Part 3: Is the Fletcher/Crown development exploitative?
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.
Visually these graphs would depict the following type of city.
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.