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Housing - Learning About The Importance Of Supply

Housing - Learning About The Importance Of “Supply”

HOUSING - LEARNING ABOUT THE IMPORTANCE OF “SUPPLY” – DALLAS FORT WORTH & HOUSTON
Hugh Pavletich

Within this November 8 2007 article Dallas-Fort Worth apartment market is profiting from housing crunch | Dallas Morning News | News for Dallas, Texas | Business by Steve Brown of the Dallas Morning News, the rapid growth of apartment building in both the Dallas Fort Worth and Houston urban markets is explained.

The article explains how the occupancy rates for apartments in Dallas Fort Worth has “fallen” to 94.3% - which means that the “vacancy rate” is now 5.7% (considered a low vacancy rate) - and coupled with a rise of 2% in rental incomes over the past 12 months – this is enough to trigger a massive lift in apartment construction.

Compare this to the “Australian housing shambles” where residential apartment vacancies are hovering around the 1% or less (in some areas such as Mackay rental vacancies are negative – where they are living in caravans).

The reality is that strangled urban markets (whether in Australia, NZ, US coastal cities in the main and the UK) – with their grossly inflated land prices) – do not have the capacity to respond to ever changing market demand. It is simply not economic to respond with increased supply. Rentals will have to inflate substantially to increase supply – which at best will be “muted” because of artificial land scarcities inflating land prices further . Australia is currently a textbook lesson in this regard. So the “destructive spiral” continues in the artificial land scarcity markets.

This “destructive spiral” cannot be reversed until significant land supply is made available on the urban fringes to lower land / lot prices substantially. The urban fringes are the “supply vent” or “inflation vent” of an urban market.

Indeed – the responsibly governed 42 North American urban markets ( refer Demographia website ) of the United States – and particularly the growing ones – which have maintained affordability levels between 2.5 to 3.0 times household income through the building cycle – have been acting as the “supply vent” for the rest of the United States urban markets for many years. This is illustrated within the Demographia Domestic Migration & Housing Affordability: US Metropolitan Areas over 1,000,000: 2000-2005 Survey as reported on in an October 31 2007 article "America's Fastest-Growing Cities" by Matt Woolsey of Forbes magazine.

The artificial land supply constraints of poorly governed urban markets globally, also fuelled much of the poor quality lending that has occurred over recent years. US residential stock is valued at around $33 trillion – the mortgage market some $10.5 trillion and of this, the sub prime is about $1 trillion and what is known as the Alt A (Alternative A) or low doc / liar loans some $2 trillion.

As artificial land scarcities provided the foundation for the property inflation – lenders simply threw money at the market, as they perceived it to be “risk free”. The view was that “defaults” would be covered by ever rising prices. That “inflation party” stopped around March 2006 and now we are going through what could diplomatically be described as a “correction phase”.

Artificial property inflation and poor quality business – go hand in hand.

*************

Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
Christchurch

Suggested further background reading………..
(1) United States housing market correction - Wikipedia, the free encyclopedia

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