WCC approach to housing problems: hot-bedding

I think the imported chief executive of the Wellington City Council, Kevin Lavery –  he of non-transparent subsidies to Singapore Airlines, and the like – must have pushed “send” on an email to staff without checking just who he was sending it to.   My household just received two copies, on two different email addresses, of what looks a lot like a staff email.  Since we used those two email addresses to make our separate submissions last night on the Island Bay cycleway –  and the Council otherwise wouldn’t have one of the addresses –  it looks as though he sent his staff email to online responders to the cycleway proposals

Most of it looks harmless enough, although it was wryly amusing to note the self-congratulation about the Council’s Annual Report

Congratulations to everyone involved with our 2015/16 Annual Report, which received a silver medal at the Australasian Reporting Awards. The award is a reminder that the public documents we produce are not just about our performance as an organisation – they are also an opportunity to communicate effectively with our stakeholders.

When this is the same Council that simply refuses to comply with the Official Information Act, in its local government manifestation.   Self-promotion, rather than transparency, is rather more like the hallmark of the council.

But included in the email was a “Good Reads” section, with links to various articles on housing and cities related issues.    Perhaps next time he could make room for Brendon Harre’s interesting new piece on “Successful cities understand spatial economics”. Out of interest, I did click on one of the links, described this way

Some interesting ideas from outside of New Zealand at possible solutions to housing affordability issues. I like this because it looks, with a different lens, at the challenge of providing adequate, secure and affordable housing and suggestions for tackling them.

Sounded promising.

But I was somewhat taken aback by what I found, in an article championed by the chief executive of a Council that is keen on promoting Wellington as a cool, successful, and prosperous city.

The author –  a freelance writer in the US –  is writing about a report from something called the World Resources Institute, on housing options.  Not mind, housing policy options for advanced countries, but for

the global south (India, Africa, Asia, Latin America) where the lack of affordable, adequate and secure housing in cities is projected to grow the fastest.

We are told that

The paper spotlights three key challenge areas “to providing adequate, secure and affordable housing in the Global South,” as well as suggestions for tackling them. They include the growth of informal or substandard settlements (i.e., slums), policies and laws that push poorer residents out of the city, or to its fringes, and, interestingly, an overemphasis on home ownership.

The authors apparently favour skewing the tax system to “incentivise renting”.

It gets worse

Beyond the policy-side, however, it also looks at a number of creative rental models, from land leases and co-ops to lump-sum rentals, which are popular in a number of Asian countries, including Thailand, China and India. …… The paper also makes a case for a practice known as “hot bedding,” in which “a bed space in a shared room is rented for a specific number of hours to sleep, typically 7 to 10 hours.”

Hot-bedding………

In conclusion,

“Promoting a range of rental housing options expands opportunities for more renters while testing which types of rentals best meet local demand,” the authors conclude.

I’m all for flexibility, but does the chief executive of the Wellington City Council really think that “hot bedding” is an appropriate or desirable solution for the increasingly unaffordable Wellington housing market?   Is his vision of the city he temporarily serves now so diminished he regards the growth of slums as the sort of pragmatic idea his staff should be interested in, to fix the mess the Council itself has created?

To be clear, I’m sure Mr Lavery believes none of those things.  And perhaps they are reasonable and practical partial solutions in very poor but rapidly urbanising countries.  But what does it tell us about his mindset – and that of his political masters –  that this is the sort of stuff he is encouraging his staff to read?    Most New Zealanders –  most Wellingtonians –  want to own their place.  They don’t have much tolerance for imported bureuacrats who think that home ownership

in many economies just takes up too much mental bandwidth

They are just excuses for the decades-long failure by New Zealand central and local governments.

Free up the land use rules instead. There is plenty of land in greater Wellington, but owners simply aren’t encouraged, or even allowed, to use it.  And look for creative ways of allowing greater density where people would prefer that, but in ways that respect the interests of current owners.  Above all, look and sound as if you think Wellington might have a future as a first world city, in which residents –  present and future –  might be able to buy good quality housing at genuinely affordable prices.

But “hot-bedding”………I still can’t quite believe it.  But it was good of Mr Lavery to send his email to (presumably) the wrong list of recipients, and thus shed further light on the sort of mindset that prevails at council headquarters.

UPDATE: While I was typing that another email arrived

For those of you who’ve unexpectedly received an email from Wellington City Council – we apologise profusely! The message from our Chief Executive was meant to be a routine communication to Council staff but we’ve hit the wrong button and so it’s received a considerably wider audience. Hopefully it provides a positive, albeit unintended, glimpse inside the engine-room of the Council.

“Positive” –  I think not.

 

 

Blunders of our local government

Shortly after I began this blog, I wrote about a couple of books on government failure.  There was Why Government Fails So Often which had a US focus, and The Blunders of our Governments which had a UK focus.

The authors of the second book define a blunder as

as an episode in which a government adopts a specific course of action in order to achieve one or more objectives and, as a result largely or wholly of its own mistakes, either fails completely to achieve those objectives, or does achieve some or all of them but contrives at the same time to cause a significant amount of “collateral damage” in the form of unintended and undesired consequences….financial, human, political or some combination of all three.

Most of the specific episodes the authors wrote about were on quite a large scale.  But smaller debacles can be just as telling.   Take, for example, the Island Bay cycleway.

I was the among the hundreds of local residents who crammed into a local church last night for the latest round in what must surely be a case study in how not to do things.  Unless, that is, your purpose is to deliberately and repeatedly ignore the cleary-stated wishes and preferences of the most directly affected members of the public –  in this case, the residents of the suburb.

Some years ago, the Wellington City Council and its cycling (Island Bay resident) mayor kicked off an ambitious (to give it the most flattering possible description) plan to build a cycleway from the sea (Island Bay) to the city.  The cost would, we were told, be modest and the benefits considerable.

As most readers will know, Wellington is not a flat city.  And much of the territory the cycleway was supposed to go through included older suburbs with cramped housing, narrow streets, and no nice wide grassy verges.   Berhampore isn’t Grey Lynn.  It was never remotely likely that creating a cycleway the full length planned would be cheap or easy.  Probably not very sensible either, but set that observation to one side.

By contrast, the main road through Island Bay is flat and wide (at least by Wellington standards), lined with pohutakawa trees that help make it a pleasure to be around home at Christmas.  So, thought the Council enthusiasts and the cycling lobby group, lets start in Island Bay.  A cycleway might go nowhere, but at least we’ll have made a start: they’d show sceptics what could be done.  It should have bothered evidence-based policymakers, that (a) there that weren’t many cyclists, and (b) that over the decades there had been very few accidents.   In other words, not much case for doing anything at all.  The status quo seemed to be working well.  Not, of course, that that ever deterred a visionary with someone else’s money and no effective accountability.

The process that led to the cycleway being constructed a couple of years ago was deeply flawed.  There was no proper consultation with residents, and the Council simply barged ahead with their plan.  In the process, they spent around $1.7 million –  that was originally what the entire cycleway (sea to city) was planned to cost.   And thus we have today a bizarre cycleway.    There still aren’t many cyclists.  There are more accidents than there were.  And in the one potentially dangerous part of the road –  though recall, with few or no actual accidents over the years –  through the main shopping area, there is no cycleway at all.    Visibility is much worse than it was (especially turning from side streets. or getting out of driveways of houses on The Parade), and the designers coped with bus-stops by weaving the cycleway onto the footpath in places.    Dozens of car parks were removed –  and anyone who does find a parallel park has to remember (in this small part of the city alone) to look on the passenger side before opening the door, lest they open the door into the path of a (rare) cyclist.   It is an outcome that has almost nothing to commend it.

Most of all, most residents really don’t like it or want it.   The Residents Association last year organised a vote of residents.   It wasn’t perfect, but as these things go it was organised pretty well, the checking was pretty good, and the final result wasn’t even close.  On a pretty big turnout, there was overwhelming opposition  (80 per cent plus, if I recall correctly) to what the council had landed us with.

That prompted a rethink.  In a constructive spirit, the Residents Association and the Council agreed to work together in a consultative process on better options.  That was more than a year ago.   There was a series of public meetings and workshops, and then the council staff went away to consider.  In all this, the elected councillors seem to have been largely absent  –  as if the staff ran the council, not the councillors.

Last week. the council staff revealed four new options, and opened a short period of public consultation on those options.    When I picked up the newspaper and read the story, I was flabbergasted. I have a low opinion of the Wellington City Council, but even I wasn’t prepared for what I read:

  • four possible options, not one of which involved simply unwinding what was done a couple of years ago and putting The Parade back as it was,
  • the cheapest of these four options –  recall, to fix something that had already cost $1.7 million –  was anouther $4.1 million (others cost up to $6.2 million).

And having taken out 34 parking places when they put the cycleway in, the council bureaucrats now proposed to take out another 57 parking places – including, in three of the four options, removing more than half the public carparks currently available in the shopping centre.

It was incredible.

And thus there was a huge turnout to the public meeting last night, at which council staff and their engineers/architects attempted to make their case (burbling on about “urban design principles”, the priority of safety etc) and councillors rather lamely defended the process.  We’ll see what the overall tone of the submissions/votes is, but I think it is prety easy to predict that residents’ opinion will be overwhelmingly opposed to any of the four council options, and in favour of something that looks a lot like a simple reinstatement of the way things were until a couple of years ago.

The committee of the Residents’ Association, and representatives of the local business community, took the stage to denounce the council.    The president of the association –  who has been keen to work with the Council –  described the process as a travesty of democracy, noting further

Greco called the four sanctioned options an insult, and warned the removal of 57 car parks could economically ruin the suburb.

She said residents had been put in an untenable position by arrogant council officers.

They offered a fifth option, which they estimated –  using some of the council’s own numbers – could be put in place for well under $1 million.   Applause from the floor suggested that at least among those attending the meeting it would command a great deal of support.

Who knows how it will end.   Most councillors don’t live in Island Bay, and aren’t necessarily responsive to residents’ wishes.  It is easy for them simply to impose a Green/cycling agenda, at ratepayers’ expense.  Of our own two ward councillors, neither will be standing at the next local body election –  one is heading for Parliament in a rock-solid safe Labour seat, and the other is also running for Parliament, in Christchurch, and plans to move to Christchurch anyway. He appears more interested in his Green Party agenda than in the interests and preferences of residents.

There are roughly 8000 people in Island Bay.  The cheapest of the Council’s four options is another $4.1 million –  or around $500 per head.    I know that my family of five would much rather have the $2500.  In fact, if the Residents Association costings are roughly right, we could have our main street back, parking spaces and all, fewer accidents, easier driving, better visibility, and still save 80 per cent of that money.

Island Bay is at the end of the road.   Get to the end of our suburb and the next stop would be Antarctica.  There is no through traffic, so no obvious reason why people outside the suburb should have any say at all, especially when the clear preference of residents is the spend much less money (most would prefer none had been spent in the first place) than the Council bureaucrats want to spend.    The principle of subsidiarity – making decisions at the lowest level possible –  seems highly relevant here.  If the Council don’t trust expressions of public opinion so far, perhaps they could run a proper little referendum, restricted to Island Bay residents, and including the Residents’ Association option.  Ask people to rank the five options, use preferential voting, and see which option wins.    It seems highly likely that the cheapest option would win, and not just because it is cheapest but because it reflects the way most residents would prefer Island Bay to be.

But I guess there is an ideology to pursue and bureaus to build.  And even our notionally centre-right government is apparently committed to lavishing public money (our money) on cycleways, whether they are needed and wanted or not.    I’m still torn as to whether the cycleway is a blunder of our (local) government, or a deliberate arrogant strategy.  Even if the latter, I suspect it is destined to end up the former.  It will be a long time before residents –  not just here, but in much of the rest of Wellington looking on –  will trust councillors again.

In sort of, kind of, half-hearted partial defence of Wellington City Council

That isn’t a stance that comes naturally.   Wellington City Council wastes money with the best of them (convention centres, possible runway extension, bike stands outside our church, and so on –  they even use ratepayers’ money to help fund the New Zealand Initiative) and presides over land-use restrictions that deliver increasingly high house prices.  And then there are more localised gripes – but which have managed to get quite a bit of national coverage –  like the Island Bay cycleway.

It was built without adequate consultation, and after it was built an overwhelming majority of participants in a well-run survey of residents conducted by the Residents Association told the Council they didn’t like it and wanted it gone.  There was never an obvious reason for it in the first place –  The Parade was one of the wider flatter safer streets in Wellington –  but the then Mayor lived in Island Bay and liked to cycle to work.   (It remains part of a grand vision of a cycleway all the way into the city –  key bits of rest of the route currently serviced by roads that are barely wide enough anyway).   And the only bit of the street I’d be a bit hesitant about cycling –  through the shopping centre, with reversing angle parkers etc –  is the only bit where there is no cycleway.  It has been a fiasco all round.  It is still relatively early days, but as someone who is mostly a pedestrian or a motorist, I suspect the overall environment is now more dangerous than it was (not very).  As a pedestrian, one suddenly finds the cycleway merging with the footpath (to get round bus stops).  As a motorist turning out of side streets it is materially harder to see oncoming traffic than it used to be.  And I’m not at all sure how people who live on The Parade, backing out of their driveways, cope.  It would probably matter even more if there were many cyclists, but on a nice autumn morning I just walked the length of the cycleway and didn’t see a cyclist.

The story is back in the news because a local dairy owner has decided to close his business, and blames the loss of short-term parking for a downturn in business (more than a few parks were removed to facilitate the cycleway).  Perhaps so, but I’m just a little sceptical.  Perhaps that is partly because it isn’t clear to me who uses dairies, even when parking is no problem, apart perhaps from school kids buying lollies.   I’m in the neighbourhood all day, and I might have used a dairy twice in a year.  But along the length of the cycleway –  a distance I just walked in 14 minutes –  there are six dairies (including the one planning to close soon) and a full-service supermarket (open from 7am to 10pm every day), for a population of around 7000.  There were only one or two more when I first moved here 40 years ago.  On one corner, two dairies face each other across the street –  and somehow seem to survive.  And actually, the dairy that is to close is the furthest from all the others, and the only one everyone has to pass coming into Island Bay from the city.  It is a little hard to believe that the ill-considered cycleway is the only, or even dominant, factor.  The Wellington City Council is guilty of many things, and a prima facie assumpton that they will be guilty of whatever they are charged with is often safe (don’t get me started on the walkway they currently have indefinitely closed to protect “heritage interests”), but perhaps not this time.

None of which excuses the inaction on the cycleway.  It was kicked beyond the election last year, even after the survey results had been released, and now we are told to expect a decision in six months time.  Meanwhile, of our two local councillors, one is off to become a member of Parliament –  unless perhaps the Greens find a more dynamic candidate, in this one of their strongest party vote seats –  and the other sees his future in Christchurch –  he’s running for Parliament for the Greens in Ilam.   The fear remains that the other councillors, the bureaucrats, and the cycling lobby  –  all keen on a whole network of cycleways –  will just wait things out and the monstrosity will be with us forever.

What’s wrong with Auckland and Wellington?

Having not lived anywhere else in New Zealand since I was 10, I’m not quite sure.

Yesterday I was filming an interview in which one of the questions the interviewer asked was whether Auckland house prices could be explained, at least in part, by an influx of New Zealanders, whether returning from overseas or moving to Auckland from elsewhere in New Zealand.  I noted that the data actually still showed a net outflow of New Zealanders from Auckland to other countries in 2016 (albeit much smaller than in earlier years), and that Census data had suggested a modest net outflow of Aucklanders to the rest of New Zealand since the mid 1990s, and that that pattern seemed unlikely to have changed in the years since the last census.

All of which got me curious.  If New Zealanders were still (net) leaving Auckland for abroad, what was happening in other regions of the country.  Were there places where there was a net inflow of returning New Zealanders?   As it happened, the answer proved to be most of them.

plt-by-region

Auckland and Wellington were, in fact, the outliers.

Here is a  more aggregated look at the same data.

plt-by-agg-region

New Zealanders (net) came back last year to the rest of the North Island, and to the South Island, but not to Auckland or Wellington.

I wouldn’t want to make too much of it.  It is, after all, one year’s data, and has all the pitfalls of the PLT data (self-reported intentions and all that).

But it did bring to mind some analysis from The Treasury that I highlighted a couple of weeks ago

As agglomeration and clustering theory predicts, our more urban services-based regional economies (Auckland and Wellington and to a lesser extent Christchurch) are relatively more productive and generate higher incomes than our more resource-based regional economies.

Our Treasury preference is usually to encourage or permit the continued concentration of economic activity in key centres (forces of agglomeration) where returns are expected to be greatest.  Resources and activities should be allowed to flow betwen regions over time.

New Zealanders don’t seem to have been convinced by our officials’ analysis of the prospects and opportunities within New Zealand.

What about over a longer period?   Here is the average annual net outflow of New Zealand citizens from each regional council area, as a per cent of that region’s population each year, for the period 1996 to 2014 (ie from when the data start to just prior to the current sharp reduction in the overall outflow of New Zealanders).

plt-net-flow-96-to-14

Wellington and Auckland were losing just over 0.6 per cent of their population each year as New Zealand citizens left those regions for abroad.  But so were the Bay of Plenty and Gisborne.    (What is, perhaps, more striking is how much lower the net outflow rate abroad was from the South Island).    And in the last year, New Zealanders flowed into Gisborne and the Bay of Plenty, and they still flowed out of Wellington and Auckland.

I can think of various stories why this might be.  Auckland, presumably, has the highest share of naturalised citizens, and perhaps there is more of tendency for those new citizens to leave, than for natives?  But if so, it doesn’t explain the previous 20 years of Wellington, Bay of Plenty or Gisborne.   And while house prices are ruinously high in Auckland, they are nowhere near so bad in Wellington.   Perhaps there is something in a story about Auckland and Wellington people being more “internationally connected” – but again, over almost 20 years, the outflow rates were the same in the Bay of Plenty and Gisborne.   And perhaps, for all the talk of agglomeration opportunities, and a focus on Auckland and Wellington, the economic opportunities, and overall prospective living standards, just aren’t really there in Auckland and Wellington.   The regional per capita GDP data certainly support that story for Auckland.

Perhaps the patterns will change again this year –  and there is quite a bit of year-to-year variation in the regional outflow rates –  but for now, despite all the talk of “problems of success“, or “quality problems“, the migration data suggest New Zealanders when deciding whether to stay or go, and where to come back to if they do, don’t seem to share the sense of Wellington and Auckland as success stories.

Other interpretations/perspectives most welcome.

Wellington rental market: a problem of success?

I’m a bit tied up with other stuff today, so will come back to the New Zealand Initiative’s immigration report next week.  But in the meantime, I was somewhat taken aback to see the Prime Minister quoted as describing the current squeeze on the Wellington private rental market as “a problem of success“.

Sadly, it is like some line lifted directly from the John Key playbook.  I wrote last year about the then Prime Minister’s ludicrous, and frankly insulting to the intelligence of ordinary citizens/voters, attempt to pass off the extraordinary pressures on Auckland house prices and infrastructure, including traffic congestion, as “quality problems”.  In fact, what they were –  and are –  are failures of central and local government to get the land supply market functioning effectively, having over-regulated it in the first place, interacting with central government’s decisions to keep on bringing in lots more non-citizen immigrants.

How does the new Prime Minister justify his insouciance about the Wellington situation?

However, English said the demand for rentals was “a problem of success”, which the Wellington City Council was already trying to address.

“It’s actually a long time since Wellington has felt the pressures of growth – the Government’s investing large amounts of money in the infrastructure…

“The council has shown that it understands for the first time in a number of decades, there is pressure on the housing stock and they are enabling more houses to be built because that’s the only way that they’re going to see a bit less pressurised.”

Damage to Wellington office buildings from last November’s Kaikoura earthquake had also had “a bit of a flow-on effect” to the city’s accommodation, English said.

Although the large lines were “certainly concerning for people who are looking for accommodation”, they did not show a crisis as the housing shortfall was well understood by the council.

Wellington hasn’t experienced pressure in its market for quite some time and as long as they respond quickly, they’ll be able to deal with it.”

I presume not even he is arguing that the earthquake effects were a problem of success.

I was a bit puzzled by the infrastructure spending line.  I’m looking forward to trying out the new Kapiti expressway, but the biggest local infrastructure spend is on Transmission Gully,  the total uneconomic  new motorway on the outskirts of the city.  Perhaps that might, in time, help ease housing pressures in Wellington city, if people could get in more easily from Kapiti, but then I recall a commenter a while ago pointing out how little land Kapiti had actually zoned as residential.

But what really puzzled me about the PM’s comment was that it was a long time since Wellington had felt the pressures of growth, as if this was the dawn of some new renaissance of Wellington.  But here are the population growth data for Wellington city (where the pressures seem to be), greater Wellington (Wellington, Upper and Lower Hutt, Porirua and Kapiti) and New Zealand as a whole.

wellington-popn

Wellington city has had population growth rates very similar to those for the country as a whole –  Wellington city grew faster than the country as a whole in the previous population surge in the early 2000s, and has been just slightly behind in the last few years.  As for the “greater Wellington” region –  a more comparable basis to compare to Christchurch or Auckland –  there has certainly been a rebound in population growth in the last few years, but it continues to lag behind New Zealand’s population growth rate as a whole.  In only two years in the 20 shown here has greater Wellington’s population growth exceeded that of the country as a whole, none of them in this decade.    House prices rose rapidly in Wellington in the 2000s boom, and they are doing so again now.  It just looks like the same old shared central and local government failure.

I’ve written about rents previously.  In a well-functioning urban land supply market, a substantial and sustained fall in real interest rates should be expected to result in rents falling.  Actually, what has happened –  and still appears to be happening in Wellington –  is that real rents have been rising: not as much as house prices have certainly (rental yields have been falling), but they;ve been rising when, if governments hadn’t so badly messed up the housing market, they’d have been falling.

But, says the Prime Minister, not to worry: the Wellington city council is apparently on the case and moving to resolve the problem.    Really?  They didn’t do anything very much in the previous boom, and I haven’t seen much sign of far-reaching reform this time round.  Last week, they announced a plan to build more “social housing” –  which might or might not be a good thing in time –  but I’ve seen little sign of any sort of serious reform of the land supply regulatory situation.

Immediately after the local body election late last year, I wrote about the prospects for housing supply liberalisation in Wellington.

Sadly I don’t expect much.  Here is the housing policy of the new Labour Party mayor of Wellington.

For starters, I’ll be sending a bill through to parliament to make rental WoF a reality in Wellington. If you’re paying rental for a house it’s only fair that house meets basic standards. Living in a warm, dry house that’s free of mould should be a right for every Wellingtonian.

I’ll also invest in social housing, so there’s more available for the people who need it most. This means a long term building program, partnering with third sector housing providers to increase the number of live-to-own dwellings. It also means improving the 2500 existing Wellington council owned social housing units, making them safer and better to live in. 

But that’s not enough. It’s vital that we look after those in need, but we also want Wellington to grow and prosper. That’s why I’m offering a $5000 rates rebate for anyone building their first home in Wellington. Newer homes means better quality homes, and Wellington needs to encourage fresh young talent and new families to move here if we want to keep thriving. 

Plus, I’m committed to establishing Build Wellington, an urban development agency that will utilise existing green-field land holdings for affordable, good quality residential development in the tradition of state and Council housing in years gone by.

Nothing, at all, about freeing-up land supply, just more statist “solutions”, and a local version of the sort of first home buyer grant central government offers –  the sort of tool that has been proved, time and time again, to do precisely nothing to improve housing affordability.

And this is the Council that the Prime Minister thinks is going to quickly resolve the stresses?    Promising to make renting more costly, and offering subsidies to first home buyers to bid up the price of houses

In truth, Wellington’s situation looks a lot like the situation in the country as a whole –  a milder form of Auckland’s stresses, with 2 per cent population growth at present rather than 3 per cent.  There is no sign that housing stresses are a result of some great Wellington renaissance, but rather it looks like the outcome of the same old mess: land use regulations imposed and enabled by central and local government combined with a fresh wave of fairly rapid population growth.  Some of that is about a drop in the number of New Zealanders leaving Wellington –  only about 800 last year – but much of it is, in effect, down to central government’s non-citizen immigration policy.

What Wellington house prices have come to

A real estate agent yesterday sent me a PDF showing all the recent house sales in southern and eastern Wellington.

This one caught my eye

rintoul st.png

It is tiny, by almost any New Zealand standards.

It caught my eye because it is almost over the road from the school one of my daughters goes to, and because a fellow parishoner had spent her adult life in the almost identically small next door house.

Not only is the house tiny, but the section is pretty small by any standards.  No great redevelopment opportunities, unless (I suppose) someone managed to buy up the whole row of tiny houses.

Berhampore isn’t such a bad location I suppose.  It is an easy walk to the hospital or to Massey’s Wellington campus.  And I guess one could walk to work in town. The distance from this house to, say, Unity Books in Willis St is about the same as the distance from the Mt Eden shops to the Auckland Unity Books in High St.   But…….Berhampore is not Mt Eden.  It is slowly rejuvenating, and is apparently very popular among Green Party voters, but it will always have small houses, tiny sections, and rather a lot of council/state housing (oh, and the Satan’s Slaves are almost over the back fence).

And yet this tiny property went for $633,500.

Out of curiosity I checked out the real price I paid for my first house in 1989.  It was another couple of kilometres out of town, but the house was bigger, it was a couple of blocks from the beach, and the section was about three times the size of the Berhampore one.  In 2016 dollars, that house cost me $282000.

People in central and local government –  ministers, mayors, councillors, relevant officials – should really be hanging their heads in shame, at having so badly messed up housing and land supply markets to have produced such an atrocious situation.  Sadly, shame now seems like a foreign concept to those who do so much (always well-intentioned, but good intentions are never enough) damage to the prospects, and reasonable expectations, of our younger generations.

Wellington airport and the runway extension

Fairfax’s Hamish Rutherford had a substantial piece in Saturday’s Dominion-Post on the proposed Wellington airport runway extension, under the heading If we build it, will they come? (a rather similar title to my own first post on the airport last year).  It seemed like a fairly balanced article, covering many (but not all) of the key uncertainties about the project.   Most of them wouldn’t be a matter for public concern if this was to be a privately-funded project, but it isn’t –  and everyone agrees on that.

There was an interesting quote to that effect at the start of the article from airport company chair Tim Brown.

As Tim Brown tells it, the first time he discussed a “back of the envelope”-type analysis of the cost to extend Wellington runway with the airport’s chief executive, Steve Sanderson, the conversation was “completely negative”.

…..Brown had just been presented an outline of a $300 million project, aiming to enable non-stop long-haul flights to the capital.

However, the  potential gains to the airport (two-thirds owned by Infratil, the rest by Wellington City Council) were likely to see a boost in profits that would only justify it investing around $100m.

Whatever the final costs of the project might be (and the estimates are unmoved in the years since), Brown was clear about the chances.

“Literally within 10 seconds I said: ‘So what? What do I care? We’re not going to do that, are we?’,” Brown recalled this week.

This isn’t a project that might need the last 10 or 20 per cent of the cost picked up by the taxpayer/ratepayer to make it viable.  Instead it only works –  even on their own numbers –  if the Crown/WCC picks up two-thirds of the capital cost (and ratepayers have already paid millions of dollars to get the proposal this far).  This is a politically-driven project at least as much (and probably more) than it is a WIAL/Infratil one.

The whole process is getting underway again now, both because the airport company (WIAL) has restarted its resource consent application, and because now that the election is past the ability of citizens and ratepayers to hold in check the big spending “boosterish” tendencies of the mayor and councillors is diminished considerably.  It is difficult to tell quite what the balance of the council now is, but the new mayor has been at the forefront of the various “booster” projects the Council is spending money on, and one councillor who was vocally opposed to the extension in the previous term is no longer on the council.  WCC’s track record –  of wanting to “do something”, spend money on big ticket initiatives, often with little or no public scrutiny (sometimes not even with scrutiny from councilors) – is pretty disquieting.

Presumably under some pressure during the election campaign, the new mayor Justin Lester modified his stance somewhat in responding to pre-election candidate surveys.

I have committed to seeking the resource consent for the airport extension project. It’s too early to say whether the project will proceed because the following three caveats will need to be satisfied before it proceeds:

1. Resource consent approval

2. Financial support from Central Government

3. Commitment from airlines to fly direct routes to Asia.

This is a 50 year project and needs careful consideration before any decision is made.

On the face of it, that looks like a fairly insurmountable set of hurdles.  It is very unlikely that any airline is going to give a commitment to fly direct long-haul routes between Asia and Wellington in advance of (multi-year) construction even starting –  they couldn’t know what would happen to fuel prices, the world/regional economy or the like in the intervening period.    That is especially so given the expressed lack of interest in flying long-haul from Wellington from the one airline that always will be flying New Zealand routes, Air New Zealand.

And, to date, central government seems to have been commendably non-encouraging about any suggestion of central government financial support.

So what –  beyond the track record of poor quality secretive spending – makes me uneasy about the Lester-led Council?  First, Lester knows very well that he won’t get commitments from airlines before the Council has to make decisions on whether to fund the runway extension –  but he might get non-binding expression of interests, which could be politically spun to sound a bit like commitments.  Second, the government has a  track record of ending up funding uneconomic infrastructure projects, including ones it initially poured cold water over.  One could think of Transmission Gully, or KiwiRail, or Northland (by-election) bridges or –  perhaps most concerningly – the City Rail Link in Auckland.   With a modest budget surplus to be subject to an electoral auction next year, is it so inconceivable that the government could change tack (government built houses and immigration last week) and throw $100 million in the direction of the runway extension?  Compared to the spending on Transmission Gully, it would be chicken feed.

And while Lester is quoted extensively in the Fairfax article, neither of the conditions in the pre-election quote above (airline commitments, central government funding) is repeated.  [UPDATE: I gather they are still part of his set of pre-conditions]

So ratepayers beware.  Citizens beware.

In the Fairfax article, Lester tries to blunt possible ratepayer concerns by suggesting the bulk of any Council funding should be raised from business rates rather than from residential ratepayers, because “the majority of the benefit would go to the business sector”.  That might sound superficially plausible (if there were material benefits at all) but the mayor seems unaware of the notion of tax incidence: that the party who writes the cheque to pay a tax or rates bill isn’t typically the party that bears the economic cost.   Much of any company tax is actually borne, over time, by workers –  because less investment occurs than otherwise, and wages are lower as a result.  Just as renters bear some/much of the incidence of rates bills paid by landlords, we should expect that the wider pool of Wellington citizens would bear much of the economic cost of higher business rates to fund an airport extension, even if no non-business ratepayer ever has to increase their direct rates bill.  This is an issue that should bother all citizens, not just business ratepayers.

A lot of the decision-making should turn on a robust cost-benefit analysis of the proposal.  WIAL and the Council have commissioned their own analysis, which suggests large positive national benefits.  Not many people who have looked carefully at the numbers have found their numbers persuasive.  Justin Lester seems to suggest this is all about self-interest

“I’m not going to have people telling me and telling Wellington and telling our council what we should be doing because of their own interests.”

If one wanted to descend to a similar level, one could ask about the incentives on and interests of councillors –  spending other people’s money on big ticket projects.  But, perhaps more importantly, advocates like Lester would do better to front up and explain why they disagree with specific points raised by critics –  whether those critics are representatives of the airline industry, or other commentators and economists.

In the last few weeks, questions have begun to surface about the estimated cost of the runway extension itself.  In a private sector project, citizens wouldn’t need to worry too much.  After all, if the company proposing the development gets it wrong, its own shareholders will be the ones who lose money.  But this is a project where large amounts of ratepayers/taxpayers money will be at stake, and where it isn’t clear how well aligned incentives really are.  The construction estimates are being done for WIAL, which has already concluded that it would only be worth them putting in around $100 million.  If the project is to proceed central or local government will be on the hook for the rest.  Mightn’t the incentives at present be to keep the construction estimates to the low end of a possible range?  Doing so might (a) increase the chances of getting a resource consent (since, sadly, the Environment Court needs to do an economic appraisal) and (b) increase the chances of getting central and local government approval to proceed, with political commitment to the project, with any later cost-overruns perhaps largely falling on those parties.

My own unease has been around three main points; developed in earlier posts:

(a) the large assumed increase in long-haul visitors to New Zealand, simply because of an option to fly long-haul into Wellington (rather than Auckland or Christchurch.

(b) the very large assumed “wider economic benefits” assumed to flow from such increases in visitor numbers, even if the passenger projections were accurate, and

(c) the discount rate being used to evaluate such gains (many of them decades into the future).

I dealt with the visitor number points in this post late last year.   The WIAL cost-benefit analysis uses passenger projections which assume an increase of 200000 visitors to New Zealand (building up over time) simply because it becomes physically possible to fly long haul into Wellington.   That seems implausible.  In his own look at the passenger projections, Ian Harrison of Tailrisk Economics, noted that the numbers assumed that within 20 years 30000 more Americans a year will come to New Zealand simply because they can fly directly into Wellington.   One can imagine a few more might want to arrive via Wellington, but is it really credible that so many more will come to New Zealand as a whole?  Perhaps more startling were the assumptions for “other Asia” (ie other than China and Japan).  At present, only around 30000 people come from those countries to Wellington in a year.  The projections assume that putting in a runway allowing long-haul flights will provide a boost of an additional 105000 visitors annually within 20 years.  Were Wellington Florence, perhaps it would be a credible story.  As it is –  and even with some more marketing spending and a heavily subsidized new film museum – it just doesn’t ring true.  Long-haul passengers don’t come to New Zealand for its cities –  the cities are mostly gateways, and in the case of the lower North Island, Wellington isn’t the gateway to much.  (And yes, I can see the South Island as I type, so perhaps there is a small “gateway to the South, by slow ferry” market).

I touched on the “wider economic benefits” and the discount rates in this post. Here are some extracts from that post:

But much the biggest issues relate to the possibility of benefits to New Zealand from additional foreign tourists buying real goods and services in New Zealand.  Sapere appear to have estimated a total for the likely increase in tourist spending in New Zealand and then subtracted an estimate for the cost of providing those services.  For that they have assumed that 45.5 per cent of the expenditure is domestic value-added (ie returns to labour and capital).  That approach doesn’t seem right and generates highly implausible estimates.

The producer surplus is the gain to the provider of a good or service over and above what he or she would have been willing to provide that service at.   The cost of providing the service includes the cost of intermediate inputs (materials etc) but also the cost of the labour and the cost of capital (a normal rate of return).  If the producer sells product at that cost, there is no producer surplus. In this context, there is no net economic benefits –  economic costs have just been covered.

Over the long haul, in reasonably competitive markets, producer surpluses should be very small (in the limit zero).  For a hotel that budgeted on 80 per cent occupancy, a surprise influx of visitors for the weekend will generate a producer surplus –  the windfall arrivals add much more to revenue than they do to costs of supplying the service.  But over the long haul –  and the airport project is evaluated over the period out to 2060 –  it is fairly implausible that there will be any material producer surplus resulting from well-foreshadowed increases in visitor numbers.  Most of what tourists spend money on in New Zealand are items such as accommodation, domestic travel, and food and beverage.  In all those sectors, capacity is scalable.  One would expect new entrants just to the point where only normal costs of capital were covered.  In the long run, supply curves for most of these sorts of services/products should almost flat.

My proposition is that there are few or no producer surpluses likely to arise from a trend increase in foreign tourism as a result of extending Wellington airport.  But even if there were, any such gains would have to be offset against the loss of producer surplus for New Zealand producer (to foreign producers instead) from New Zealanders taking more holidays abroad.  It makes little difference to the hoteliers if I take my holiday in London instead of Queenstown, while at the some time someone in Manchester takes his in Queenstown instead of taking it in London.

Even if the consultants are right that there would be more additional inward visitors than outward, any producer surpluses from either set of numbers should be small.  And the net of two small offsetting numbers is even smaller.

The safest assumption, in evaluating the WIAL proposal, is to assume that the economic benefits of the proposal all accrue to users, and that there are no material net economic benefits (or costs) to the rest of the community.  Perhaps there is a small amount in the net GST flow, but it is hardly worth focusing on given the scale of the other uncertainties.

Perhaps this point will seem counterintuitive to lay readers and city councillors.  Surely “Wellington” or “New Zealand” is better off from having more foreign visitors (assuming the numbers outweigh the increased outflow of New Zealanders)?  And if so, shouldn’t we –  Councils, government –  be willing to spend money to get those benefits?   The short answer is no.    Good and services cost real resources to provide, and in a competitive market simply providing more goods and services won’t make the city or country better off –  you need to be able to sell stuff that generates more of a return than it costs to provide (including the cost of capital).  Vanilla products and services typically don’t do that.  After all, labour that is used to provide services to tourists is labour that can’t be used for something other activity.  And over a horizon of 45 years we can’t just assume there are spare resources sitting round unused.  Spending public money to generate this economic activity will come at a cost of some other economic activity being displaced (as well as the deadweight costs of taxation, which are allowed for in the cost-benefit analysis).

If, to a first approximation, there are no “net incremental economic benefits” for the “rest of the community” then even if the WIAL/Sapere passenger number estimates are totally robust, the net benefits of the project drop from $2090 million to $954 million.

It is not as if the new visitors – even if they eventuate –  are likely to be top-end exclusive customers.  Business and government travel –  a significant part of the Wellington market –  is unlikely to be much affected, and any boost to overall visitor numbers seems likely to be mostly tourists, consuming fairly vanilla, easily replicable, goods and services.

And what of the discount rate?

It is very unlikely that any private company (or shareholder) would evaluate such a risky project using anything as low as a 7 per cent real cost of capital.  On the WIAL/Sapere numbers, even raising the discount rate to 10 per cent –  a fairly typical cost of capital for Australian companies according to a relatively recent survey by the RBA –  roughly halves the value of any net benefits from the project (even if all the other assumptions about passengers numbers, and “wider economic benefits” are in fact well-founded).  But this runway extension seems much riskier than the typical investment project –  it is location-specific, not usable for anything else, and relies on assumptions that involve transforming the nature of the business (ie there is no long haul capacity at present, and no one can know with any confidence how much demand there might be for the service).  It would be enlightening if Infratil/WIAL told us what cost of capital/discount rate assumptions they would use in evaluating such a project if all the risk were on them?  I’m sure, for such a hard-nosed bunch of operators, if would prudently be more than 10 per cent real.

The Fairfax article picks up a number of other points, including some comments from me. In some of those comments, I probably wasn’t as clear as I might have been.

A few weeks ago, Singapore Airlines –  assisted by a non-transparent Wellington City Council subsidy –  began flying several times a week between Singapore and Wellington, with a stopover in (of all places) Canberra.  No one know whether those flights will succeed (SIA reportedly wants to move to daily), and become viable without ongoing Council subsidies.  That uncertainty is reflected in the article.  Tim Brown from WIAL seems to believe that if the route succeeds, and attracts a larger proportion of foreign passengers, it would tend to support the case for the runway extension.  Justin Lester seems a bit nervous

Like the airport company, Lester also appears to concede that if the Singapore Airlines flights do not show the demand its supporters hope, it would be bad news for the runway extension.

“People are getting on and off these planes four times a week and if the demand doesn’t go up to seven times a week, you know, we won’t need to do it,” he said, quickly adding that this would be a “strong indicator” rather than proof the runway extension was not worthwhile.

I was quoted along similar lines

Would strong success of Singapore Airlines’ new route, with a high proportion of visitors, help prove the case of the missing passengers?

For a man who freely admits he is naturally sceptical about most public infrastructure projects, Reddell is surprisingly open to the idea.

“If they can make that route viable without larger public subsidies than they’ve got then I think that would be interesting”, especially given that passengers face being “stuck in Canberra for a couple of hours”.

But with several caveats.  First, even if the Wellington-Canberra-Singapore route proves viable, it only offers any insight on the long-haul issue if a material proportion of the passengers in and out of Wellington are not just Wellington-Canberra passengers (although it seems unlikely that a daily 777 flight just Wellington/Canberra would be economic).

Second, if such flights prove viable with the current runway, that is great. All involved are likely to gain.  But that is different proposition than spending  (an irreversible) $300 million on a new runway.  As I noted

However, Reddell adds, this may only prove Brown is right about the problem being a lack of marketing, without proving the airport extension itself was needed.

“I would open up the argument, [of] let’s subsidise some more flights, and if they don’t work we can shut them down, whereas with the $300m runway extension, it’s a sunk cost,” Reddell said.

“The great thing about marketing is you can shut it off. You can’t do much with a runway extension” that doesn’t work out.

In the cost-benefit analysis, one of the options they looked at was a big increase in marketing expenditure.  It produced net benefits not that much smaller than those purportedly on offer from the runway extension, and could be re-evaluated constantly, rather than being irreversible.

If central and local government do go ahead and fund the extension, it wouldn’t surprise me if 10 years hence there were a few long haul flights in and out of Wellington.  But, of itself, that would prove nothing about the economics of the project.  The financial contribution of central or local government would, no doubt, be treated as a bygone –  with no direct financial returns, and arguable and uncertain indirect ones –  and with a runway in place, and only its own capital contribution to cover, perhaps WIAL could attract a few flights.  That might leave today’s councilors feeling better, as they show the extension to their grandchildren, but is no reason to think that Wellington citizens and ratepayers will have been made better off as a result.

I’ve not touched at all on issues like the possibility that future carbon charges make long haul travel less attractive than it is today, or that rising sea levels might raise questions about Wellington airport more generally.  But they all should bring us back to Justin Lester’s point

This is a 50 year project

and

His “gut instinct” was that the case would eventually be proven, but it could be soon, or it could be decades away.

The costs of waiting simply aren’t that large.  If the proponents are right, the case will look that much more compelling  –  and less risky –  10 years from now.  If they are wrong, (lots of) real resources will have been irreversibly wasted –  and that burden will be felt not just by Wellington businesses, but by all citizens and ratepayers of Wellington.   I’d urge the incoming Council to reflect on that choice, and to take seriously what decisionmaking under uncertainty should mean.