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Guest Post: $1 billion Fletcher/Crown housing development — Christchurch CBD – Part 3

This is part three in a five part series of guest posts on the Christchurch rebuild from reader Brendon Harre. It first appeared on the Making Christchurch blog.

You can read Part 1 and Part 2

Part 3: Is the Fletcher/Crown development exploitative?

Brendon Harre - Chch Part 3 - Henry George Sign

What did Mike Greer mean by “politicking on houses”? If one uses standard urban economic geography analysis to examine this situation we get some understanding of what he might of meant (note I have never met Mike Greer so this is an educated guess). The following graphs show how key variables of a typical city change from the centre to the edge of the city.

Kulish et al (2011) unconstrained

Visually these graphs would depict the following type of city.

Missing Middle

The key point is that house and land prices are typically higher in the city centre and decline towards the edge of the city. For cities it really is all about location, location, location.

Why are centrally located properties worth more than peripheral ones?

  • Centrally located properties are closer to public and private amenities — shops, parks, restaurants, entertainment, customers, employees and places of employment. This is a basic geometric law — the centre of a circle is the point closest to all other points within the circle. Note as cities get bigger they evolve secondary peaks and move from monocentric to polycentric. Also views, sun, proximity to waterfronts and other factors can skew this otherwise simple model but as a general rule the model is quite predictive.

So when one is discussing the property prices of a city you are really talking about a 3D curve. With site prices varying with location –x and y dimensions. But a city can be built in three dimensions –X,Y,Z or ‘out and up’. Businesses and residents choose where to locate themselves based on price, land area, floor area and whether to be more centrally or peripherally located.

The key features of the graphs being how high the central values are, what the median value is and how low the peripheral values are.

Actual land values in Greater Christchurch vary from industrial land in Izone Park and Carter’s Group Iport in Rolleston 20km South of Christchurch. A price list obtained by NBR shows lots being advertised for $125 a square metre up to $160 a square metre (in Rolleston). According to an industrial specialist Greg Mann, the price of similar land closer to the city at Wigram is $300–350 a square metre and at Hornby $225 a square metre. This price rises to around $1000 a square metre for the Crown’s purchases of central city land of the Eastern Frame and $3000 to $3,500 a square metre for land under the proposed convention centre adjacent to Cathedral square.

To reduce median property values to get affordable housing, the whole curve has to move lower, site prices in real terms have to be stable or falling in all locations. Construction costs have to be falling or at least stable for all locations. Then competition from cheaper new builds will cap rising prices of existing property.

There is an argument that cities need a supply vent that can quickly respond to increased demand to prevent excessive increases in land and property prices. That supply vent needs to be some combination of ‘up and out’. Typically affordable housing advocates such as Demographia argue that access to cheaper rural price fringe land through the competition effect keeps more centrally located city land prices lower and therefor median property prices affordable. They argue ‘up’ by itself is not enough to keep the property market stable. This article will focus on the other end of the market, on whether there is competition in the inner city section of the Christchurch property price curve. The underlying question is: does this section of the market need competition too?

Affordable housing has been a stated aim of this government since prior to their first election in 2008. How have their actions in rebuilding Christchurch since the earthquakes of 2010 and 2011 been towards achieving this aim?

The business model of the Fletcher/Crown agreement is that this entity would use it monopolistic control over a large part of the centre of Christchurch to extract the maximum profit possible from both the underlying land and the housing units. In other words to push up the city centre section of the property price curve as high as possible. It is hard to reconcile this monopolistic profit maximising business model against the governments long expressed goal of improving housing affordability.

Monopolistic suppliers achieve pricing power by restricting the amount supplied to the market in such a way that prices rise. In the real estate game this is called land banking. Typically land bankers exploit the difference between rising demand and inadequate new supply -delayed due to regulatory or infrastructure failure. The suspicion is that Fletchers Christchurch CBD development will price for the top dollar and if it doesn’t achieve that, it will slow construction down, until it receives the desired price. At the time Eastern Frame land was acquired by the Crown (with the threat of compulsory acquisition) many land owners questioned the morality of this “land banking acquisition process”. Many commenting on the Press’s article “Owners riled by eastern frame plan”. Here is a few examples.

Stolenbytheccdu 666 days ago

“Brownlee said the Crown did not stand to profit from on-selling parcels of frame land.” yeah right. The prices they paid for the eastern frame were low. The Government stole that land.
Freethinker 666 days ago

Great to hear Govt will make no profit on land sales so there will be no reason not to disclose the govts purchase and sale price and if there is a profit this can returned to the owners — and father christmas will visit all believers on 25/12 with a sack of goodies!!!

There has been an apartment building boom in many Australasian cities, sites for apartments have doubled in price in the past three years in Sydney, constructions costs are also rising. Vancouver in Canada is facing similar pressures. Is the Fletchers/Crown profit maximising entity trying to capture some of that boom? Australian and Canadian business commentators indicate the key driver of this apartment building and property price boom is off-shore investors. So Mike Greer may be right in that the CBD rebuild is not to service the local Christchurch community in an affordable manner. Instead, it is designed to create unearned capital gains opportunities for those outside of Christchurch. In the first instance the beneficiaries will be the Fletchers/Crown profit sharing partnership, whose priorities are nationally focused, rather than giving back to the Christchurch community. Off-shore property investors with a capital gains business model are a potential second wave of non-community beneficiaries.

The above analysis points towards a deliberate exploitative process, that the government is not interested in its market regulator duty of ensuring the property market provides affordable housing and low property related input costs for business. But the deliberate part may not be true, Gerry Brownlee the Earthquake Recovery minister firmly rejects any ‘conspiracy theory’ accusations of favouritism between the Crown and Fletchers.

11 comments to Guest Post: $1 billion Fletcher/Crown housing development — Christchurch CBD – Part 3

  • I am quite confused about why we are up in arms about any kind of lack of Govt intervention or caring attitude toward the (supposed) monopolistic attitude of developers in Christchurch. Not that we shouldn’t care, but when did anyone think that the Govt DID care about affordable housing? Auckland has designated SHAs which are producing almost NO housing for our city (I note that nobody has responded to my comment on the post about the new SHAs that have been released in Auckland asking why, when there are 80 designated SHAs in Auckland that in the 6month period to March only 15% of all sections and dwellings brought to market in Auckland were in SHAs?? Not such a ‘fast track development of affordable housing’ is it?). What market regulator duty does the Govt hold for ensuring the property market provides affordable housing (as you refer to in your last paragraph)?

    • Brendon Harre

      Lizkateweb I am from Canterbury so I am not so familiar with Auckland’s SHA’s, but if they are not performing as promised then you could do some research, collate your facts and write an article.

      The Crown has a responsibility to regulate all markets to ensure their is fair competition between buyers and sellers. In the case of housing the government has been promising affordable housing since prior to them being elected in 2008. The government have consistently said over many years they will ensure there is an increase in the supply of housing and this will provide affordable housing.

      I have used this $1 billion property development as a case study to examine this argument. I am asking questions like -is this the right sort of housing supply? Why could I on a entry level nurses salary buy a 2 bedroom townhouse for $160,000 near the CBD in 2003 but young nurses will not be able to afford to buy property in the Christchurch Eastern frame development -two blocks away from where I used to live because the average price in the development will be $800,000.

    • Brendon Harre

      Lizkateweb maybe from what you saying SHA’s will not add supply and will not provide affordable housing.

      Also there is supply and then there is affordable supply. As Mark Todd the Auckland developer says -if the new housing supply is above the median house prices then mathematically that means the new supply will not provide more affordable housing.

      The solution to affordable housing is to find a way to build new houses for less than the median price for existing houses in places where people want to live.

  • John Polkinghorne

    According to mainstream economic theory, there shouldn’t be much of an issue with Fletcher being the “monopolist” on this inner city land. The govt should hold the cards – if it wanted the highest possible price for its land, it could have held a competitive bidding process for it, and extracted most of the profits itself. If it was happy to get a lower price for the land, it could have used its leverage to ensure that the homes were sold at lower prices (or built quicker than a profit-maximising monopolist would want) as a result, rather than simply letting the winning developer pocket the difference.

    I haven’t followed this particular saga closely, and maybe the govt has done something like that, and maybe it hasn’t. It certainly says it has – from https://ccdu.govt.nz/projects-and-precincts/the-east-frame:

    “A robust and competitive bid process was followed before the selection of the Fletcher Living proposal. This included an open request for expressions of interest, where 13 developers put their name forward for consideration. Four of those, who had the capacity and capability to deliver the East Frame development, were selected to submit a more detailed development proposal for CERA to consider.
    At each stage proposals were evaluated by a panel of experts against a set of criteria detailed in the tender documents.

    Fletcher Living has been selected because their proposal offers the best combination of design quality, timeline for development, assurance of delivery and commercial outcomes”.

    • John Polkinghorne

      The other thing is that there’s often a tradeoff for large-scale developments between “competition” from multiple developers being able to take part, vs. the economies of scale/ consistency of vision/ etc from a single developer doing the lot. A well-structured bidding process can provide the “competition” at an earlier stage.

      Last thing – since Fletcher have apparently been selected in part because of their “timeline for development”, I would hope that this is something that is set out in their agreement with the govt, so that they do actually have to go and develop rather than land banking.

      • Brendon Harre

        John the government compulsory acquired the land, so if they on sell the land for a greater amount than they acquired it, then the original land owners would be justified in claiming their land was stolen from them. In this deal the Crown is the land banker. They only sell each block of land to Fletchers once Fletchers has completed and sold the previous block. I haven’t confirmed this, so their may be a side deal with CCC, but in general the Crown does not pay rates. So the usual holding costs may not exist for this Crown/Fletchers development. This means the incentives are geared towards Fletchers slowly supplying the market.

        • John Polkinghorne

          Whoops, forgot to check this thread… you may be right there Brendon, or the govt may have written in something to cover itself e.g. it sells each stage at market value, or something like that. Also, sorry if I came off as a bit harsh, I’m enjoying your post series 🙂 and just trying to point out potential ways around the problems you’ve identified.

  • Brendon Harre

    Note the poster “Everybody works but the vacant lot” is a paraphrased quote from 19th century economist Henry George. I sourced this photo from the Prosper Australia Research Institute which researches economic rents. – See more at: https://www.prosper.org.au/2008/06/23/everybody-works-but-the-vacant-lot/#sthash.jBclfeWH.dpuf

    I am not a supporter of Land Value Tax as a single tax as many modern ‘Georgists’ are, I don’t think it is practical to raise the revenue of a modern democracy from this one tax. But there is no denying it is an efficient tax that should be used more widely, I think rates should be based on land values -not land + capital values as this will encourage the most productive use of urban land i.e. it will incentivise going up as opposed to out. https://www.prosper.org.au/our-policy/

    • Brendon Harre

      Economic rent was a much more familiar concept 100 years ago. The dangers of the land monopolist was a matter of national importance and debate. A young Winston Churchill made an important speech on Land Monopolies in a campaign to introduce a kind of land value tax. Unfortunately it was blocked by the House of Lords. http://www.landvaluetax.org/current-affairs-comment/winston-churchill-said-it-all-better-then-we-can.html

      The speech is well worth a read. The British campaigners for land tax have this to say. “Winston Churchill made this speech in 1909. We can’t put the case better ourselves. A century on, it remains clear, concise and to the point. We would commend it to David Cameron and his team.”

  • George D

    If there was any hope of changing this, it was demolished when Christchurch gave the government a strong endorsement last year.

    • Brendon Harre

      George I like to be a glass half full person (as hard as that can be sometimes). So I think there is lessons to learnt and the past doesn’t always dictate the future. We have choices as individuals and as a society……