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Housing Bubbles: Learning From Houston

Housing Bubbles: Learning From Houston


Hugh Pavletich
Performance Urban Planning
Christchurch
New Zealand

February 24, 2009

Mid last year, the satirical website, The Onion, pleaded for “just one more bubble” in "Recession-Plagued Nation Demands New Bubble To Invest In'’.

A vain hope…………

Recently Mr Koyo Oseki, executive vice president and head of Asian credit research of Pimco, wrote a most informative article Outlook for Global Finance where he discusses the Japanese Bubble of 1989 and the lessons that can be learnt from that experience.

Mr Oseki is very clear in explaining the behavior of housing bubbles and the limited ability of governments to arrest the inevitable process of bubbles deflating. He states –

“The only cures for asset deflation (mainly real estate assets) are a recovery in property demand via expectations of economic growth and improvement in asset operating profitability. This may sound like a tautology, but in a situation where the economy continues to retreat amid a financial crisis, demand for real estate will not recover until a severe enough drop in prices significantly reduces the downside risk of holding property. In Japans case it took 15 years for real estate prices to hit bottom, and it is unlikely that earlier government action might have halted the slide at a higher level. Even if it could have shortened the process and duration of the crisis, the government probably could not have prevented the drop in prices. That is, while government and central bank initiatives, such as liquidity provisions and outright purchases of securitized product, can help temper the disarray in financial markets, there are limits to government’s ability to prevent deterioration in the real estate market.”

The 2009 5th edition Demographia International Housing Affordability Survey, which surveys the 6 countries and 265 major urban markets of the English speaking world, is a useful guide in assessing the extent of the housing bubbles of specific urban markets.

Housing should not exceed three times gross annual household incomes.

If this does occur - it is a sure sign that there are governance and regulatory failures at the local level - that must be dealt with.

This years Demographia Survey identified 87 affordable markets – 77 of them in the United States and 10 in Canada. Currently – there are none in the United Kingdom, Republic of Ireland, Australia and New Zealand.

One of the major affordable urban markets is Greater Houston, an economic powerhouse with near 5.8 million people. This year’s Demographia Survey (September quarter 2008 data) found the median house price was $US160,200 with a median gross annual household income of $US55,000, so housing was 2.9 times household income at this time.

The September Quarter median house price was a peak as illustrated by the latest Houston Association of Realtors (HAR) Monthly Report , noting that in January 2008, single family homes were $US139,720 and January 2009 $US127,850. Houston has not been immune to the “sub prime slime” – and as the latest HAR Report states - it is this factor that’s pulling the medians down as the foreclosure stock is being cleared.

Houston cannot avoid the fallout from the sheer destruction created by the bubble markets, both within the United States and elsewhere – but is in a strong position to withstand the worst of it, as illustrated within this Dallas Federal Reserve Reports of January 2008 and May 2008 .

Understandably - conditions have eased as outlined within Dallas Fed Houston Update December 2008 .

US Builder magazine in conjunction with the construction industry researchers Hanley Wood – rate Houston the healthiest residential construction market within a recent EcoHome magazine article The Healthiest Housing Markets for 2009.

In assessing housing markets the magazine states –
“To compile these lists, we analyzed the top 75 housing markets in the country. We ranked them based on population trends and job growth, perennial drivers of housing demand. We also examined what’s happened with house prices, many of the healthiest markets have managed to hold the line on home values. And finally we considered the rate of building permits, which may be the single best ongoing indicator of builder confidence in a market”.

The article states that Houston is the “largest home building market in the country” with 42,697 building permits through 2008. The US National Association of Home Builders January 2009 Report State and Local Data: Housing Starts and Building Permits provides detailed data of permitting activity throughout the United States.

In assessing permitting activity – the best measure is permits per 1000 population. This would suggest that Houston with a population approaching 5.8 million and 42,697 permits had 7.36 permits / 1000 population through 2008.

A remarkable achievement, with US bubble markets collapsing.

To illustrate – if the US overall with its population of 305 million achieved Houston’s permitting rate of 7.36 / 1000 – 2.244 million new residential permits would have been issued nationally through 2008.

At the other end of the spectrum is the “epicenter of the global financial crisis” – California – where, with a population of 37 million, just 61,220 new residential permits were issued through 2008 – a permitting rate of 1.65 / 1000.

That’s just 22% of the Houston rate on a per thousand population basis.

If the United States was issuing new residential permits at the California rate of 1.65 / 1000 – just 503,250 permits would have been issued throughout 2008 Throughout 2008 there were 893,000 permits issued and for 2007 - 1.380, 000 permits issued . The latest report from the US Department of Commerce as reported by Bloomberg indicates that permits across the country have nearly reached 2008 California levels at 521,000 on an annual basis.

Recently – Metrostudy, a leading US construction industry researcher expressed the view that government projections on residential permits were too high (refer Metrostudy Calls Housing Starts Forecasts Too High).

For Australia to be permitting at the Houston rate of 7.36 / 1000 at its 2008 rate – it would need to reach 154,560; New Zealand 31,648; United Kingdom 448,960; Canada 242,880 and the Republic of Ireland 32,384 residential building permits annually.

Policymakers in bubble markets only have too choices –

Either – negligently stand idly by, allowing their construction industries and general employment to collapse – and with it – tax revenues.

Or - learn from Houston and Texas – fast.

ENDS

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