the street from our house. I trust that the asbestos is contained, or that medical technology will have progressed such that new lungs can be printed on demand in thirty years' time. South Brighton Elementary School is due for merger with Central New Brighton School. We are placing our children at Ilam school, right next door to the University, to add 45 minutes to my working day rather than to avoid the merger process. But I fear that if consolidation closes the facility across the street, the buildings will be abandoned and left to ruin rather than converted to parkland or put to other purpose like so much else in the East.

Quality of life on the east side of town remains in need of improvement. Aucklanders weary of Christchurch whinging are invited to rent a car in Christchurch and drive the neighbourhood around Kia Ora St.

No such problems exist near the University; students considering Canterbury can effectively ignore that the east side of town exists.

Embedded fragility

Christchurch could have a sister-city in New York. Richard Kimball writes in the Wall Street Journal of his Kafkaesque journey through the regulations that are keeping him from fixing his home, damaged by Hurricane Sandy.

Fixing his house requires getting building permits. Getting a building permit requires getting the house up to code, which can involve simultaneously meeting a requirement to elevate the house above flood level while staying beneath a mandated total height limit that may be below the level of the house plus elevation. Kimball misses the obvious solution of lowering all his ceilings by a foot, I suppose.

Other problems?

A woman in our neighborhood has two adjoining properties, with a house and a cottage. She rents the house and lives in the cottage. For 29 years she has paid taxes on both. The cottage was severely damaged but she can't tear it down and rebuild because Zoning says the plots are not zoned for two structures, never mind that for 29 years two property-tax payments were gladly accepted.

Kafka would have liked FEMA, too. We've met plenty of its agents. Every one we've encountered has been polite and oozing with sympathy. Even the lady who reduced my wife to tears was nice. The issue was my wife's proof of income. We sent our tax return to FEMA, but that wasn't good enough. They wanted pay stubs. My wife works as a freelance writer and editor. She doesn't get a pay stub. Which apparently makes her a nonperson to this government agency.

In "The Road to Serfdom," Friedrich Hayek noted that "the power which a multiple millionaire, who may be my neighbor and perhaps my employer, has over me is very much less than that which the smallest functionnaire possesses who wields the coercive power of the state on whose discretion it depends whether and how I am to be allowed to live or to work."

Urban planning regulations can easily embed systemic fragility. In normal times, maybe you could argue that the amenities they provide are worth the cost. I'd disagree, but valuation of those amenities varies. But when something bad happens, whether earthquake or hurricane, the last thing you need are an army of compliance officers ensuring that nobody can build new houses unless things go through years-long subdivision approval processes, nobody can fix their houses until they get sign-off from some Council office whose workload will have gone up by a few orders of magnitude post-disaster, or that nobody can build a downstairs apartment into their house to help ease some of the strong post-disaster housing pressures.*

Kimball could perhaps commiserate over beer with David Haywood.

* As best I can tell, Christchurch Council's only reason for banning this one is that it's banned. Pre-quake, they made it impossible because of worries about disamenity effects on neighbours. And maybe - maybe - you could have made a case for the reg under pre-quake conditions. But it seems ridiculously unlikely that aggregate disamenity effects of this sort would outweigh the benefits provided in a post-quake, housing scarcity world. Rents are up more than 25% over last year. And last year wasn't cheap either. The pre-quake justification for the rule was debatable; I have a hard time seeing it as the basis for Council's continued intransigence. More likely, rich homeowners near the University who have the ear of Council mandarins lobby them for fear that their neighbours build in flats to accommodate more students. If that's all it is, just ban the flats near the University and allow it everywhere else in town. And for freaking shame on those who have engaged in such lobbying at the expense of those on the east side of town in need of housing.