Housing Affordability: Lessons From California?

Housing Affordability: Are There Lessons to Be Learnt from California?

California single-family home construction hits 25-year-low - Silicon Valley / San Jose Business Journal:

This article states that California’s single family home construction in 2007 fell to the lowest level in 25 years –according to the California Building Industry Association.

The Construction Industry Research Board California permit data for 2007 – indicates 112,300 new residential units permitted – down nearly 32% from 2006 and 100,000 units less than the peak year of 2004 (212,300 in 2004).

These “bald figures” alone are misleading (something it is long overdue property commentators and the media picked up on) – as the most accurate measure of building performance is the “build rate per thousand population”.

Assuming that California’s population in 2004 (the peak) was 36 million – the build rate per 1000 population in that year would have been an anaemic 5.89 / 1000…..and it would appear that in 2007 with an estimated population of 37 million, that its build rate has fallen to an appalling 3.0 / 1000 – barely replacement levels.

At an estimated 2.8 persons per household (a high estimate) – this indicates around 357 houses per 1000 population. At a build rate of 3 /1000 (and for the sake of simplicity) the current housing stock would need an overall life of 119 years. No account has been taken of the reality that of the total new residential permits for 2007 – a certain proportion of these would be second / holiday homes. When this is taken in to account – it is likely the California housing stock is deteriorating / aging overall.

Thanks to its draconian planning environment –it would appear that California’s build rate per 1000 population has fallen to British levels. In contrast – Texas hit a build rate of 9 / 1000 in 2006 and it is assumed is still building at around the 8 / 1000 population.

New Zealand is currently building an inadequate 6 / 1000 – Australia 7 / 1000. None of it “affordable”.

Information from DQNews - DataQuick Real Estate Headlines and Statistics illustrates just what a shambles the California housing market is – as its December 2007 Market Report illustrates. The Median house price for California in that month was $402,000 – whereas at its peak it had been $484,000. It is likely around a trillion dollars has been wiped off the top of the inflated California housing market…….so far.

Due to the draconian planning environment elevating these prices to unsustainable levels (where the underlying incomes simply cannot support them), with an overall Median Multiple of at least 8.0 (assuming a gross annual median household income of about $60,000) – purchasers through the “inflating bubble years” had no option other than to burden themselves with grossly excessive debt. This is graphically illustrated within Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider – where the example is provided of lending at 11.11 times gross household earnings ($90,000 household income / million dollar mortgage) .

California’s planning provided the environment for the “mickey mouse” mortgage structures - that were in reality necessary, if people wished to access home ownership in that State. It should be aggrieved purchasers and financiers suing the State and urban governments – for gross mismanagement. Urban governments that artificially inflate their housing markets are the ones that should be held accountable.

Put simply – it would have been rather difficult to mortgage debt load with a million dollars - a $150,000 house in Texas……or Georgia……and much of the rest of middle North America for that matter.

We should not be surprised that the current “global credit crunch” first erupted in California and is spreading around the rest of the globe (particularly through the artificially inflated urban markets) – like a virus. There has been no research of the massive “comprehensive disruption costs” of these artificially created urban asset bubbles.

Regrettably – most economists and planners appear in “blissful ignorance” of the significance of artificially created urban property bubbles and the havoc they wreck when they “pop”. As the bubbles expanded – they were of course more than happy to “sell” the idea to the public than inflation was growth. They might like to consider how the Australian and New Zealand urban markets “sit” – when the higher interest costs are incorporated - to gauge the years of income required to purchase a house and the mortgage debt servicing costs of households.

US policymakers - it would appear - have decided to “panic” in attempting to reflate the asset bubbles (they will fail) – instead of dealing with the structural problems in the artificially inflated urban markets and finance sector.

To the best of the writers’ knowledge –the Australian and New Zealand publics have not been informed of their household debt loads and interest cost differentials – in comparison with the United States, Canada and examples such as Texas.

The reality is that households should not have to pay any more than three times their annual gross income to house themselves –with a mortgage debt load not exceeding 2.5 times income. Acceptable fringe starter housing should be priced at 2.5 times the median household income of individual urban markets – to ensure urban markets do not exceed the “ceiling multiple” of 3.0. These issues are discussed in Restoring the Housing Opportunity - Hugh Pavletich and Housing Affordability Crisis - Muriel Newman .

This highlights the urgent need for effective regulatory disciplines of urban markets – where sound performance measures are incorporated - and most importantly – adhered to.

Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
www.demographia.com

ENDS

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