On the Baltimore Sun editorial....

The Sun got it partly right in its March 23 editorial "Squeezed Out." Maryland's loss of housing affordability has driven people out of the state, as it is driving households out of other unaffordable states like California and New York, not to mention the counties of northern Virginia. And yes, it is too bad. However, the Sun's suggestion that there is plenty of room for more housing in Baltimore is hopeless. Generally, people would rather locate out of state to York, Sussex, Kent and Berkeley Counties. The sooner Maryland wakes up to this reality, the sooner it can adopt the more liberal land use policies that make housing affordable. Otherwise, the prospect is for things to get even worse.

Posted by Wendell Cox at 10:25 PM | Permalink

Faced with some of the most unaffordable housing in the world, New South Wales residents continue to move away. According to data just released by the Australian Bureau of Statistics, 172,500 New South Wales residents have moved to other parts of the nation during the 2000s. This is an annual average out-migration of 24,600, up strongly from the 14,900 annual loss rate of the 1990s (when housing prices were also escalating relative to incomes). Approximately 24,000 people moved away from New South Wales in 2006 to other parts of Australia. Because the Sydney area comprises the majority of the state’s population, it seems likely that it has suffered most of the out-migration. The 172,500 loss is larger than the population of the city of Liverpool, one of Sydney’s larger local government authorities.

Queensland has been the beneficiary of the New South Wales losses. During the 2000s, Queensland has gained 210,600 internal migrants, an annual average of 30,100. This nearly equals the strong 1990s in-migration, which averaged 31,000 annually.

Outside of Queensland, only Victoria has posted a gain in internal migration during the 2000s, at a modest 4,700. Western Australia lost 4,900 movers to other parts of Australia, though in the last year gained 3,100. Tasmania has lost 1,600 during the decade. More substantial losses have occurred in the Australian Capital Territory (8,800), the Northern Territory (11,800) and South Australia (19,000).

Data

Posted by Wendell Cox at 08:12 PM | Permalink

According to the Sydney Morning Herald a survey in the Fujitsu/JP Morgan Mortgage Industry Report indicated that one-quarter of households has had to reduce spending to pay home mortgages in the bloated property markets of Australia.

The Demographia International Housing Affordability Survey reported earlier this year that housing prices relative to incomes (the Median Multiple) had escalated to more than double the historic norm in all major Australian markets.

The net effect is house price escalation so severe that in Perth, it now takes 11 years of additional pre-tax household income to pay for the median priced house than would have been the case if housing had remained as affordable relative to incomes as 10 years ago. In Sydney, the additional income required is more than eight years, in Adelaide seven years and more than six years in Adelaide and Melbourne.

It should come as no surprise that consumer spending is taking a hit. A household with six to 11 years less income will buy fewer cars, fewer television sets, and less of just about everything. Households simply are not able to spend money that they do not have (or cannot borrow). Taking years of income away to pay for overheated house prices can only hurt the ability can only hobble the economy in the long run, leading to less job creation and less home ownership. Given the wealth creating effects of home ownership, inordinately high housing prices are likely to expand poverty, not to mention the escalating rental prices that must inevitably follow out-of-control land prices.

The housing bubble that has developed in Australia is not to be found everywhere. In a number of US and Canadian markets housing remains affordable, with Median Multiples near or below the historic norm of 3.0. Today, housing prices relative to incomes are little different than a decade ago in these markets. This includes markets such as Atlanta, Dallas-Fort Worth, Houston and Austin, which have stronger demand than any major Australian market, demonstrating that the universally available low interest rates and exotic mortgage products are not the explanation.

The difference, of course, is land use policies. Virtually all of the overheated Australian markets (as well as the overheated markets in other surveyed nations) have development restrictions, in law or practice, which severely ration the amount of land available for new housing. The law of supply and demand makes it clear that rationing supply drives up the price of any desired good or service. And, state land rationing in Australia has driven the price of land up with a vengeance --- at a rate that exceeds any element of the Consumer Price Index. Not even Typhoon Larry could drive the price of fruit up as much as urban consolidation policies have driven up the price of land. Few if any government policies in history have inflicted such horrendous losses on future generations in so short a period of time.

The loss of housing affordability in is about much more than academic discussions of home ownership rates. Rather, it is about the future of the economy and the quality of life in Australia.

Posted by Wendell Cox at 11:39 AM | Permalink

An article in the Globe and Mail, Canada's oldest national newspaper, trumpets the results of the just announced national census with: the 2006 census data say population growth is exploding around Toronto, Montreal, Vancouver, Ottawa-Gatineau, Calgary and Edmonton. For the first time the city of Toronto comprises less than half the population of its metropolitan population.

Yet the message of the article is not the continuing suburbanzation of Canada, which mirrors the continuing suburbanization of virtually everywhere that governments allow people to live where they like. Rather, the story imagines a rejection of the suburban life style by the very residents who have moved to the suburbs. The Globe and Mail's proof? A few anecdotes here and there that say more about the urban elite preoccupation with autophobia than trends as they are really occurring.

The article mentions a suburbanite who has managed to add 80 minutes to his daily commute by riding a bicycle to a rail station in Vancouver rather than using the car. The Globe apparently misses the connection between time, productivity and economic growth. What if everyone in Canada spent an additional 80 minutes each day traveling to work? Our bicycling hero spends a total of 3 hours daily traveling to and from work --- more than three times the average American commute. Surely Canada would have among the world’s highest gross domestic products per capita. China, which is trading its bikes in for cars could wave good-bye to Canada in not too many years.

Here is what the story should have said. Despite considerable efforts on the part of governments and planning officials, Canadians continue to choose the suburban lifestyle (Data).

In the Toronto area, nearly 95 percent of growth was outside the core Municipality of Metropolitan Toronto, which itself includes vast expanses of suburban territory forced in by the provincial government in a 1997 amalgamation.

In Montreal, 80 percent of the growth was outside the ville de Montreal, which also includes considerable suburban territory as the result of a Quebec government forced amalgamation, some of which was undone by popular referenda.

Vancouver is the central city growth champion. Vancouverites "rejected" the suburban dream by locating at a rate of 75 percent in the suburbs.

In Canada's other large metropolitan areas, the story is similar, though sometimes masked by large central municipalities that incorporate most suburban development.

Posted by Wendell Cox at 08:59 AM | Permalink

The US transit public relations machine is at it again, this time claiming significant ridership increases from 2005 to 2006. Finally, they have restored the 1957 level of ridership. By comparison, in 2006, car use was more than any year in history. In fact, since 1957, commuting by car has doubled. Transit says that ridership increased nearly three percent. In fact, annual increases have averaged nearly as much for 10 years, yet transit’s share of urban travel has fallen nearly 20 percent during the period. Why? Because, even in an era of unprecedented gasoline prices, urban car use has grown more rapidly. People leaving their cars for transit makes good press. It just isn’t true.

Posted by Wendell Cox at 06:47 PM | Permalink

Seattle Mayor Greg Nickels favors spending unnecessary billions to put the Alaskan Way viaduct in tunnel. If no tunnel, he proposes not replacing the viaduct, which is in need of reconstruction. He cites removal of San Francisco’s Embarcadero Freeway as a precedent. The Mayor should look more closely, because the two situations are radically different. The Embarcadero was a stub of a freeway that was to have connected to the Golden Gate Bridge, but was never finished. It did not carry through traffic and instead served the role of an extended freeway off-ramp. The Alaskan Way was the principal through route from south to north through downtown Seattle until Interstate 5 was completed. It remains an indispensable through artery in a city with some of the nation’s worst traffic congestion. Better to spend the least money to replace the failing structure, maintain the capacity. There are plenty of other worthy highway projects competing for the additional billions that could improve congestion in the Seattle area.

Posted by Wendell Cox at 06:45 PM | Permalink

To the editor:
Washington Examiner

Re: Berliner says ‘McMansion’ legislation is in the works (March 7)

Over-development is one of the predictable outcomes of the so-called “smart growth” (anti-suburban) land use policies that have been implemented in Montgomery County and the Washington area. Whether it is large areas that are made off-limits to new residents (such as the Montgomery County Agricultural Preserve), or the large-lot zoning sweeping Northern Virginia, the result is artificial land price escalation. Developable land becomes so valuable that over-development becomes attractive. The second and far more damaging impact of smart growth is the destruction of housing affordability. In the last decade, the house prices to income ratio (“Median Multiple”) has risen so much that the equivalent of five more years of median household income is needed to buy and finance the median priced house in Washington. Of course, the third impact is that people move to West Virginia and undertake long commutes or move to other areas. Where smart growth policies have been avoided, housing affordability remains at historic norms. For example, far faster growing Atlanta, Dallas-Fort Worth and Houston have housing prices less than one-half that of Washington relative to income. These higher demand markets have also had the same low interest rates that some wrongly claim have driven house prices up. It is time area public officials wake up to the damage they are inflicting on the future.

Sincerely,
Wendell Cox

Posted by Wendell Cox at 06:36 PM | Permalink

Much has been written about the housing industry slowdown in the United States and the “housing bubble” evident in overvalued house prices. In fact, only part of the US market is experiencing overvalued housing prices, with the rest of the nation enjoying historic housing affordability ratios in what has become a two-speed housing market. National Association of Realtors data indicates substantial reductions in existing house sales year-to-year in a number of states, most of which are characterized by highly regulated land markets (principally so-called “smart growth” policies). These policies ration the land available for residential development and, not surprisingly, inflate land and housing prices. The costs are substantial, with many years of housing expense (including mortgage interest) being added to the budgets of households now purchasing homes. In the longer run, it seems likely the “bubble” will deflate or even “burst” in the highly regulated markets. This could occur in various ways. Until the necessary correction occurs, the highly regulated markets can be expected to continue to experience laggard population and economic growth.

The housing slowdown

Perhaps the most covered economic story in the nation in recent months has been the housing slowdown. National Association of Realtors data indicates that in 2006, existing house sales fell 8.5 per cent in the United States compared to 2005.

The two-speed housing economy

Much has been written in recent years about the “housing bubble.” However, national data mask some very significant differences. Some parts of the country are doing just fine. New York Times economic columnist Paul Krugman noted more than a year ago that the “bubble” is concentrated in what he called the “zoned-zone” The “zoned-zone” is the highly regulated states in what has developed as a two-speed housing market. There is not a national housing slowdown so much as a slowdown in some areas.

Sales volumes have generally plummeted in markets where land use regulation is strongest – where zoning and restrictions are the most severe. Conversely, where land use regulation is less stringent, sales volumes are steady or even increasing.

Market seizure in highly regulated markets

Housing market seizure – akin to heart seizure – has hit the most regulated markets in the United States, according to an analysis of the state data by Demographia. The strong land use regulations include land rationing policies, such as so-called smart growth, large-lot zoning, and insufficiently rapid government land sales where there is insufficient privately owned land left for development. All 19 states with strong land use regulations experienced sales declines, with a minimum loss of 4.5 per cent between 2005 and 2006. The largest losses were in Nevada (minus 28.9 per cent), Arizona (minus 28.2 per cent), Florida (minus 27.6 per cent) California (minus 23.5 per cent and Virginia (minus 22.9 per cent), all states where government policies have stood in the way of sufficient land supply. Overall, the highly regulated states experienced a housing sales decline of more than 17 per cent from 2005 to 2006.

At the same time, median house prices in the metropolitan markets of the highly regulated states held steady. This is to be expected, given the artificial shortage of supply that land use policies have created in these states.

Market strength in liberally regulated markets

Conversely, in the states without excessive land use regulation, annual existing house sales rose nearly one per cent. Gains of more than six per cent were posted in Alaska, Arkansas, North Carolina, Texas, and Indiana. Existing house sales rose three per cent in booming Georgia, home of the high-income world’s fastest growing large metropolitan area, Atlanta.

It is the law of supply and demand

Some analysts have blamed low interest rates and high demand for the bloated housing prices in some markets. This view is disproven by the fact that the same interest rates have been available in markets that have experienced housing cost escalation and those that have not. Moreover, the unaffordable markets do not have the greatest demand. The fastest growing metropolitan areas with more than 4,000,000 in the high-income world are Atlanta, Dallas-Fort Worth and Houston, and each of these has remained affordable – with “median multiples” (median house price relative to median household income) below 3.0. Economics is governed by the “law of supply and demand,” not the “law of demand”.

Uncharted unaffordability territory

Finally, virtually all of the unaffordable markets were nearly as affordable as the liberally regulated markets just a decade ago. In recent years, government policies have driven housing prices to unprecedented unaffordability in many highly regulated markets. In a number of highly regulated metropolitan areas, such as San Diego, Los Angeles and San Francisco, housing costs have escalated so rapidly in recent years that the median multiple is more than three times the historic standard of 3.0.

In highly regulated San Diego, the escalation in the housing and financing cost for the median priced house (at today’s low rates of interest) relative to incomes in just 10 years has been the equivalent of 14 years of median household income. This has imposed $800,000 more in costs for each household buying a median priced house, and is making San Diego extraordinarily uncompetitive. The same is true to a greater or lesser degree in other highly regulated markets.

These unnecessarily higher prices are likely to translate into lower rates of home ownership. This will disproportionately affect lower income households, which are minority to a larger degree. Today, African-American and Hispanic home ownership rates hover at or below 50 per cent compared to the half-again higher 75 per cent among White non-Hispanic households. The gap has been narrowing in recent years, but smart growth is likely to reverse that.

Irrelevant solutions

There is no point in proposing the conventional housing affordability programs to solve the problem. “Inclusionary zoning” and home buyer give politicians the appearance of doing something, but their impact reaches little beyond headlines. Such programs are simply irrelevant to housing affordability. The depth of the housing affordability crisis in California, the Northeast and other highly regulated markets is far beyond the ability of any conventional housing affordability program to correct. The problem is that smart growth, urban planning and regional planning have manipulated the price of land so high that nothing short of a structural correction will solve the problem.

Regulation associated with less economic growth

The price of regulation is being paid in a housing market seizure that has seen sales volumes plummet. This is not surprising. United States Federal Reserve Board research indicates that metropolitan areas with more stringent land use regulation can expect to grow less quickly than would otherwise be expected.

Demographic reversals

This research is validated by US Bureau of the Census migration data. The excessive over-valuation of residential property appears to be a major factor in driving more than 2,5 million residents from the high cost coastal markets to more affordable inland markets since 2000. This represents virtually a complete reversal of the demographic trends from World War II to the early 1990s. There is no reason for it to have occurred other than that housing affordability has been destroyed in the formerly strong but now highly regulated markets. Shockingly, previously fast-growing San Diego is now losing domestic migrants at twice the rate of Pittsburgh.

Deflating the housing bubble in the highly regulated markets

Housing prices have reached uncharted territory relative to incomes. Some analysts have suggested that housing affordability was nearly as bad when interest rates were high, especially in the late 1980s. But those interest rates passed and nearly all high-interest-rate mortgages were replaced with lower-rate loans. Thus, the affordability crisis was “transitional.” This housing affordability crisis is “structural.” Buyers are stuck with the high prices they paid and the costly mortgages. It seems likely that, in the longer run, the bloated prices in highly regulated markets will be subject to correction. This could occur in various ways. For example:

Slower economic growth: Overvalued markets could experience stagnant population and economic growth (already evident in the domestic migration data, especially in California and the Northeast) as household incomes rise over a period of many years or decades in relation to housing prices. For example, San Francisco-San Jose, which had been one of the nation’s fastest growing metropolitan areas from World War II to the early 1990s, is now growing at one-third the rate of rust belt St. Louis.

Inflating away windfall profits: Scarcity-induced overvalued prices could fuel higher inflation, which would in the longer run negate the higher nominal house prices. This may be unlikely in the United States because liberal regulation remains in so much of the nation, including some of the fastest growing markets. However, inflation may well be the easiest way out for economies such as Australia and New Zealand (where smart growth is called “urban consolidation”) that have nearly lost the housing affordability battle. They do not have the outlet of affordable markets that allows US households to find reasonable-priced houses outside smart growth areas. In Australia and New Zealand, political pressure could build on central banks to allow higher inflation to minimize foreclosures on households overburdened by high debt, principally in excessively large mortgages. (Already, major political parties in Australia are treating central bank interest rate decisions as a political matter.)

The bubble bursts: The current housing market seizure in over-regulated markets could turn into a “bust”, as the already weakening demand is transformed into a massive decline, precipitating huge losses in the overvalued markets.. This would involve people abandoning homes and mortgages due to negative equity in a regional real estate panic.

A correction could occur by other means as well, and the future is always impossible to foresee. However, the overvalued prices in overregulated markets are not likely to be sustainable. The price of smart growth and excessive regulation is already being paid by some households. The next question is the extent of damage that the increasingly expensive mortgages created by smart growth will inflict upon regional economies, if not the national economy.

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Data
US Existing House Sales: 2005-2006.

Draft at 2007.03.07

Posted by Wendell Cox at 03:01 AM | Permalink