Nick Jahnecke: Misnomers of the ‘free market’

If the East West Link was the big city issue in Melbourne for 2014, apartment design standards are shaping up to be the big issue of 2015. Whilst the quality of apartments, particularly in Melbourne’s CBD has been publicly questioned for some time, 10 days ago Planning Minister Richard Wynne released a discussion paper: Better Apartments, to structure the debate which is now in full swing. This discussion paper will be analysed in depth in the coming weeks prior to the close of submissions at the end of July.

A couple of weeks before the release of the discussion paper, the Victorian Chapter of the Australian Institute of Architects held their monthly public event Friday Night X, which is a curated series of short talks in a fairly informal setting. On this particular night the topic was ‘Families in the City’ which facilitated a lively discussion on many aspects including planning, apartment quality and how to better facilitate families in the city. After this event, Darcy Allen, an economist who attended the event wrote an interesting blog piece entitled Architects and planners: the perfect storm for rent seeking.

Masters of Architecture student Nick Jahnecke brought this to the attention of The Red+Black Architect blog and I am delighted to give him the opportunity to respond with the following, well researched piece.

Melbourne

 

The article written April 25, 2015 titled Architects and planners: the perfect storm for rent seeking by Darcy Allen poses some interesting points for discussion, and the motivation for his article was the lack of discussion about economic theories in an architectural context.

Allen’s article revolves around two key points, the first being that town planning and architects are structured in a way that facilitates rent seeking. The second point being that the debates over planning mistake the only two options as being to plan or to have no planning. This piece will further explore some of the points raised in Allen’s piece.

Law through the Architects Act 1991 protects the title of “architect”. This creates a barrier to entry in the profession of architecture. What this does not do is limit the supply of professionals that can prepare a set of contract documents for construction. An article by Nathan Johnson states that non-architects are engaged in 97% of residential works, including 90% of multi-residential; architects are not the only professionals who can design a building.

What the protection of the title of ‘architect’ actually does is recognise that individual for completing the prescribed levels of education and supervised experience in industry, and that they are more competent in designing our built environment than someone that is not an architect.

Allen states “restricting the use of the label ‘architect’ decreases the supply of architects, and increases the average wage in the industry…” The following chart shows where architects sit in the context of industry wages (fig 1a).

Allen’s concerns of principal-agent problems arise next, “architects earn commission based on build cost…what we have here is a classic principal-agent problem.” This can be addressed by reviewing some legal instruments used in industry.

A Client-Architect Agreement provides an outline of a project’s scope in the early stages of a project. This includes an approximate cost of works, and the scope of services to be provided. Importantly, Section 5.0 Fees describes options for remuneration, with parties agreeing to a percentage (commission), lump sum, hourly rate, or a combination of the three.

Further to this, standard form contracts such as AS2124 work to protect clients from problems such as principal-agent issues. Clause 23 of the contract states, “The principal shall ensure that at all times…the superintendent… act honestly and fairly.” This is one example of a contract, but if an architect is the superintendent of a contract, they face legal ramification for acting unfairly.  The case Walton v Illawarra [2011][1] saw a decision made where the superintendent played the dual-role, doubling as project architect, and the hearing was based on claims of unfair conduct against the architect.

The concern continues as Allen’s article notes “build cost is a function of regulatory prescription,” and discusses regulations increasing the cost of construction. There would be few instances where regulation decreases build costs, but the important question is ‘is it good value?’ Being concerned solely with cost can be a shortsighted approach. Looking at regulations surrounding Bushfire and energy use performance are cases in point.

The purpose of responding to a Bushfire Attack Level (BAL) assessment is to improve the likelihood of building stock surviving a bushfire; prevention is better than cure. The purpose of complying with energy star ratings is to reduce the environmental impact of operating a house, which generally translates in to lower operational costs (usually realised through reduced loading on heating and cooling systems). This is arguably better value despite the higher cost.

Allen’s article turns towards the NSW State Environment Planning Policy 65 (SEPP 65) to explore the regulation of apartment sizes and the resulting increase in construction costs. Part of the concern is that increasing the size of apartments will increase their cost, and this will place a larger financial burden on consumers. There are other ways to cut costs in a development however, and building to a price point doesn’t mean that good quality design is nonexistent.

The Nightingale development maintains a high level of design quality by rigorously analyzing the scope and omitting unnecessary costs, such as marketing, agent fees, car parking and more.

Where some might disagree with the minimum sizes is from an innovation and quality perspective. Having a small space doesn’t mean it can’t function effectively. Conversely, having a larger space doesn’t imply it is well designed. This is why the SEPP 65 is performance based, and not prescriptive on minimum sizes, “buildings not meeting the minimum standards listed above, must demonstrate how satisfactory daylighting and natural ventilation can be achieved…” p69 [2]. These projects are inherently complex so a prescriptive standard wouldn’t be possible in all cases.

The AIA president calling for the mandatory use of architects for the design of certain building typologies is to ensure that those most qualified to tackle a project with such inherent complexity. This is not at all like “protecting the title of financial planners and then saying every time you make a credit card transaction over $1000 you have to engage with them,” as Allen’s article proclaims. A better analogy would be that a government regulator must be engaged for one bank to buy another bank. Buildings are like tattoos; they’re permanent to a degree, and they’re expensive to procure and remove, you want to get them right. Whilst an individual deals with a tattoo, a building effects more than one person, and can’t be covered by a long-sleeved shirt.

Regulating these projects is designed to protect the individual. A developer has little interest in the end-user and in the urban context of the project; instead their primary concern is with profits. Looking internationally, examples of developers having tunnel vision for profits can be seen.

Market led policy measures for urban redevelopment in Singapore (Lum et al, 2004 [3]) shows that private sector redevelopment achieved some design outcomes- clearing dilapidated building stock for example. There were several problems overall however as developers tried to maximise density, showing no consideration for harmony within a streetscape, and showing no thought for infrastructure capacities. The private sector developers failed to coordinate with each other in the city context.

Allen’s article reflects on planning regulation in Houston, Texas, USA, where a less rigid system allows for individual planning rather than central planning. The argument is that this will cater for “more affordable housing and more innovative and growth friendly environments.”

The use of Houston as an example of a good city is questionable though. The photo below (fig. 1b) shows a shot of Houston in the 90’s, when over two-thirds of the city was car parking and roads. It might be apparently cheaper to build in Houston, but does that mean it is better value in an environment designed for cars? Looking at cities like Sydney or Melbourne may give a different perspective.

Houston we have a problem

Fig 1b Aerial photo of Houston, Texas, approximately pre-1991, source unknown.

Sydney is coming out of a large rejuvenation period, which is has modeled somewhat off Melbourne’s efforts roughly a decade beforehand, both cities’ policies coming from government. These efforts were a central planning intervention in response to the lack of positive impact provided from the private sector.

Pro-developer regulations of the late 60’s and early 70’s left Sydney with tall, low-quality buildings, and poor quality public spaces. Fine Grain, Global City (McNeil, 2011 [4]) found that Sydney realised it had an oversupply of “physically introverted [spaces] that maintained private control” p164.

“The Sydney case is an interesting example of how a city centre increasingly dominated by global city functions of advanced producer services, may seek to use regulatory, supply-side mechanisms to seek to achieve a particular social and cultural mix of activities in its downtown (CBD),” p176.

The central planning essentially resuscitated two capital cities, which are now renowned internationally for their livability

Allen also investigates larger urban scale private sector development and planning in Gurgaon, India. The article by Rajagopalan and Tabarook (2014) [5] acknowledges the efficiency of individual planning in this instance thanks partly to monopolized corruption. The findings also discover again the lack of coordination between the private sector, and the inability to respond to urban infrastructure; “by 2021 Gurgaon will be generating 533 million litres of sewage but will have the capacity to treat only 255 million litres,” p208. Whilst the some companies in the private sector have private sewage treatment facilities, others choose to dump their waste illegally. This is not really an example of individual planning outperforming central planning, and at best it’s an opportunity to review and iron out kinks in future attempts.

A larger scale again in private individual development is seen with Walt Disney World. The success of this development is partly due to the scale of which it was done, and that the undeveloped site had one individual controlling the project.

It’s a shame that architects can be unfairly on the receiving end of criticism, however I think Allen’s article is more of a collaborative review of the profession as a whole. That being said, setting the record straight on a number of points is important. Architects are not out there to gouge clients for every penny they have, their interest is to solve problems and deliver good projects. Contracts protect unsuspecting clients from such behavior. Rent-seeking with planning departments is a long bow to draw in the SEPP65 context when considering the both the permanence and complexity of these developments, and the intent is to protect consumers and cities from poor design.

 

References:
 [1] Walton v Illawarra, 2011, New South Wales Supreme Court, 13 October 2011,
 [2] State Government of New South Wales & Department of Planning and Environment 2002, State Environmental Planning Policy No 65- Design Quality of Residential Flat Development.
 [3] Lum, SK, Sim, LL & Malone-Lee, LC 2004, ‘Market-led policy measures for urban redevelopment in Singapore’, Land Use Policy, vol. Vol 21, no. 1, pp. 1-19.
 [4] McNeill, D 2011, ‘Fine Grain, Global City: Jahn Gehl, Public Space and Commercial Culture in Central Sydney’, Journal of Urban Design, vol. Vol 16, no. No 2, pp. 161-78.
 [5] Rajagopalan, S & Tabarrok, A 2014, ‘Lessons from Gurgaon, India’s private city’, Cities and Private Planning, pp. 191-231.

 


Nick Jahnecke

About the Author

Nick Jahnecke has a Bachelor of Design (Architecture) and a bachelor of Construction Management (honours), and is expecting to complete his final year in a masters of architecture in 2016. Nick has worked in an architectural practice as well as for a design and construct builder.

 

 

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About Michael Smith

Architect and Director of Atelier Red + Black based in Melbourne, Australia
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One Response to Nick Jahnecke: Misnomers of the ‘free market’

  1. Well written article, Nick. I read Allen’s article too and say many of the same holes as you did. It appeared that he failed to read to the end of his research sources, cherry picking bits and pieces to suit his argument.

    I felt a bit like Steve Vizard, who was imprisoned a number of years ago for insider trading, but ironically made a loss on the relevant transactions. If the profession has been so succesful at regulatory capture and rent seeking, why aren’t we richer / more influential / enjoying a larger slice of the pie!?

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