“Housing : Focus on Structural Issues”
Hugh Pavletich FDIA
Co author – Annual Demographia International Housing Affordability Survey
Christchurch
New Zealand
May 3, 2009
It would appear the Australian economist Christopher Joye of Rismark International (An analysis of the Australian Property Market - L P Shadow - Business Spectator) and the promoter of the failed housing shared equity schemes, has been much distracted this year, in his futile
attempts to discredit the Annual Demographia international Housing Affordability Surveys ( www.demographia.com ).
Housing prices in Australia are a very touchy subject –particularly for those with a vested interest in ensuring the
current housing bubbles are propped up – irrespective of the cost to taxpayers and the wider community.
While housing shared equity schemes are a dumb idea in the first place – and are only saleable to gullible politicians
when housing markets are grossly overcooked – they become a complete disaster as housing bubbles deflate – as they
inevitably do. Indeed - Mr Joye states he assisted the last New Zealand Government in getting this in place (I am only
aware of this from Mr Joye), which thankfully, the current Government is throwing out.
Following the fanfare last year of the announcement of it and widespread scorn by commentators (including the writer of
course) and the wider public – just seven people applied.
There was much laughter in the New Zealand Parliament when the announcement was made recently by Hon Phil Heatley,
Minister of Housing. The remnants of the last Government were conspicuous by their silence and obvious embarrassment.
Another flop. One of many currently heading for the trash can.
In owning their houses – Kiwis at least - were in no hurry whatsoever to jump in bed with the Government (it was a very
hard sell for Ms Clark and her Housing Minister Ms Street). The “fishhooks” were obvious to the New Zealand public, but
not the enthusiastic Mr Joye it would appear.
These “housing shared equity schemes” had been thoroughly discredited internationally well prior to this. The funny
thing was that Mr Joye on the Rismark website tells us that he “invented” them. To those of us in the property industry
– we had always thought they had been around since the time of Adam and Eve, when they “helped” their kids in to houses.
Recently Mr Joye had a swipe at the Demographia Survey, by plucking a table from a recent OECD Report. This table
suggested that Australian housing was not particularly overcooked, based on the average affordability of housing over
the past thirty something years for a numbers of countries. Housing has been overcooked in many urban markets for a long
time – so the OECD Report and Mr Joye told us exactly nothing on this issue. And other issues too it would appear. Roger
Kerr of the New Zealand Business Roundtable was extremely harsh in his criticism of many aspects of this report.
But if there is one thing Mr Joye has in abundance – it is persistence.
The Australian Business Spectator with its obvious and commendable policy of extreme tolerance in these matters, has
allowed Mr Joye to bring on board his anonymous pal aptly named L P Shadow, to enlighten us all why Australian housing
is ready to boom again and we should all feel a lot happier about life in general.
In wading my way through this torturous Joye and his Shadows “sun rises in the west” litany of economic logic (?) – I
had imagined that the Demographia Survey was to be spared this time. But alas - the long winded entry concluded with
just another nitpicking exercise of the Demographia Survey.
The Annual Demographia International Housing Affordability Survey is not “perfect” of course – as I made clear to New
Zealanders within a New Zealand Herald article I wrote soon after the release of the 5th Annual Survey January this
year. Mr Joye needs to read the end notes. He obviously hasn’t. But the Median Multiple (median house price divided by
gross annual median household income) is “adequate”.
It happens to be recommended by the United Nations and World Bank and is employed by Harvard University with its Median
Multiple Tables. Some of us consider these to be reputable organizations.
The author of the Preface of last year’s Demographia Survey was Dr Donald Brash, former Governor of the New Zealand
Reserve Bank and of the National Party. This year - Shlomo Angel, Adjunct Professor Princeton and New York Universities,
co architect of the World Bank and UN Urban Indicators Programmes and author of the book Housing Policy Matters. The
Annual Demographia Surveys have widespread political support, and too, the support of the New Zealand Planning
Institute.
Readers are encouraged to refer to my website www.PerformanceUrbanPlanning.org for further information with respect to these and other matters pertaining to housing and local government.
For those of us who have been around the property industry for a while (and are aware of most of the tricks) – what we
particularly like about the “median multiple” methodology, is that it is a “clean measure”.
“Clean” is not a word that creates a great deal of joy in the hearts of those in the property industry keen to sell
things – irrespective of the costs.
Indeed – it was the desperate need for a “clean measure”that motivated me to chose the Median Multiple back in late 2004
and thankfully gain the support of my colleague Wendell Cox of Demographia, Illinois, USA in getting these Annual
Demographia Surveys underway. Many in the property industry were furious (a wonderful complement as I saw it). The last
thing they wanted to see happen, was evidence clearly set out, illustrating how grossly overpriced housing is in
Australia and New Zealand.
Those old “mixed measure” Housing Affordability Indexes –with house prices to income and mortgage costs mixed and
manipulated to suit market conditions, where all the long suffering public was fed – by a gullible media. The media –
like the rest of us – never understood them. That was the idea of course. Victorian State economist Alun Breward on ABC
Okhams Radio back in 2004 tore these apart.
They should have been thrown in to the trash heap of history long ago.
The hugely important median multiple measure is an excellent foundation for us to employ in dealing with the structural
issues, in restoring housing affordability in Australia and New Zealand over a reasonable and realistic time frame.
The New Zealand Government recognizes this (refer my website) – and is committed to dealing with these real structural
issues. It is sad to see Australian Prime Minister Rudd still “up the creek” on housing issues – as he is pandering to
his property industry pals in their vain and clearly ill advised endeavours (the unnecessary and hugely expensive First
Home Owners Grant being just one example) to protect their political and commercial skins.
Mr Rudd would be well advised to re read his Victory Speech at the last election (he intended to govern in the wider
public interest - on that day at least) and the Sydney Morning Herald Fitch Rating Research soon after. Voters in
Australia then came over to Labour in the expectation that the new Government would ensure housing became more
affordable – and their mortgage loads would be lowered substantially. Australians it would appear, had tired of being
“mortgage slaves” to the Howard Government (and the housing bubble denier Costello).
The magic number is “3”.
To rate as affordable, housing should not exceed three times gross annual household earnings. And further to this –
purchasers should not load themselves up with any more than 2.5 annual income of mortgage debt. Not the exorbitant 4 to
5 times annual income New Zealanders and 5 to 7 times annual incomes Australian new home buyers are conned in to
mortgage loading themselves.
To illustrate – through the recent era of “easy money” - Texas housing stayed at around 2.5 times household earnings,
while the strangled basket case of California blew itself out to in excess of 9 times annual household earnings with
mortgages through to a stratospheric 11 times –triggering the global financial crisis.
Last year I studied housing in the United States, with a good deal of the time spent in Houston. This year’s Demographia
Survey found Houston, with a population of 5.8 million and population growth in excess of 2% per year, had a Median
Multiple of 2.9 (it is currently about 2.5) where the median household income was $US55,600 and median house price was
$US160,200.
New fringe starter homes of 235 square metres on 700 square metre lots are being put in place all up for $US140,000
($US30,000 lot, $110,000 house construction). These comprise double garage, 4 bedrooms, master with ensuite, separate
dining and ducted air conditioning. Manufactured housing of 160 square metres on 700 square metre lots for $US73,000
($US20,000 for the lot, $US53,000 for the manufactured home).
No wonder there were so many young families on the cruise ships heading for the Caribbean out of Galveston. Young
Houstonians prefer to spend their incomes this way – rather than doing what their Australian and New Zealand
counterparts are forced to do – making charitable donations to Banks.
Some of us don’t think these housing bubbles are a clever idea and are rather keen to explore ways to deal with them –
something Mr Joye and his Shadow are clearly not keen to do. My suggestions are set out within the March 2008 paper
“Getting performance urban planning in place”.
It would make a pleasant change to start seeing “performance” in the areas of housing and local government.
But if there is one thing these housing bubbles and their consequences have taught us – is that in putting this as
diplomatically as possible – there are “knowledge gaps” (or is it chasms?) in the fields of economics, planning and
property appraisal / valuation. I cover these issues within an article “Housing Bubbles and Market Sense”.
Indeed - the economics profession should shoulder a good share of the blame for these housing bubbles. A little
humility, at least, would be appreciated.
Before these professionals can be of any use in assisting their communities to get solutions in place, so that housing
affordability is restored – they will need to better understand property markets and structural urban economics.
We gain knowledge by reading and wisdom by observing.
Go check out Houston and other affordable North American urban markets Mr Joye (and stay away from Washington DC – it
will only confuse you more). Then tell us what you have observed and learnt about properly performing housing markets.
Meantime – since we are past the “nitpicking” stage here in New Zealand – we will focus on getting solutions in place.
Then our pals the Australians can copy us, again, in due course, as happened with the Reserve Bank and Resource
Management Acts – to name just two of many policy innovations.
ENDS