Paper submitted to City Council June 12th, 2017 by Queens Park resident David Brett in support of the Queens Park Heritage Conservation Area in New Westminster, British Columbia, Canada.

Quote from the Financial Times, London:

“So the message to politicians who see heritage legislation as restrictive and stifling of growth is: look at the evidence. People like living in protected, historic places and it makes their properties more valuable. Companies want to locate close to conservation areas because their employees want to live there. Enlightened local authorities invest in culture and heritage because they know that it makes their environment attractive to business.”

Simon Thurley, “Heritage Homes are Worth the Red Tape,” Financial Times, London, July 6, 2012

The above quote is from an article reporting on a landmark 2012 study by the London School of Economics that analysed over 1 million property transactions in and near over 8,000 heritage Conservation Areas in England. The study found that on average, properties within CAs sold for a premium of 9%, and that price premiums extended beyond the perimeter of the CAs, exhibiting a 4% within 50 metres of the boarder of the CAs and then diminishing to zero at 500 metres away. The rigorous LSE analysis echos the findings of numerous similar economic studies from around the world, leading to a strong consensus among researchers that protected heritage areas consistently attract price premiums.

But in his article, Thurley goes beyond the direct benefits enjoyed by heritage property owners to underscore a clear benefit to business that is quite applicable to New Westminster’s economic development plans. Given New Westminster’s Smart City aspirations and desire to drive our economy through the location of knowledge intensive businesses within the City, making our location attractive to the talent required for those businesses to thrive is of paramount importance.

For example, it is hoped that ongoing investments in the health infrastructure at and near RCH will generate economic spin-offs such as the formation of a Life Sciences innovation cluster. It is well known that early-stage companies in the biotechnology, pharma, and medical technologies fields cannot succeed without human capital inputs of the highest order, and up and coming firms engage in global wars for talent, with compensation levels comprising only part of the arsenal that recruiters must deploy. Lifestyle and location are key. New Westminster’s attractive heritage amenities would be a much more potent weapon for attracting talent if those assets were protected.

Having strong and growing knowledge-based businesses in New Westminster will be beneficial to all property taxpayers in the City, and as such heritage protection will drive benefits well beyond the boarders of any neighbourhood that is covered by such protections.

Regulation Versus the Free Market

As a person who is well known in the community as a strong advocate of free enterprise, some might wonder why I am advocating in favour of freedom-restricting regulation. The truth is, students of free market economics know that regulation is often required to ensure that certain kinds of markets operate efficiently. The market for heritage is a classic example of a market requiring regulation to operate efficiently.

The above referenced LSE study, and other authoritative research completed in other markets, foreign and domestic, are highly applicable to the Queens Park Heritage Conservation Area proposal because they rest on universal economic principles that transcend location, including:

• Public goods.
• The free rider problem.
• The phenomenon of collective action.
• Willingness to pay.

Public Goods

In economic terms, heritage is a public good. Public goods:

• Have beneficial externalities, that is, qualities that can be enjoyed by others who have no ownership interest in the good. The beauty of a heritage home can be enjoyed by individuals who neither own nor pay for the good.
• Are non-excludable. Unless extremely high hedges or fences exist, the private owner of a heritage home cannot stop passers-by from enjoying the view of their house and surrounding gardens.
• Are non-rivalrous. Positive heritage externalities do not “run out.” One person’s enjoyment of the beautiful exterior of a heritage house does not reduce the supply of that enjoyment to anyone else.

The inside of a heritage home, on the other hand, is not a public good. As such, those wishing to enjoy internal heritage amenities may patronize heritage homes tours, buying tickets from a limited supply, queuing up in long lines, and often traveling long distances.

Free Rider Problem

Neighbourhood wide heritage preservation represents a classic case of what economists call the free rider problem.  When neighbourhood residents voluntarily work together to preserve the historic quality of their properties, they all equally enjoy a collective benefit. However, there exists within such areas a significant motivation for some individual home owners within the heritage neighbourhood to diverge from compliance with the generally accepted heritage conventions of the larger group. Rational, utility maximizing home owners reason that their property alone, if altered in a non-conforming way, would not result in a significantly perceptible reduction in the collective heritage amenity of the entire area. “My single non-conforming alteration will not make a noticeable difference to a neighbourhood of 700 homes” it is reasoned. Unfortunately, the collective action of each, single, rational, utility maximizing resident can end up in a net loss for all residents, including themselves, as the collective heritage amenity is gradually eroded.

The Tragedy of the Commons

The free-rider problem exhibited in heritage neighbourhoods is illustrated well by William Forster Lloyd’s classic 1833 essay “The Tragedy of the Commons,” where villagers have access to common, shared grazing lands in the middle of town. In Lloyd’s grazing scenario, villagers, each acting in their own, rational self interest, bring their cows to the area as often as they can, to maximize their own benefit. In due course, the common grazing area becomes permanently depleted, resulting in a complete loss to all participants in the market.

Collective Action

The Tragedy of the Commons is a classic “market failure,” where Adam Smith’s “invisible hand of the market” does not operate as it should to the greater welfare of society. As with the fishery, open competition between rivals respecting a non-excludable public good (fish in the sea) can lead to loss of all of the resource for everyone. Fishers therefor submit to restrictions on there rights to access the resource as they correctly conclude that it is in their own interest to do so, with appropriate enforcement to prohibit free-riders. Protection of the natural environment similarly requires collective action, whereby as a society we mutually agree to, for example, refrain from disposing of recyclable materials into landfills. A single plastic water bottle carelessly disposed of has an impact on the environment approaching zero, encouraging free riding on a massive scale. Some countries that have no deposit requirement on plastic bottles see millions of containers clogging streams and littering roadways.

In an HCA, participants willingly submit to regulation to preserve a common resource that is subject to depletion through free-riding on a non-excludable public good.

Willingness to Pay

It’s well established that the Queens Park Neighbourhood (“QPN”) is the most expensive residential land in New Westminster. Home buyers are clearly willing to pay a premium to live in a neighbourhood made up primarily of old homes. This premium extends to land occupied by both old and newer houses, as the heritage character of the area overwhelms the more modern additions.

All owners of land in the QPN have a direct, financial interest in the Collective Heritage Amenity (“CHA”) represented by the aggregate of all the individual heritage properties currently extant inside the QPN. The aggregate monetary value of the QPN HCA is diminished each time a unit is removed from the aggregate heritage stock, reducing the willingness to pay of new buyers. It stands to reason, therefore, that current land owners would seek to lock in their CHA through regulation. Both current owners and new buyers are placing long-term bets on heritage, and an Heritage Conservation Area is an attractive means of securing long-run gains.

Naturally, free-riders seeking short-run profit maximization through demolition or non-conforming alteration will have very low interest in medium and long-run heritage protection gains. In the absence of area-based protections, a small percentage of individual owners in the market will seek to “cash in” their Collective Heritage Amenity “chips” prior to regulation, which is why BC’s heritage policy provides for a 12-month Heritage Control Period (“HCP”). By its nature, an HCP is designed to prevent such “cashing in” and to be effective must be imposed with a minimum of “signalling” to the market. Public “warnings” of an impending HCP would undermine its purpose, which is to preserve culturally beneficial historic buildings and landscapes for the greater social welfare.

Private Property Rights

In a 2015 paper published by The Frontier Institute, Canadian economist Dr. Frank Atkins raises the issue of property rights in the context of heritage protection regulation in Canada. In the course of his analysis, Atkins reviews the substantial literature indicating higher market values for protected heritage areas, but argues that the issue of private property rights are insufficiently factored in due to the fact that individual property rights are not constitutionally enshrined in Canada. As Atkins writes “Unfortunately, in order to enshrine property rights in the Constitution, the federal government would have to convene another round of constitutional negotiations, which would be subject to the usual contentious amending formula.”

In light of the federal constitutional nature of property rights, it would appear that it is beyond the jurisdiction of municipal governments to pass judgment on the appropriateness of Provincial heritage regulation duly operating under the laws of Canada. The City of New Westminster should rightly proceed to interpret individual property rights as comprising the limited and restricted set of privileges they currently confer, such as the right, subject to building codes and other bylaws, to erect or alter a dwelling and/or make improvements thereon.

Unlike the United Sates Constitution, Canada’s Charter does not specify property rights, and as such we are left to assume that such exclusion was intentional, and by its exclusion collective action is more liberally encourage. This current balance of Canadian rights seems appropriate for heritage protection.

Why Now?

After decades of heritage restoration in the QPN without regulation, why is regulation required now? The simple answer is: the value of land. It’s accepted that land values have skyrocketed in the Metro Vancouver region within the last 10-15 years, whereas the relative value of a dwelling located on that land has not escaped normal depreciation rates. As such, the ratio of house value to land value is becoming an ever-smaller number.

A UBC study released in February of 2017, dubbed the “teardown Index,” using house to land value ratios published b the BC Assessment Authority, predicted that 25% of Vancouver’s current detached houses would be demolished by 2030.  The study found that when the value of a house becomes just 10% of the overall value of the property, there is a 25% chance such a house will be demolished. Ironically, as houses age, they depreciate further, lowering the ratio and increasing the chances of demolition.  There is no reason to believe that Queens Park can escape the inevitable and escalating effects of the “teardown index.” As such, urgent action is warranted.

Summary

As drafted, the proposed Heritage Conservation Area for Queens Park is good policy that I would urge Mayor and Council to pass. As a resident of the QPN for going on 24 years, I have no interest in seeing my hard-earned equity diminished nor my property rights unduly curtailed. On the contrary, those very equity gains and property rights are under threat due to the increasing likelihood of erosion of the Collective Heritage Amenity that I currently enjoy. By advocating for this HCA, I am adding to my rights, not giving them away.

At the same time, this QPN HCA extends benefits to the larger community of New Westminster by preserving and enhancing the distinctive character of the City for all residents. The QPN exudes a valued ambiance for residents across the City, and makes our location more attractive to the workers that businesses need to succeed.

As Vice Chair of the Queens Park Neighbourhood Heritage Study Working Group, I was encouraged to observe the overwhelmingly strong support for the HCA in the community. It is a balanced policy with tremendous tangible and intangible benefits and negligible downside.

I urge you to support this policy.

References:

Gabriel M. Ahlfeldt, Nancy Holman•& Nicolai Wendland. An Assessment of the Effects of Conservation Areas on Value, London School of Economics, May 2012.

Atkins, Frank, PhD. Some Issues Concerning Heritage Preservation. The Frontier Centre for Public Policy, Winnipeg, Manitoba, 2015.