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Americans Slow Learners About Housing Bubbles

Americans Slow Learners About Housing Bubbles

Hugh Pavletich FDIA
Performance Urban Planning
New Zealand

June 7, 2010

Within this important article “A recipe for housing bubbles: Analyst says development restraints inflated prices | Inman News”, Glen Roberts reports on an important speech by Mike Inselmann, co founder and President of the highly regarded United States construction industry research firm Metrostudy, to the recent US National Association of Real Estate Editors Conference at Austin, Texas.

Mr Inselmann made it clear within his speech that the “witch brew” of the housing bubbles was a local growing economy restricted by regulation and lack of land supply to meet demand – not the sub prime (lax) lending.

“ The housing bubble ‘didn’t start with sub prime – they were the guys who added gasoline to the fire. They (others – being regulators)) created a mismatch which started the inflation in housing, that was turbocharged by sub prime financing’ he said”.

“ ‘The housing market was hitting a wall in affordability, and sub prime lending offered the means to continue the price escalation’ he noted”.

“ ‘When the next housing cycle hits, the danger is that we are going to go through exactly the same phenomenon we went through this time’ Inselmann said”.

The Annual Demographia International Housing Affordability Surveys (6 editions to date) clearly illustrate that housing prices in normal housing markets do not exceed three times annual household income. The definition of an affordable housing market is as follows – and its long past time economists and property commentators understood it –

“For metropolitan areas to rate as “affordable” and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household incomes. To allow this to occur, new starter housing of an acceptable quality to the purchasers (with associated commercial and industrial development) must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market. The fringe is the only supply or inflation vent for an urban market. The critically important fringe development ratio’s should be 17 – 23% serviced lot / section cost – the balance the actual housing construction. Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3 through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.”

This is a simple definition. One that should be easily grasped by those with basic common sense and market sense – but regrettably much more difficult for those schooled in economics and planning it would appear (refer this writers article “ Housing Bubbles And Market Sense).

Even real estate agents understand this simple definition of an affordable housing market, as the irresponsible “bubble cheerleading” Real Estate Institute of Western Australia illustrated, in reacting to a recent statement by the West Australian Housing Minister Bill Marmion, stating he is determined to open up more land to allow affordable housing to be provided (refer - New Minister wants to flood WA with land - The West Australian and the writers ABC Perth Interview).

The Real Estate Institute of Australia Chief Executive Anne Arnold reacted by stating it would be politically unwise to go down this path, as Australians stored most of their wealth in their housing. She forgot to mention that it is not real wealth but simply “bubble wealth”. Currently Perth house prices are 6.9 times household earnings, on a median basis at least $A260,000 more than they should be. The median house prices in Perth should be below $A200,000 – not the stratospheric $A460,000 they currently are.

Perth, Australia, with its gross annual median household income (refer Demographia Survey Schedule 2) of $A67,100 should be supplying new starter house and land packages on the fringes at $167,750 – with serviced lots at $A33,500 and the balance house construction of $A134,250.

Young “westies”, with 20% deposits should have mortgages of $A134,200, so they have sufficient remaining income to live decent lives.

Clearly the plight of first home buyers is not the concern or interest of the Real Estate Institute of Western Australia. The real concern of the Institute is the lower commission incomes available to members for affordable housing.

Little wonder real estate agents are not held in high regard by the public. They will be, if and when they decide to act in their customers best interests and publicly support Bill Marmion, the responsible Housing Minister of Western Australia.

The New Zealand Government is well aware of “market realities” and is determined to deal with the impediments to the provision of affordable new housing (refer Performance Urban Planning), as it is currently working to make the necessary legislative changes and get the appropriate institutional arrangements in place. The important Urban Technical Advisory Groups Report, with accompanying Statements from the Environment, Local Government, Infrastructure, Housing and Building Ministers is expected in the next month or so.

Unbelievably – as Mr Inselmann of the US based Metrostudy made clear in his speech to the Real Estate Editors Conference, there has been no progress made at Local and States level in the “bubble markets” of the United States, to the regulatory and structural impediments to the provision of affordable new housing. He stated to the Dallas Morning News that the Texas residential construction markets are the healthiest in the United States.

The Americans in the “Bubble States” appear to be determined to repeat the mistakes of history and pay the political, social and economic costs for further unnecessary housing bubbles in the future. It was the California housing bubble that triggered the Global Financial Crisis.


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