Poor Analysis, Reporting of Urban Property Bubbles

Poor Analysis and Reporting of Urban Property Bubbles
HUGH PAVLETICH
DEMOGRAPHIA

As this article The Japanese bubble: Alarming parallels with U.S. - International Herald Tribune illustrates - the standard of analysis and reporting of the current global credit contraction, precipitated by the bursting of specific asset bubbles, is generally of an exceptionally poor standard. In this case, the IHT excels itself in exclaiming in the headline “alarming parallels with US’– then proceeds to inform us through the body of the article, that there are no parallels.

This follows hard on the heals of the recent “floundering effort” by US Businessweek in another irresponsible headline grabber Housing Meltdown - which missed the real market drivers completely and concluded by informing readers that the grossly distorted and inflated Australian housing market is “the good”, Spain “the bad” and that the British housing market had a “silver lining”!

The British housing market is - in structural terms - (with new residential stock average build size being just 76 square metres), the most damaged of the Anglo world – although California in its race to the bottom, is doing its best to emulate the British disaster. Both Britain and California currently have appalling build rates at or below 3 per thousand population – barely replacement.

The reality is that normal open urban markets housing should move between a Median Multiple (median house price divided by median gross annual household income) from the floor multiple of 2.0 through the swing multiple of 2.5 and top out at a ceiling multiple of 3.0, through the building cycle.

Ideally – this swing through the building cycle should be more moderate in moving between a floor multiple of about 2.3 to a ceiling multiple of 2.7 – to avoid excessive construction market swings, adversely impacting the residential construction sectors long term pricing and productivity performance.

This is clearly illustrated within the (in this case 2008 4th Edition) Annual Demographia International Housing Affordability Survey , where obviously (for those with a rudimentary understanding of urban property markets) normal open urban markets do not exceed three times household incomes.

This is achieved by allowing new housing to be built on the urban fringes – unimpeded, without further onerous levies and charges inflating pricing. In effect – the urban fringes act as a supply vent or inflation vent (there is no other way), by providing “acceptable”(in terms of size and quality depending on local market conditions and particularly incomes) new starter housing at the swing multiple of around 2.5, as clearly illustrated in the recent Demographia Sydney - Dallas Fort Worth Fringe Starter Housing Comparative Study.

Dallas Fort Worth is an open market (something Sydney clearly is not), capable of providing new starter homes on the fringes for around $140,000 comprising $30,000 for the lot and $110,000 for the actual house construction. The important development ratios of 20% lot – 80% house construction are maintained around the fringes of open affordable urban markets.

This is something the closed urban markets –such as those along the coasts of North America, the United Kingdom, Ireland, New Zealand and Australia and elsewhere can not achieve, because through artificial regulatory impediments, land supply is starved and land prices inflated.

Since the Local and State Governments were responsible for the creation of these artificial scarcities and inflated pricing of land around the fringes - they are never slow “sharing in the booty” by extracting as much of these “artificial fringe land scarcity values” for themselves. Orwellian language comes in to play here – as these are described as betterment and developer levies. Better for whom? Developer levies? In reality of course, they are imposed on the new home purchaser.

These “artificial fringe land scarcity values” can easily hoist the fringe land by one million dollars –two million dollars – three million dollars a hectare and beyond. Governments engaged in what really should be termed “extortion”generally aim to capture at least half of these artificial scarcity values for themselves. The Australian governments are particularly zealous in this regard – often owning the land and succeeding in “milking” most of these artificial scarcity values for themselves.

So obviously these “government milked markets” before long inflate well outside the ceiling multiple of 3,0 and households within these dysfunctional markets are soon forced to pay 4, 5, 6, 7. 8, 9, 10 and beyond their annual household incomes to house themselves. The “most milked” in this years Demographia Survey are the households of Los Angeles at an astronomical 11.5 times their median gross household income.

The reality is – that for people to access ownership within these dysfunctional markets – dysfunctional mortgage products need to be designed to meet their needs. The normal purchasing and financing practices of buying houses at no more than three times annual household income, with deposits of 10 and 20% and mortgage debt loads of around two and a half times annual household income are quickly abandoned.

The “market culture” soon turns from a disciplined and responsible one - in to an irresponsible and hugely damaging speculative frenzy – something all participating convince themselves will never end. It could be said that property inflation is make believe wealth creation (fools gold) for the ignorant.

Never ending urban property inflation (supposedly) makes the equity ( a word that very soon fades from view) and debt financing risk free to the ignorant and gullible as illustrated in Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider . When these bubbles pop (as they always do) – it would appear that Las Vegas is where some of the victims gather to “lick their wounds” as outlined in Creators of Credit Crisis Revel in Las Vegas - New York Times . The New York Times article is wrong in suggesting that the finance sector was the “creator” of these bubbles. Governments - both State and Local are the creators of these artificial scarcities – understandably triggering the speculative frenzies.

The finance sector simply and understandably (what other option did they have?) – with the willing support of their customers - assisted in providing the fuel to inflate these government created scarcities.

It appears that the havoc of asset bubbles has to be learnt by experience with every generation and that it is impossible to teach people about them out of textbooks. No doubt the Las Vegas finance sector conference attendees called in to Washington first, pleading for government welfare, prior to heading out to Las Vegas.

California of course was the first place the property asset bubble “popped” – and Californians - being very adaptable and innovative people, appear to be first off the rank in refining the art of “mortgage walking” as explained within The Rise of the Mortgage 'Walkers' - WSJ.com , Who will pay the mortgage when the homeowner walks? You and Troubled borrowers are walking away from their homes - Feb. 6, 2008 . In fact - they now have a website available Should You Walk Away? - Educate Yourself On Your Rights If You Face Foreclosure. Our Website Can Help You. to assist with the processes involved.

It would appear that the Banks and other lending institutions may become very significant property owners in California, Florida and other dysfunctional and inflated urban markets throughout North America and beyond.

Keep the inflation profits through the upside of the bubble – but “bank” the losses through the downside – seems to be the order of the day.

The easy California “bail out laws” will no doubt assist people to migrate from the dysfunctional to the normal open markets such as Texas. This migration has in any event been speeding up as these bubbles inflated, as set out by these Demographia Studies ( here , here and here ) based on US Census data.

As the saying goes “demographics is destiny”.

In this regard – it would appear that the State of Texas (with the other normal United States markets) has an enormous competitive advantage as outlined within Texas Homeowners Hold Winning Hand, Says Real Estate Center reporting on a speech by Dr James Gaines of the Real Estate Center of Texas A & M University, following the recent release of their Report

It is to be hoped that the business and property media refrain from “selling” to the public the myth that property inflation is growth – and instead – “report reality” by focusing their attention on the structural issues and drivers of urban markets.

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

Further reading: Scoop New Zealand

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