Following my previous post outlining how rent control is equally efficient as any form of private property ownership, since it merely transfers rent between building owners and tenants, I want now explore in more detail the hold-out potential of rent-control tenants, and of strata title owners in general.
As is typical these days, the impetus for this post was a tweet, this time from @marketurbanism arguing that rent controls hinder development. I disagreed and responded by linking to my previous post, which prompted a brief discussion on the hold-out ability of strata title owners in the event of proposed redevelopment. The back-and-forth ended with this tweet of mine
@MarketUrbanism What if a land/whole building owner holds out from selling to a developer because of unrealistic price demands? Same thing
— Cameron Murray (@Rumplestatskin) March 19, 2014
Put simply, the ability for a strata title owner to hold out from the amalgamation of their building for redevelopment is exactly the same as the ability for a single owner of the whole building to hold-out from development. Or for that matter, the ability of a land owner to hold-out for an unrealistic price before developing their land in the first place.
In NSW changes to strata laws are under consideration, with the developer lobby strongly supporting proposed reforms that will force sales of strata title units if there is a minimum level of agreement of owners within the scheme. In Singapore such rules are in place. There, if 90% of strata owners agree to sell, the remaining 10% of owners are forced to sell at the agreed price. Here, pro-development groups are proposing (also PCA) a lower threshold of 75% to generate a forced sale of a strata title scheme.
Not only that, but a simple majority vote (50% of lot owners) under the proposed changes is sufficient to begin the sale process. After the process is started all that is then needed is 75% to agree on the price, leaving the remaining 25% forced to sell at the agreed price.
While I would need more facts to judge the appropriateness of the law, it is worth noting that this is a complete shift in bargaining power towards developers and away from the existing strata unit owners as a collective. For example, a developer only needs to buy 50% of lots to get the process started, and then only get agreement from 50% of remaining lot owners. They are effectively able to squeeze the final hold-out owners – transferring rent from those owners to themselves in the process.
There is no efficiency argument for this change of law, although there may be other arguments which I won’t be discussing (I’d be interest in reader’s views on potential justifications of the law on other grounds).
To give some perspective, we can take the same logic and apply it to another situation. In many planning schemes there are minimum lots sizes required in order to access greater density limits. If you have a lot over 2,000sqm, for example, you may be able to build with a Floor Area Ratio (FAR – the ratio of building floor space to land area) of 5 instead of 4. Or more generally, set-back requirements, the size or shape of lots, or other design requirements might make a slightly larger lot much more valuable.
If I owned a lot with an area of 1,800sqm, and the neighbouring lot was 200sqm, that neighbouring lot would have a uniquely high value to me because of the ability to amalgamate the two lots and get a higher development capacity. They would have exactly the same type of hold-out power as strata unit owners currently have, and which US rent-control tenants also have. In the extreme, my neighbour could hold out for a price that represents almost all the gain to me from the amalgamation, or even refuse to sell at all.
Should there be a mechanism in place to force my neighbour to sell to me in the name of efficiency? If you answer no, then you must also question the validity of the currently proposed law changes happening in NSW. If you answer yes, then you need to consider carefully where the limits to such powers should sit and exactly what remaining rights private property owners should have.
To me this is merely an example of the developer lobby chipping away and the legislative environment, shaping it in their favour.
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