Friday, August 29, 2014

How do you mitigate a problem like a NIMBY?

I think I might have a partial solution to NIMBY blocking of urban intensification: a way of paying them at the margin for disamenity effects.

The one-line version: if your neighbour develops, your taxes drop.

Here's how we do it. Or at least the initial sketch-outline blog version of it. I'll expand on it later and, hopefully, fix the problems with it that you'll helpfully point out.

Consider a city of 10,000 dwellings and 12,000 households. Most of these dwellings contain one household, but some contain two households because there are more households than there are dwellings. The City collects $10,000,000 in taxes, with a $1,000 per-dwelling tax, on a standard Council rates system: the Council specifies how much money it needs to collect and that amount is apportioned across dwellings based on the relative value of the dwellings. Dwellings with higher total capital valuation pay more in tax. In this case, they're all identical for simplicity of exposition but nothing requires that they be identical or pay identical taxes.

Suppose that, in this set-up, somebody wants to put up an apartment building that would contain 100 dwellings to house 100 households. The developer pays Council a development levy that covers the building's interconnection costs: the costs the building imposes on Council. Since people would move into this building from existing overcrowded dwellings, there's no additional cost on Council of additional capitation-based services. Specify for now that each of these apartments has the same capital valuation as existing dwellings for simplicity, though again, that will vary in the real world. Council still needs to collect $10,000,000 in taxes in total to cover those services, so long as it's set the development levy correctly.*

Under the existing system, the $10,000,000 in taxes will now be spread over 10,100 dwellings rather than over 10,000 dwellings. Each dwelling consequently remits $990 in taxes. If the neighbours of the apartment building get more than $10 in disamenities from the apartment building's existence, they will lobby against its construction.

Now the RMA has some mechanism for identifying neighbours who are affected by the new development. Maybe some experience more traffic, maybe some lose a bit of view, and maybe others lose a bit of neighbourhood character. Specify that these effects, for this apartment building, extend over 100 dwellings in a circle around the new apartment building. Again, in the real world, it won't be a circle, but it doesn't matter. The RMA and Councils already have some mechanism for identifying affected neighbours; whatever that mechanism is has, in this case, identified these 100 dwellings.

Council needs to raise $10,000,000 in total, but nothing says that we need to spread the abatement provided by the new apartments to the city as a whole. In fact, on thinking about it, it seems pretty silly to spread the abatement so broadly. We've identified a set of affected neighbours who bear the costs of the new development but get the same tax abatement benefits as everybody else. Why not define a Special Ratings Area by the dwellings that experience disamenities from the new development, using whatever process is already in place for defining affected neighbours?

Let's instead specify that the total rates collected from both the new development and all the affected neighbours remains constant after the new development's construction. Those 100 dwellings used to remit, in total, $100,000 in taxes: $1000 each. Dwellings in the circle paid $100,000; dwellings outside of the circle paid $9,900,000. Outside of the circle isn't affected by the apartment building. We'll say now that all of the dwellings inside the circle, including the dwellings in the apartment building, have to remit $100,000 in taxes in total. Since there are now 200 dwellings in the circle instead of 100, the per-dwelling levy is now $500 instead of $1000. The dwellings outside the circle continue to pay $9,900,000 and the necessary $10,000,000 is collected in total. Now, neighbours would need to enjoy more than $500 per year in disamenity effects in order to wish to block the development.

This doesn't solve every problem in the world. There are neighbours who would experience more than $500 per year in disamenities and would still NIMBY up. But there will be a range of neighbours in the $10 to $500 range who cease their opposition.

If we wished a stronger counter-NIMBY effect, we could say that all dwellings inside the circle remit in total the necessary $100,000, but that the new apartments are levied at the rates that obtain outside of the circle. Only the affected neighbours then enjoy the benefits of the Special Ratings Area. The total amount collected will be the same. But, in that case, and in this example, the new apartments each remit $1000 in taxes while the 100 affected neighbours each see a complete rates abatement. So we would only hear complaints from NIMBYs experiencing more than $1000 in disamenity effects.

If the apartment development were large enough, and if the number of affected neighbours were small enough, one could imagine scenarios where the neighbours received a negative rates bill: had there been 150 apartments each remitting $1000 in taxes, and the same number of affected neighbours, there would have been $50000 in surplus to distribute among the 100 affected neighbouring dwellings: a $500 cash bonus each instead of a $1000 rates bill. In that case, it would take $1500 in disamenities to trigger NIMBY activity.

I doubt you would want that this be locked in in perpetuity.** I would expect we could see this system apply in the first year. Perhaps after 10 years, the circle as a whole, including the apartment, could remit a total rates bill equal to a half-way point between the total amount remitted inside the circle prior to the development and the total amount that would be remitted had every dwelling inside the circle, apartments included, paid the same amount as those outside the circle.

The steady-state for the circle going from 100 dwellings to 100 dwellings plus 100 apartment-dwellings could then be $150,000 in total taxes rather than $200,000. Prior to the development, the 9900 dwellings outside the circle remitted $9,900,000 in total taxes; now they'd only need to cover $9,850,000, so their rates bill would drop from $1000 each to $995 each. Each of the 100 apartments would remit the same $995 in taxes, covering $99,495 of the circle's $150,000. The remaining dwellings in the special ratings area would remit $505 each in taxes. Everybody's better off. Affected neighbours get strong abatement. Other pre-existing dwellings see a small amount of abatement too. And we reduce overcrowding because we have found a way of compensating the NIMBYs.

Now real world ratings systems are more complicated than this. More valuable dwellings remit more in tax. What I'm here establishing is a new Special Rating Area within which the city could apply its standard differential progressive capital value taxation scheme, charging more valuable dwellings a greater share of the amount that needs to be collected and less valuable dwellings a smaller proportion. It's just that instead of applying it over the city as a whole, they carve out areas around new developments as defined by the affected neighbours, and re-apply the standard apportionment formula to levy a total amount of rates across dwellings within that defined area. The rates bill for those in the area has to drop relative to what they pay in the current system, and NIMBY pressure consequently drops too.

Note further that these kinds of benefits should be stackable. If your dwelling is affected by two different new developments, you should see cumulative rates decreases.

Questions for readers:

  1. Does a system like this apply anywhere in the existing world?
  2. Are there obvious gaping holes that I'm missing?
  3. What seems like a fair and politically sustainable time path for the special ratings area?

I'm sure there are many practical implementation issues like the calculations for dwellings in overlapping special ratings areas. And maybe we'd want gradations within the Special Ratings Areas where the most affected dwellings see the most abatement. But this all looks pretty feasible.

It seems like a good idea. Surely somebody has thought of this before. And surely somebody else has explained why it can't work. I'll look forward to your pointers.

* In the real world, they could under- or over-shoot. I've heard many arguments that Councils currently have incentive to over-shoot because doing so shifts the tax burden to new residents over existing ones and to discourage development to avoid NIMBY complaints. I can deal with the latter problem here, but we'll otherwise assume that the developer levies are set correctly.

** And especially where new dwellings might cater to new residents rather than for a shuffling of existing ones: the Council's total budget then has to increase for services that have a per-capita cost, and we don't want to give those outside the circle strong reason to lobby against the new development.

Thursday, August 28, 2014

Independent is an interesting word

I presented to the Ministerial Forum on Alcohol Advertising and Sponsorship a few months back with a brief submission on recent evidence on the effects of alcohol advertising on consumption behaviour.

One pretty compelling recent piece of evidence is Jon Nelson's recent meta-analysis, published in 2011. The abstract:
This paper presents a meta-analysis of prospective cohort (longitudinal) studies of alcohol marketing and adolescent drinking, which accounts for publication bias. The paper provides a summary of 12 primary studies of the marketing–drinking relationship. Each primary study surveyed a sample of youth to determine baseline drinking status and marketing exposure, and re-surveyed the youth to determine subsequent drinking outcomes. Logistic analyses provide estimates of the odds ratio for effects of baseline marketing variables on adolescent drinking at follow-up. Using meta-regression analysis, two samples are examined in this paper: 23 effect-size estimates for drinking onset (initiation); and 40 estimates for other drinking behaviours (frequency, amount, bingeing). Marketing variables include ads in mass media, promotion portrayals, brand recognition and subjective evaluations by survey respondents. Publication bias is assessed using funnel plots that account for ‘missing’ studies, bivariate regressions and multivariate meta-regressions that account for primary study heterogeneity, heteroskedasticity, data dependencies, publication bias and truncated samples. The empirical results are consistent with publication bias, omitted variable bias in some studies, and lack of a genuine effect, especially for mass media. The paper also discusses ‘dissemination bias’ in the use of research results by primary investigators and health policy interest groups.
So he picked the papers that use a baseline and exposure design and concluded that there's really nothing much there except for publication bias.

The panellists didn't seem particularly friendly or unfriendly. Tuari Potiki asked why economists' conclusions on this stuff vary so much from the public health folks who'd presented earlier in the day, and the general tone of the Forum members seemed to be "what additional restrictions should we place" rather than "do any potential restrictions do more good than harm", but maybe I misread them.

Well, the anti-alcohol advocates didn't think the Forum was independent enough so they've made their own forum.* They're calling it the Independent Expert Committee on Alcohol Advertising and Sponsorship.

Independent's an interesting word, since the IECAAS is being hosted by Alcohol Action NZ, Doug Sellman and Jennie Connor's anti-alcohol lobby group, and consists of Sellman, Connor, Janet Hoek, Mike Daube and others. They reckon the Ministerial Forum, including NZ Drug Foundation's Tuari Potiki, wasn't independent enough because the CEO of the Advertising Standards Authority is also on the Forum. Sellman et al are correct that the Forum members aren't experts in alcohol marketing, but I'm really unconvinced that that makes them less independent.

IECAAS writes:
To date IECAAS members have found no significant new research that would invalidate the recommendations made by the Law Commission in 2010. In fact the evidence supporting major reform appears to be strengthening. The recommendation to phase out alcohol advertising and sponsorship apart from objective written product information over five years is therefore as important today as it was when first reported to the government in 2010. The only difference is that New Zealand could have made several years of progress had the government responded.
I wonder how hard they've been looking. There's a reasonably important piece in the Journal of Economic Surveys that they've missed. And a few others.

* I can't stop imagining Bender setting up his own theme park. Except this one would be way less fun than Bender's.

Tuesday, August 26, 2014

Reader mailbag: restrictive covenants edition

If the particular character of a neighbourhood is all that important, why don't residents protect it using covenants?

A reader emails me:
I don’t think it is Nimbyism if a neighbourhood wants to protect its own character. What is Nimbyism is denying others beyond your neighbourhood the same opportunity you had.
It seems counter intuitive to think a place like Houston which has few zoning laws gives local communities greater control to enable the protection of individual property rights by allowing those individuals to collectively agree to covenant those rights (which include the protection of special character areas like Franklin Rd) and yet not to interfere with others who may wish a different way outside that zone.
High density advocates hate the idea that Houston communities that fringe CBD areas can continue to live a lifestyle that they have agreed to and also stop others (like Dhyrberg) from coming in and destroying it.
I know that many new developments come with covenants restricting future use of the property: developers expect that residents want rules binding both themselves and their neighbours. I don't want to live in that kind of place, but in a world of heterogeneous preferences, some prefer homogeneity.

Is there anything legally that would stop residents in places like Epsom, Grey Lynn, or any of the other hotbeds of development discord, from jointly agreeing to bind themselves against future development?

Under the status quo, everyone on the street seems to have been given a property right in what anybody else does with their property even though no covenant was put in place. It's an odd conception of property rights to say that, because I bought my house with certain expectations of what my neighbours might do, I therefore am allowed to veto anything they may wish to do with it.

Imagine some street where most residents put value on the street's current character; some on the street would prefer to turn their houses to higher-density use. The current rules let the character-amenity people shout a lot and block the development; those wishing to develop have to pay off all the potential veto players in order to prevent their blocking. Shouting is cheap and, since a developer would have to pay off every potential shouter, there is incentive to pretend to care more than you really do. I'm sure much of the shouting is genuine. But we have little sense of the real dollar value of the experienced disamentiy.

An alternative framework would have those who love the neighbourhood's particular character draft up a covenant agreement and try to get all the owners to sign on. If there are neighbours who were set to re-develop instead, they'd either not sign and not be bound, or be paid by their neighbours to take on the covenant's provisions.

Coase tells us that in low transaction cost environments the two scenarios should be equivalent. Coase also tells us that all the interesting action is in the high transaction cost real world. Is it cheaper to overstate your preference against a neighbour's re-development, or to overstate your willingness to turn your house into a 3-storey set of condos to try to induce payments not to? The former is pretty easy. The latter generally takes a set of architectural and engineering drawings plus building consent applications.

I wonder whether it would be workable to do away with neighbours' ability to object to anything other than real environmental effects like shading by replacing the regime with a menu of covenant options that neighbours might wish to impose upon themselves consensually.

Thanks to my correspondent for useful discussion.

Monday, August 25, 2014

Somebody arbitrage and fix please

I've been explaining to folks 'round the office why we might wish to pay more attention to iPredict's markets on who will be Prime Minister than to the vote share markets. And I thought I might share it with you.

National's back up over 70% in the PM.National contract. If National wins, that contract pays $1; if they lose, it pays $0. It dropped into the 60s last week during the publicity around the Hager book, but it's now back up.

But, if we look at the major party vote share markets, it's hard to see how National could possibly be 73% likely to win. National's predicted to get 43% of the vote; Labour and the Greens are predicted to get 43% of the vote; minor parties get 14%. While NZ First may be more likely to go into coalition with National, Internet/Mana isn't, and Conservatives' wasted votes, if they get 4.4%, disproportionately waste votes that otherwise would have gone to National.

There's a bit of a problem in all the vote share markets though. You can only bring so much money into iPredict at a go, and folks might there be liquidity constrained. The winner-take-all markets can then just be more interesting. The VS markets, paying off at a penny for every percentage point earned by the party in the election, give little chance of large gains or losses. You can sink a whole pile of money into that market to get maybe a cent or two's return on a 43-cent investment. It's not all that great. The PM markets provide a less certain return, as there's bigger chance of large losses if your expectation of the probability is wrong or if the wrong side of the weighted coin turns up, but the 70 cent investment either gets you a dollar or it gets you nothing.

How can we tell that it's the continuous payout structure? iPredict also has a market where the National Party vote share pays out in buckets: one contract pays $1 if the vote share is over 43% (and $0 otherwise), another at $1 if the vote share is over 43.5%, another for 44% and up, and so on through 49%.

In the vote share (continuous) market, you pay $0.43 for a contract giving you $0.01 for every percentage point of the National vote. In the vote share (discrete) market, at current prices, you would pay $0.90 for a contract paying out at $1 if National gets more than 43% of the Party Vote. You'd pay $0.83 for a contract paying $1 if National gets more than 44% of the Party Vote. You'd pay $0.67 for a contract paying $1 if National gets more than 45% of the Party Vote. You'd pay $0.59 for a contract paying $1 if National gets more than 46% of the Party Vote. 46.5% is at $0.55 and 47% is at $0.48. So the market, in those bucketed contracts, expects National to get between 46.5% and 47%; the parallel Labour ones have Labour getting between 28% and 29%. That's rather more consistent with a 70% chance of National's forming government.

But watch for Winston. NZ First is at 4.8% in the standard vote share market, but he's also odds-on to take more than 5.5% of the vote. The Conservatives only have a 29% chance of topping 5%.

Somebody with time ought to go in and fix things so there isn't free money sitting between the bucketed and continuous vote share markets.

Why do all political parties hate renters so much?

There are two main ways people can meet their accommodation needs: renting and owner occupancy. Both involve making annual payments for housing services either in rental payments, interest payments on a mortgage, or to the extent that an owner occupier has paid of his or her mortgage, in the opportunity cost of forgone interest from having money tied up in the ownership of a house. A lot of people, myself included, prefer to own their own home rather than renting. For others, renting is the preferred method of meeting accommodation, and a third group would prefer to own but rent due to not being able to secure a large enough loan.

Now I can understand a desire to help those in the that third group, particularly since they are likely to be disproportionately drawn from the poorer members of society, but if the mechanism for doing so is to make buying a house cheaper while simultaneously making renting more expensive, the mechanism will actually be hurting the most vulnerable members of the group it is seeking to assist--those sufficiently liquidity constrained that even with the assistance house purchase will still be out of reach.

And yet, the three main political parties' policies on housing seek to penalise this group of renters. The reason for this is that rental accommodation and owner-occupied accommodation are pretty close substitutes on both the demand and supply side of the market, and so their prices are very closely linked. Any policy that either makes it easier to purchase a house for owner occupancy or more costly to own a house that is rented out, while not doing anything to increase the total stock of housing, must make renting more expensive.

So, for example, a policy (Labour-Greens) to level a capital gains tax on residences but exempt residents' first homes, will make it more expensive to be a landlord in a market where house prices are expected to increase in the future requiring a higher rental rate to compensate. A policy (Labour) to prevent foreign non-residents from owning domestic residences to be rented out will have the same effect. And a policy (National) to give tax breaks to first-time house buyers will similarly favour owner-occupiers at the expense of renters, operating here through the demand side.

I would love to see each of the leaders questioned in the televised debates on why they think the effect of their proposed policies on renters would be an acceptable cost.

Landslide costs

Christchurch Council and the government will buy out some Christchurch properties at high risk of landslide. Here's Chris Hutching at NBR:
The government and Christchurch City Council will buy 16 Port Hills properties.
"The latest council-commissioned GNS Science reports show 37 green-zoned homes are in areas where the risk to life from mass movement (sometimes called landslide) is considered intolerable,” according to a council media statement.
An intolerable risk is defined when “the risk to life from mass movement in any one year is equal to or greater than one in 10,000.”
Geonet identified 37 at risk properties in total.
Ok. Recall that the value of a statistical life for policy purposes in New Zealand, or at least the one used by MoT for transport planning and subsequently adopted elsewhere in policy, is $3.85 million per fatality.

Let's work out whether the policy here makes sense.

The median 4-bedroom house in Redcliffs/Sumner, where most of this kind of risk obtains, is $690 per week. Let's take that as the value of housing services over and above the value of services that would be provided by a park in the same spot: the rental costs understate the value of housing services of owner-occupied properties, but parks provide some value too. Let's be safe and call it $500/week extra value. For a year, let's round that down to $25,000 per year. We want an annual figure because the 1/10,000 risk is annualised. Alternatively, we could take the value of the house and the lifetime risk of landslide for that house's life.

If a house has an intolerable risk at a 1/10,000 risk of landslide death, and if that risk is sufficient for buying out the home-owner and taking that property out of housing use, then we're willing to forego $25,000 per year in housing services to avoid a 1/10,000 risk of landslide death.

Now let's suppose that a 4-bedroom house, our valuation basis here, has 5 people in it.

$25,000 * 10,000 = $250,000,000.

$250,000,000 / 5 = $50,000,000

The Ministry of Transport is willing to spend up to about $3.85 million to save a life by roading improvements that prevent deaths.

The government here is spending at least $50 million per (ballpark) statistical life saved.

I'm not sure that this makes a lot of sense where there are other projects that, for the same total cost, could save more expected statistical lives.

Unless we think that dying in a landslide is about thirteen times worse than dying in a car accident. I'm really rather sure I'd rather die in a car accident than in a landslide. Suppose a genie came to me and said, "Eric, you and your family, I know with certainty, have a 10% chance of dying in a bad car accident next year. It'll be quick though. Would you like to trade that for a 0.8% chance of your family dying in a landslide? It'll be pretty terrible."

If you were given that choice, and you'd take the deal to get the landslide instead, then the government's buyout doesn't make sense. If you prefer the car accident, then the buyout can make sense.

Update: Note too that there's an important difference between houses and roading investments. The government, in the latter case, makes investments to mitigate risk of death and accident for anyone using that road. While there may be some roads that risk-averse drivers avoid because they're too terrifying, we all have reasonable expectations of safety on government-owned roads. If I choose to buy a house at the bottom of a very unstable hillside, I have demonstrated that I'm comfortable with that risk. While it's true that the earthquakes reveal more about the actual risk and that some owners may have erred, that could be an argument for an insurance payout for the amount of capital loss, not for buying the owners out and barring future residential use. All we then need is the one-time compensation, plus a great big highlighted section at the front of the property's LIM report noting the substantial landslide risk present at the property. If some prefer taking that risk for a lower-cost house, why should that be illegal?

Saturday, August 23, 2014

When Hooton's away, a Crampton will play

I filled in for Matthew Hooton in the NBR's Opening Salvo this week. It's only in the print edition; here's a taste. [Update: here for subscribers]
We can count the costs of apartment stories left unbuilt. In a well-functioning market, developers will build upwards until the cost of an additional storey roughly equals the extra revenue the developer gets from selling the extra floor space, unless we think that property developers do not really like money all that much. We have pretty good data on what it costs to build a five-storey apartment building as compared to a four-storey one. If a fifth storey left unbuilt because of height limits, whether due to viewshed protection or for other regulation, could have sold for two to three times its construction cost, as the presented study found, the effective regulatory tax imposed by height limits is pretty high. If you add up the value of all the missing apartments, the total figure is going to be massive.
While urban planners often take a lot of stick for wishing to force people into compact city forms, and sometimes rightly so, urban height limits that artificially prevent density impose a regulatory tax that either pushes prices up or pushes cities out. Auckland’s metropolitan urban limit has been pretty binding and artificially restricts building out; regulations barring development upwards need at least as much attention.
The economists at these sessions used similar method to estimate the regulatory tax implicit in zoning regulations in places like Epsom, Remuera, Point Chevalier and Grey Lynn. Add up the construction costs of a new house and the per-square-metre land cost. According to the study presented, which remains in the final polishing stages, mean house prices exceed those real costs by at least twelve percent in places like Epsom: it’s a regulatory zoning tax. The Greens’ Julie-Anne Genter was exactly on point when she excoriated ACT’s David Seymour in the Epsom candidates’ debate for opposing denisification. What kind of free-marketer thinks it right and proper to give neighbours several houses over a veto right over what I might wish to do with my house? One that needs to win votes in Epsom.
Do get a copy that you might read the whole thing. For the Genter-Seymour debate in question, hit the 8:50 - 9:16 mark here.