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How Housing Bubbles Are Triggered

How Housing Bubbles Are Triggered

Hugh Pavletich FDIA | Performance Urban Planning
Christchurch, New Zealand

1 November 2011

An excellent article by Leith van Onselen of MacroBusiness Australia, illustrates clearly why artificially strangling the supply of urban residential land in Australia, is the root of the problem.

Land Deflates - Leith van Onselen - MacroBusiness Australia

The problem comes about when Local Governments in particular lose control of their costs. It plays out in three steps –

(1) The commercial / industrial sector is the first to be “hit”, as it is more politically feasible for Local Authorities to overcharge this sector. It is not uncommon now for around a quarter of Local Authorities actual costs being attributable to the commercial / industrial sector, but the rates take can be as much as half of the total, so in effect the residential sector is subsidized for the excessively costly services it receives. This is why, as the above article illustrates, there has not been the inflation in commercial / industrial land - as there has been in residential. Simply because Local Authorities view the former as a “cash cow”.

(2) As the Local Authority costs keep escalating year after year, the pressures build to strangle fringe residential land supply, in an endeavour to lessen the infrastructure spend, so as to feed the insatiable financing requirements of the growing bureaucracy. As Local Government costs get increasingly out of control, a “tipping point” is reached, where residential development is no longer seen as a benefit, but a cost instead. This is “dressed up” with the spin, that we all need to use resources more wisely (other than Local Government of course!).

(3) Enough is never enough - as these bureaucratic costs keep growing, which created the pressures for “fee farming” and the imposition of illogical and unjustifiable Development Levies. In general terms, the larger the Local Authority, the worse they become. For what should be blindingly obvious reasons of economic efficiency and intergenerational equity, much of the capital costs of this infrastructure should be financed on the bond market (along the lines of the United States Municipal Utility District model, where everything other than the roading and footpaths are financed via this vehicle). Rocking these costs in to new home buyers, with subdivider and builder margins thrown in for bad measure, is of course both dumb and inappropriate.

The above “3 Steps” are the foundation for housing bubbles to be “triggered” – and finance in all its forms (whether equity; bubble equity; mortgage debt) is simply the "fuel".

The mortgage lending multiples to incomes simply must reflect the Median Multiples (refer Demographia International Housing Affordability Survey) of individual urban markets.

For example, lending institutions could not participate within the unaffordable housing markets, lending at the Texas multiples of 2.5 times annual household incomes. Instead – they are required to lend at 5, 6 and through to 11 times (refer - Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch) as happened in California, before it crashed it 2007, triggering the Global Financial Crisis.

Understandably, as these Local Government costs get out of control, in turn triggering housing bubbles, it feeds through to general inflation, making these bubble markets uncompetitive.

Little wonder then, that the affordable North American markets are now seen as internationally competitive. Ambrose Evans Pritchard of the UK Telegraph, within World power swings back to America, explained how manufacturing is returning from China to America, in large measure because of China’s housing / general inflation problems. And too, the “innovative capacity” of the United States, as Matt Ridley explained with respect to energy issues, at the New Zealand Centre of Political Research, within the recent article Gas against wind.

So the focus needs to be on getting some elementary performance and management disciplines in to the Local and State Government sectors – so that they are not allowed to lose control of their costs and inflict hugely destructive housing bubbles on their communities.

A good place to start is be learning what they are doing right in Texas – and adapting these lessons to suit local conditions.

Currently, Local Governments in Australia and New Zealand are sloppily administered “after a fashion”, where the Indians (lower level bureaucrats) effectively “run the show” to suit themselves. This was recently brilliantly illustrated by the Christchurch City Council in New Zealand, which with its currently bloated central admin / regulatory staff of 1,300 (for a tiny city of about 370,000 people), needs another 125 bureaucrats , to handle the appalling low volumes of building consents, as explained by David Chaston of interest co nz within this recent article –

Building consent issue levels falter in September |

– Stating specifically with respect to Christchurch –

Earthquake-related consents total NZ$29 million in September

In Canterbury, building consents identified as being earthquake-related totalled $29 million in September 2011, compared with $20 million in August and $32 million in July. In September, non-residential building consents totalled $26 million. Over half of this value is attributable to repairs to The Palms shopping centre. The remaining $3 million was for residential building consents, including four new dwellings, said Statistics NZ.

Since 4 September 2010, about 580 earthquake-related consents have been identified, totalling $157 million. This includes 194 new dwellings, of which 145 were relocatable units.

The above poor performance following the first earthquake event near 14 months ago, is simply a disgrace.

The writer explained within a recent interest co nz article why Christchurch is unnecessarily losing population and experiencing these problems within –

Christchurch earthquake: The political disaster

The problems and solutions are well understood. The only “ingredient” lacking, is competent political leadership.


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