Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

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 | interest.co.nz

– 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.

ENDS

© Scoop Media

 
 
 
Top Scoops Headlines

 

Gordon Campbell: On The Use Of Existing Drugs To Reduce The Effects Of Coronavirus

So now, we’re all getting up to speed with the travel bans, the rigorous handwashing and drying, the social distancing, and the avoidance of public transport wherever possible. Right. At a wider level…so far, the public health system has ... More>>

Gordon Campbell: On Oil Market And Regulation Crusades

Safe to say, Vladimir Putin did not expect the response he has received amidships from the Crown Prince of Saudi Arabia. Earlier, Russia chose to walk away from the OPEC talks in Vienna that were aimed at reaching an agreement on how to reduce world oil production (and protect oil prices) in the light of the fall in demand being caused by the coronavirus. No doubt, Russia and its allies in the US shale industry probably glimpsed an opportunity to undercut OPEC and seize some of its customers. Bad move. In reply, Saudi Arabia has smashed the oil market by hugely ramping up production, signing up customers and drastically cutting the oil price in a fashion designed to knock Russia and other oil suppliers right out of contention. More>>

Gordon Campbell: On 22 Short Takes About Super Tuesday

With obvious apologies to the Simpsons….Here’s my 22 short takes on the 14 Super Tuesday primaries that combined yesterday to produce a common narrative –Bernie Sanders NOT running away with the nomination, Joe Biden coming back from the dead, and the really, really rich guy proving to be really, really bad at politics. In the months ahead, it will be fascinating to see if the real Joe Biden can live up to the idea of Joe Biden that people voted for yesterday – namely, the wise old guy who can save the country from the political extremism of the right and the left... More>>

Gordon Campbell On Shane Jones: A Liability No-One Needs To Bear

New Zealand First has needed a diversion after weeks of bad coverage over its dodgy handling of donations, but it really, really doesn’t need what Shane Jones has chosen to provide. According to Jones, New Zealand has ... More>>

Binoy Kampmark: Strong Man Legacies: Burying Mubarak

Reviled strongmen of one era are often the celebrated ones of others. Citizens otherwise tormented find that replacements are poor, in some cases even crueller, than the original artefact. Such strongmen also serve as ideal alibis for rehabilitation ... More>>

Caitlin Johnstone: Humanity Is Making A Very Important Choice When It Comes To Assange

The propagandists have all gone dead silent on the WikiLeaks founder they previously were smearing with relentless viciousness, because they no longer have an argument. The facts are all in, and yes, it turns out the US government is certainly and undeniably working to exploit legal loopholes to imprison a journalist for exposing its war crimes. That is happening, and there is no justifying it... More>>

Gail Duncan: Reframing Welfare Report

Michael Joseph Savage, the architect of the 1938 Social Security Act, wouldn’t recognise today’s Social Security Act as having anything to do with the kind, cooperative, caring society he envisioned 80 years ago. Instead society in 2020 has been reduced ... More>>


Gordon Campbell: On The Addiction To Chinese Student Fees

Last week, Australian PM Scott Morrison extended its ban on foreign visitors from or passing through from mainland China – including Chinese students - for a third week. New Zealand has dutifully followed suit, with our travel ban ... More>>

Gordon Campbell: On Coronavirus, And The Iowa Debacle

As Bloomberg says, the coronavirus shutdown is creating the world’s biggest work-from-home experiment. On the upside, the mortality rate with the current outbreak is lower than with SARS in 2003, but (for a number of reasons) the economic impact this time ... More>>

Gordon Campbell: On Dodging A Bullet Over The Transport Cost Over-Runs

As New Zealand gears up to begin its $6.8 billion programme of large scale roading projects all around the country, we should be aware of this morning’s sobering headlines from New South Wales, where the cost overruns on major transport projects ... More>>


 
 
 
 
 


 
 
 
  • PublicAddress
  • Pundit
  • Kiwiblog