Housing: what would the market do?

My post last week about the Wellington City Council’s consultation meeting, on its proposals to amend the district plan to allow more medium-density housing in Island Bay, attracted some attention and a range of interesting and thoughtful comments.  Readers seem to have taken from the post what they wanted (those opposed to more density focused on the critical comments about the Council’s case, those in favour on the critical comments on the residents and the planner mentality that dominates the Council).   Perhaps that reflects my own ambivalence.  In general, I favour allowing greater flexibility to property owners, but I don’t think we  would see much pressure for the sorts of development that concerns many residents, at least beyond the immediate fringes of the central city (Thorndon, Mt Victoria, Kelburn etc) if councils did not continually and actively resist the expansion of the physical footprint of cities.

It perhaps also reflected the fact that I’m not overly affected personally.  We are probably 12 minutes walk from the “town centre”, not the rather arbitrarily-chosen 5 or 10 that the Council focused on.  If a slightly largely population increased the chances of the convenient neighbourhood supermarket surviving into the years of my dotage, so much the better.   And it would be almost impossible for any conceivable development to materially impair either our sun or our views.

However, there is no point pretending that the sentiments of residents are just illegitimate or misguided.  Or that what happens elsewhere in their neighbourhood cannot impinge on their wellbeing. Nor do I favour riding roughshod over the concerns –  in fact, on a city or countrywide basis it is just not going to happen.  As I’ve pointed out previously, I’m not aware of any examples anywhere where tight land use restrictions, once put in place, have been substantially unwound.

Perhaps as importantly, the  private marketplace itself has mechanisms to deal with the sort of issues and concerns that drive the vocal residents of Island Bay or Khandallah, at least in respect of new developments.

As the Productivity Commission’s recent land supply report noted

Restrictive covenants in new subdivisions are a very common feature of property developments in New Zealand.  The mayor of one fast-growing New Zealand city told the Commission that all subdivisions in their area were subject to detailed covenants.

And according to one source I looked at, around 55 million Americans now live in “homeowner association” complexes –  some mix of apartment blocks and suburban developments/gated communities etc.    These arrangements  presumably exist because they meet a demand, and hence enable developments to occur more profitably than otherwise.  They add value to the people’s homes.    They are not just a legacy of centuries gone by, but have become much much more popular in the last few decades (at a time when local authority planning restrictions have also become more onerous).

I’m no expert in these sorts of arrangements.  As the Commission notes, in some cases they just last until all the homes in a particular development have been built (ie they govern what is first put on the section, and nothing subsequent to that), but many others are permanent.  The rules are often very detailed –  the example the Commission cites particularly caught my eye when it specified the details of the size and construction of the letterbox.  The focus is clearly intended to be on collective action provisions that limit the possibility that some future action of a neighbour might impair the value of my property.

I wouldn’t want to live in such a tightly restricted subdivision myself.  As one succinct summary put it, they aren’t the place for people who don’t like being told what to do.

The Productivity Commission seemed rather ambivalent about these covenants.  They had three “findings” and one “recommendation”.  One was arguably just a factual statement

Covenants established in new subdivisions are increasingly common and impose detailed restrictions on purchasers.

although that could easily have been reworded to include the phrase “provide considerable protections, and impose detailed restrictions on, purchasers”.  That is, after all, what contracts do in all areas of life.

The Commission finds that

regulatory controls on covenants should reflect both the costs and benefits of covenants

which is fair enough perhaps, but fails to recognise that these are already a market solution to a revealed demand.  Market contracts might reasonably be assumed to have internalised the costs and benefits already.  The case for regulation isn’t really made.

The Commission also notes that

Covenants reduce the flexibility of land use now and in the future, and increase the cost of constructing dwellings.

Of course, the first part of the sentence is true, but really the point of these voluntary contracts.  Voluntary contracts exist to enhance welfare.  Flexibility is not an unalloyed good.  The second point is unsupported in the report –  all it seems to amount to is that buyer and sellers have voluntarily agreed that, as a condition of buying in that development, they will not use certain lower end building materials. Why is that a public policy issue?  It does not detract from the ability of other people to build using those materials and technologies.  And each covenanted development presumably has to survive the market test, in competition with other covenanted developments, and standalone dwellings (new or existing).

Consistent with the uneasiness that pervades the discussion, the Commission then recommends (page 118) that

The Ministries of Justice and of Business, Innovation, and Employment should review the legislative provisions governing covenants with a view to:

  • reducing the proportion of landowners required to agree to covenant changes from all to a super-majority; and
  • introducing a statutory sunset period on restrictive covenants of 25-30 years.
I don’t have a particular problem with super-majorities (they are not uncommon in other collective action areas, eg bondholders dealing with distressed debtor).  But, equally, nothing stops such contracts developing voluntarily, and it isn’t clear what the Commission sees the problem as being.  Nor is it clear how the Commission would minimise the risk of abuses of minorities.  Perhaps, at minimum, any super-majority would have to be prepared to offer to purchase the property of an aggrieved minority at a price which reflected the assessed benefit of the changed provisions to the majority.
More egregious is the suggestion of mandatory sunset clauses, effectively banning private property owners from voluntary collective action solutions for more than, say, 25 or 30 years (and as property will trade on the basis of expected future use, even the value of a 25 year covenant will start to decay pretty quickly after, say, 15 years or so).  Again, what is the public policy interest that should override the freedom of homeowners to enter voluntarily into contracts?   The Commission cites one jurisdiction in which the term of covenants is statutorily limited (Ontario, at 40 years), and one example (Massachusetts) where after 30 years covenants can be renewed for 20 years at a time.  But it appears that the rest of the 55 million Americans living in such developments are free to establish permanent covenants, which can generally only be dissolved by unanimous agreement.

The Productivity Commission is uneasy about these increasingly widespread private contracts.  But I wonder if we shouldn’t think about moving in the opposite direction.  Why not facilitate covenants of a sort in existing neighbourhoods?  Is there any obvious reason why, say 1000 households in Island Bay or Khandallah should not be able to  mutually agree that only, say, the current planning rules will apply to their sections in perpetuity, with perhaps a 75 per cent majority required to change those rules in future?  I can’t think of one.  I guess one can argue that the developers, and purchasers, in 1890 should have envisaged these issues and established the covenants then.  But, actually, the then borough had only 600 rateable properties, and if they have given the matter any thought the residents might reasonably have assumed they had effective control through the ballot box.    When Councils pick off one suburb at a time –  as opposed, say, to amending the district plan to allow more medium-density housing everywhere in the city –  effective control through the ballot box is much attenuated.  Which suburb has the “misfortune” (from the aggrieved residents’ perspective) to be chosen for medium-density housing, is no longer a matter of collective agreement among affected residents, but of who can lobby the most effectively and  shift the issue onto some other suburb.  That isn’t the market at work.

I’m not sure what the current legal position is.  Perhaps local property owners could already put in place such restrictive covenants now, with the consent of every one of those involved?    But why not consider amending the relevant legislation to provide for a standard set of rules that a group of homeowners could voluntarily adopt, by say, a 90 per cent initial majority of those in the area concerned?    That would empower homeowners (you would presumably vote for change when the increased value of your land, under rules allowing more intensification outweighs the risks of loss of sun, views or the “changing character of the neighbourhood”).  And it would remove the arbitrariness that exists in the current law.  I’m not suggesting giving legal force to an ability to force your number to mow his or her lawns, or get rid of the gaudy letterbox, but it would enable communities to “protect” themselves (mutually agreeing to entrench existing planning laws for their own properties)  –  or to remove those protections themselves to take advantage of new opportunities –  at a level that existing planning legislation often attempts to do, until it doesn’t (ie until some distant planner or councillor suddenly decides it is time for change).

Perhaps the grand houses that once filled The Terrace might once have been subject to such covenants.  Such houses are probably not the best used of that land today.  Owners would be free to recognise that opportunity, but to do so collectively.

Half of me thinks this is a second-best suggestion, but so widespread are such covenants in private developments here and abroad that I’m not even sure that is true.

Of course, the quid pro quo for such an amendment –  which would, at the margin, probably slow any process of intensification of a particular neighbourhood that might otherwise take place –  would have to be legislative provisions that removed the  ability of councils to restrict the physical expansion of cities and towns.  If, say, all land was automatically zoned residential (in addition to any other approved uses it might have)  and, as a default, was able to be built on to a height of two storeys, there would be ample scope for population pressures –  themselves largely now the consequence of policy choices – to be met with new building on new sites.

From voters’ perspectives, such a bundle of changes look as though it ticks most boxes.  It allows much more new peripheral development more cheaply than occurs now [1].  That, in turn, would remove some of the artificial pressure for intensification  –  arising from councils directly, and from the market because councils restrict the physical expansion of cities.  And, at the same time, it recognises a right for local communities, at a much lower level than whole cities (or even whole wards), to collectively make decisions about the nature of future potential land use changes for their properties.  Since such contracts are increasingly widespread in new developments here and abroad, they seem to reflect real pressures that have real economic value to citizens as property owners.

There is no real, or necessary, tension between keeping housing affordable and allowing property owners to act collectively, in response to opportunities (costs and benefits) to make decisions as to how their land is able to be used.

[1] And, yes, pricing the infrastructure and transport connection issues still has to be resolved.