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Urban Planning Degrades Housing Productivity

HOW PRESCRIPTIVE URBAN PLANNING SERIOUSLY DEGRADES HOUSING PRODUCTIVITY PERFORMANCE – HUGH PAVLETICH

It was I think former British Prime Minister Harold Macmillan (Lord Stockton) when asked “What drives politics’” responded by saying “Events, dear boy, events”. Politicians are essentially judged on how well they manage them. Some succeed – others fail.

Going forward – it is going to be an extremely testing time for politicians – as they are “tested”in how well they manage “global urban bubbles” and whether they elect to restore affordability in a responsible phased way - or instead - choose to do nothing and restore affordability by the process of outwards migration.

The current New Zealand Labour Government has clearly chosen the latter course.

There are only two choices in restoring affordability.

By opening up land supply OR by outwards migration.

There are no other “options”– and those who suggest otherwise – are simply snake oil salesmen. There is no shortage of “land”.

My sense too – is that the finance sector globally is in a process of extremely rapid change – as it initially participated willingly and naively in playing its part fueling the upside of these global urban bubbles and is currently participating in “reaping the rewards” as they are deflating.

I am very sure in my own mind that the finance sector will be in no hurry whatsoever to participate in creating further “urban bubbles” – as the costs of the current ones - in financial, social and political terms - become obvious.

They will be pricing the risks appropriately and clearly differentiating with respect to contract conditions between “real value” (at or below three times household incomes) and “fake value” (above three times incomes).

The “costs” that they have worn to date - can only be described as the initial ones. For the stressed urban markets (those above three times household earnings) – this promises to be a long rocky road. The current comparative performances of Texas and California should be studied by researchers and media – so that other stressed housing markets better understand what is in store for them.

It was rather interesting to read yesterday on Dr Housing Bubble - how a family on $US100,000 a year (a breakdown of monthly living expenses is provided) living in a $US385,000 house with a $US350,000 mortgage is “struggling” in California. And a $US385,000 house (a 3.8 Multiple) is hardly “expensive” in the context of California (which hit between 8 and 9 times earnings through the top of the bubble) if the California Association of Realtors March 2008 Report is any guide. It is a “sobering exercise” when one reads the March 2008 Report of the Houston Association of Realtors – where housing is “affordable” in being below 3 times household incomes.

Now – if the struggling Californian family had got out of there and relocated to Houston or Dallas Fort Worth with the same income – they could be living in a much better house today for $US250,000 with an 80% $US200,000 mortgage (instead of a $US350,000 one in California) – with much lower living costs (where property inflation does not feed through to general inflation) - without the stress. Dr James Gaines of the Texas A&M University explains this within a recent article.

Very clearly – businesses exposed to global competition – and those associated with them – will increasingly become mindful of “governance risks” when making decisions in where to locate and relocate their businesses. They simply cannot be competitive - if located in irresponsibly governed bubble urban markets.

It is clear to me - that as these “comprehensive disruption costs” of inflating and deflating urban bubbles become better understood – the “old order” of irresponsibly governing and participating in urban markets as “casinos” – will no longer be acceptable. The Germans learnt all about inflation with the Weimar Republic experience – one they have never forgotten. We are in the early stages of a somewhat similar lesson being learnt in the Anglo world with respect to urban inflation and bubbles.

As part of this process - we will see the emergence of a new field of “structural urban economics” – which before too long will form part of the training of economists, real estate professionals, planners and allied professions . The Annual Demographia Surveys are an important contribution in this regard – and in expanding on this “structural approach” I prepared a paper recently “Getting performance urban planning in place” following a Television New Zealand interview and a December 2007 Open Letter to NZ Housing Minister and a serve to the Housing Industry Association in Australia. Plus the NZ Housing Affordability Inquiry (Terms of Reference) with the Demographia submission and a number of articles here, here, here and here.

It is pleasing to see the Queensland Division of the Urban Development Institute of Australia (here) in a recent release share my view that the focus must now be on Local Government “performance”. The days of prescriptive land use planning are over – and clearly will have to be replaced with performance based planning and urban governance.

No if, buts, maybes about it. “Playtime” is over for Local Government.

It appears to me the Australians will “lead the charge” in getting performance in to Local Government and restoring affordability. The call has just gone out internationally (here, here) for another 40,000 construction people. Land sufficient for a further 90,000 lots, associated development and services for Melbourne were announced by the Brumby Government in the State of Victoria at the UDIA National Congress early March – and I would expect other States to follow suit before long. I am sure too – that the new Rudd Federal Government will be very committed to working with the States and Local Government with a “focus on performance”. Prime Minister Kevin Rudd is a proven political performer – as his time as Chief as Staff with the Queensland Goss Government clearly illustrated.

Put rather bluntly – Australia will build its way to affordability – New Zealand will out migrate (with businesses) its way to affordability. A staggering 10% of New Zealanders are seriously considering migrating to Australia according to a media report of the recent Fairfax Neilsen poll – and the March Migration Report of Statistics New Zealand is not encouraging, as economic and construction activity has only been weakening substantially in recent months.

When the Americans talk in terms of “house size” – they express it as “living space”and don’t state that a double garage is included – although it is. So taking in to account the inclusion of a double garage (say 7 by 6 metres) – and using the Demographia Sydney / Dallas Fort Worth Fringe Comparison Study and the examples from Our Young New Zealanders deserve affordable housing – the 200 square metre American house (with the double garage included) becomes 242 square metres on a 500 square metre serviced lot / section. All up – these are being put in place for around $140,000 – some $30,000 for the serviced lot – the balance $110,000 for the building construction.

(a) Dallas Fort Worth, Texas – 242 square metre starter house on 500 square metre lot – all up $US140,000 - $US30,000 for the serviced lot ( $US124 per square metre – building area basis) - $US110,000 ($US454 per sq meter building area basis) for the house construction. Dallas Fort Worth gross annual median household income $57,600. So – all up – the house and land package is being put in place for 2.43 times gross annual median household income for DFW. The building construction component of it (at $US110,000) is about 1.9 times the DFW median household income – with the serviced lot component at 0.53 times the annual median household income of DFW.

(b) Christchurch, New Zealand – 242 square metre starter house on 500 square metre lot – all up $NZ492,000 - $NZ250,000 for the lot - $NZ242,000 ($1,000 per square metre) construction costs. Christchurch, New Zealand gross annual median household income (latest Demographia Survey) is $NZ49,400. So – all up the fringe housing is near 10 time’s median household income – 5.06 times annual household earnings for the serviced lot (0.53 times annual household earnings for Texas) – 4.94 times annual household earnings for the house construction (1.9 times annual household income in Texas).

(c) English city 25,000 pound median household income (refer Demographia Surveys). 242 square metre house at 800 pound per square metre 193,600 pound – assume 60% lot / 40% house construction – 290,000 pond lot. All up 483,600 pound. If development ratio 30% house construction / 70% lot – 193,600 pound house construction / 451,700 pound – all up 645,300 pounds. That would suggest – based on the 25,000 pound median household income that fringe housing of this type (only considered starter home quality in Texas) is going in at 19.3 times median household incomes through to 26 times median household incomes. No wonder the average new build has shrunk from 110 square metres in 1920 to 76 square metres today – in attempting to keep the new builds at or below the 200,000 pound mark. Just at the more modest 40 / 60 development ratio (483,600 pounds all up) this would suggest that the serviced lot costs represent 11.6 times median household incomes (0.53 times in Texas) and the house construction 7.74 times annual gross median household incomes (1.9 times median household incomes in Texas).

To be as competitive as the Texan urban markets – the housing should not exceed 3 times gross annual median household incomes – with fringe new starter house and land packages going in at 2.5 times household incomes. The fringes act as a “supply vent”or “inflation vent”. In the case of Christchurch (median household income $49,400) that suggests that the fringe starter pricing should be in the order of $123,500 – 20% or $24,700 for the lot – 80% or $98,800 for the actual house construction. In the case of the English cities with a gross annual median household income of 25,000 pounds that suggests 62,500 pounds for a house and land package on the fringes. At 20% for the serviced lot 12,500 pounds – the balance 80% for the actual house construction being 50,000 pounds.

Very much a guess at this stage – is that New Zealand should be able to lift performance to $500 per square metre starter housing construction costs which would suggest (with double garage) fringe starter housing of around 197 square metres should be achievable (building suppliers pricing is well above Australian levels currently). If British housing costs on the fringes could be bought back to say 300 pound a square metre (bear in mind Texas ones are just $US450 per square metre with double garages) suggesting an all up (with double garage) house size of 167 square metres. For “net living area” deduct the 7 metre by 6 metre or 42 square metre double garage from the Chistchurch NZ and 25,000 pound median household income English cities. In the case of Christchurch NZ –a net living area of 155 square metres – in the case of the English city fringe 125 square metres net living area.

The above calculations are what I would refer to as “reasonable expectations”. In fact they could be considered too reasonable because Australia would need to be “”slotted” in there as well. My view is that Australia should be capable (because of its productivity, current construction pricing and incomes) of producing new fringe starter homes of a standard similar to those in Texas. What this exercise clearly illustrates as well – is that the British standard of living (and the Irish too for that matter) is nowhere near as high as that of the United States, Australia and New Zealand. It appears to me that the GDP / GDP per capita measures may not be a particularly accurate reflection of standard of living.

Expressed another way – if the British were “up there” with the Texans – putting in place fringe starter housing of 242 square metres at 2.5 times the median household income of 25,000 pounds – as illustrated earlier, the all up price would be 62,500 pounds with 12,500 pounds going to the serviced lot and 50,000 pounds to the actual construction. This would mean the British would need to get the 242 square metre houses built at 206 pound per square metre (currently 800 pound per square metre).

If the Christchurch New Zealand fringe starter housing pricing and productivity performance was “up there”with the Texans with median household incomes of $49,400 and providing fringe starter house and land packages at 2.5 times incomes – as illustrated earlier – the fringe starter housing would need to go in at $123,500. Allow 20% for the serviced lot at $24,700 – and the 80% balance for the construction at $98,800. At the Texas building size (including double garage) of 242 square metres – we would need to be getting the build costs down to $408 per square metre (currently $1,000 per square metre).

So the above figures would suggest that British house building (exclusive of lot pricing) is just 25% as productive and Christchurch NZ just 40% as productive as fringe new housing construction in Texas. With the Australian fringe build rates in the order of $Aust650 per square metre and the Texan ones at $US454 per square metre around 60% - 70% as productive as its Texan counterparts. My view is that both Australia and New Zealand - with lower wage rates than those in the United States – should be getting new starter housing in at the $450 - $500 range – in local currencies.

We should not be surprised by these “productivity gaps” – as prescriptive planning, strangling land supply has been in place in the United Kingdom for 60 years. It began to “bite” in New Zealand in the early 1980’s strangling land supply and some ten years later in Australia. Economists should be able to plot prescriptive planning’s capacity for “productivity destruction” on a graph – so that the damage of it can be more clearly illustrated to planners and politicians – should they have ideas of allowing it to persist.

The reality is that prescriptive urban planning is clearly not sustainable and has done enormous damage to the productivity of the house building sector. This “productivity damage” has also flowed through to the commercial and infrastructure construction sectors as well. This means that the failed policies of forced urban consolidation – in vainly attempting to save on infrastructure (which they clearly do not do) have compounded Local Government problems by degrading the performance and pricing of infrastructure construction.

It is very clear to me that the focus from this point must be on “structural issues” and “performance based solutions” to restore productivity performance across the board in the construction sector – and over a realistic and reasonable time frame – restore housing affordability to the “affordable” levels of a maximum of three times annual household earnings.

ENDS

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