‘Performance Urban Planning’ Website Launched
“ ‘PERFORMANCE URBAN PLANNING’ WEBSITE LAUNCHED”
Demographia International Housing Affordability Survey
November 12, 2008
The urban markets / cities are the growth engines of a modern economy – that attract people to them for the higher standards of living and greater opportunities they offer. It is clearly in the wider national interest to ensure that this natural and sustainable process of human consolidation and progress is not constrained and severely disrupted due to regulatory and governance failures at the local level.
Local Government does not – or at least should not – have the right to deny people the opportunity of housing they can afford.
This is why back in late 2004 - I initiated with Wendell Cox of St Louis, Illinois, USA, the Annual Demographia International Housing Affordability Surveys, which employ the Median Multiple (median house price divided by the gross annual median household income), to rate the degrees of housing affordability, of the 227 major urban markets of the United States, Canada, United Kingdom. Republic of Ireland, Australia and New Zealand. This approach is recommended by the United Nations and World Bank.
The 2008 4th Annual Edition Demographia International Housing Affordability Survey (data 3rd Quarter 2007) was released January 20th – and illustrates clearly the urban markets that are experiencing housing stress.
Soundly governed urban markets housing should not exceed three times gross annual household income. Too many markets exceeded that –with the worst example being Los Angeles, California, where housing had inflated out to a stratospheric 11.5 times gross annual household incomes.
The 2008 Demographia Survey found that the average Median Multiples of the urban markets for the countries surveyed were – Canada 3.1; United States 3.6; Republic of Ireland 4.7; United Kingdom 5.5 with Australia and New Zealand overall “severely unaffordable” at 6.3 times annual household earnings.
By allowing urban governance and planning performance to fail - almost collapsing the global financial system - these bubbles began the inevitable process of collapsing and deflating. Because housing markets in total asset terms are substantially larger than stock markets –collapsing housing markets induced recessions are generally far more serious and long lasting than stock market induced recessions.
The global recession that is getting underway now has been caused by what is generally regarded as the “Mother of all Bubbles” – and will therefore likely be the longest and most painful in living memory.
These inevitable and indeed unavoidable “shifts from fantasy to reality” cannot be re inflated with “splash economics” – being Government’s throwing taxpayer money at them. Indeed – generally this approach only aggravates and stalls the recovery process.
The recovery process cannot get underway again - until the structural regulatory impediments within dysfunctional urban markets are dealt with - allowing affordable new housing stock to be provided at or below three times the gross annual household earnings of prospective purchasers.
The trauma currently being experienced by the global financial system, will ensure that surviving financial institutions will definitely remain unwilling for the foreseeable future, to engage in “inflation based lending”. As the costs of “inflation based lending” continue to mount over coming years, financial institutions will become increasingly insistent on stricter “cash flow lending” for houses at three times or less of gross annual household income.
Understandably - residential construction volumes are currently falling around the world, with volumes during 2008 in California and the United Kingdom for example (based on the “build rate per 1000 population”measure) being below the average annual builds through the Great Depression years of the 1930’s. “Regulatory failure” induced collapsing construction markets soon radiate out to other sectors of a national economy and further afield.
The little known Baltic Dry Index (Wikipedia) is a graphic example of this and is a number issued daily by the London based Baltic Exchange, which traces its roots to the Baltic and Virginia coffeehouses in London’s Financial District in 1744. Every working day - the Baltic canvasses ship owners and brokers around the world and asks them how much it would cost to book various cargoes of raw materials from one Port to another and issues the Daily Market Report. During May 2008 it reached 11.793 points – collapsing recently to 826 points – so sea freight prices had fallen approximately some 93% within this short period of time.
The Baltic Dry Index is a sound “leading indicator”, which illustrates clearly the severity of the current global downturn.
It is clear that policymakers at Federal / National, State and Local Government levels must start dealing with “real structural issues”and refrain from treating these serious issues, as public relations exercises with “splash economics” – throwing taxpayer money at the problem, in a vain endeavor to re inflate these housing bubbles.
The aim of the new Performance Urban Planning ( www.performanceurbanplanning.org ) website, is to contribute to this process of structural change at local level, by suggesting realistic solutions to these issues. In essence – it is a collection of my writings over these past few years, built on thirty years practical experience as a commercial property developer, former industry leader in New Zealand and international researcher.
During March 2008 - I prepared a paper “Getting performance urban planning in place” – explaining the nature of the current difficulties and sketching out where the focus needs to be, in getting realistic solutions in place.
It is clear to me that the language with respect to urban markets has to change – and property commentators and the media generally must refrain from referring to property “inflation” as “growth” – and start recognizing the reality - that the price of housing (as with all property types) must be a reflection of the underlying incomes supporting these prices. Professionals involved with urban issues - particularly economists, urban planners and property appraisers / valuers - need to with urgency incorporate “performance urban planning” and “structural urban economics” within their training and re training – so they can play a constructive role in assisting local communities to deal with these issues.
The paper “Getting performance urban planning in place” outlines how the focus must now be on (a) getting performance measures inculcated in to local government culture, so that affordability can be restored over a reasonable and realistic time frame (b) opening up fringe land supply and (c) appropriately debt financing infrastructure for the obvious reasons of economic efficiency and inter generational equity.
With respect to performance measures for local government –the simpler these can be kept the better – and within this paper “Getting performance urban planning in place” I have suggested that the key indicator should be the Median Multiple – with a small suite of supporting supplementary indicators being (a) population – population growth rate and trends (b) fringe raw urban – true rural land price differences (c) total housing stock – usually occupied housing stock per thousand population (d) annual build rates per thousand population (e) age of housing stock in decadal bands and finally (f) residential rental vacancy rates. Just seven measures in total – there is no need whatsoever for complexity.
With this “foundation” in place – urban researchers then need to focus their attention on developing “structural urban economics” - so that the wider public and governments at all levels are provided with sound information. It needs to be recognized that it has been the constant use of “romantic rhetoric” with respect to urban markets – that has been the root cause of these problems.
For example – the economics profession (with Bank economists being the worst offenders) peddling the idea to the public that “inflation” is “growth” – deliberately confusing the words “boom” and “bubble”– and unbelievably suggesting to the public the “wealth effects” of property inflation. In essence – whatever it took, to generate excessive fees and profits in loading up households with excessive debts.
Likewise – urban planners have to date too often acted irresponsibly - in treating urban governance and planning as a political play thing - peddling juvenile social engineering fads and scares.
The destructiveness of the current global housing bubbles will only be arrested when realistic solutions are put in place. The aim of the new Performance Urban Planning ( www.performanceurbanplanning.org ) website is to encourage public conversion of these important issues.