Housing Bubbles: Are the British waking up too?

Housing Bubbles: Are the British waking up too?

Hugh Pavletich FDIA
Performance Urban Planning

Christchurch
New Zealand

July 10, 2010

Martin Wolf, Associate Editor and Chief Economics Commentator of the leading global business publication the Financial Times, is making an important contribution to the public conversation in the United Kingdom and elsewhere, with his opinion of July 8, 2010 "Why we must halt the land cycle” (attached copy for non subscribers).

Mr Wolf is reigniting the public conversation in the United Kingdom, following the important work on urban planning failures during and before the period of the last Labour Government by Kate Barker , then a member of the UK Monetary Policy Committee . The previous Government was never prepared to deal with the failures of the public bureaucracies.

Within this article, Mr Wolf explains how he bought his current home in 1984, when its land value was one hundred thousand pounds. Now its bubble worth is a million pounds – some ten times as much.

It is a “wealth illusion” of course – as Mr Wolf will find if he sells his current house and buys another one. Indeed he will likely be enticed in to an excessive mortgage (we rarely trade down – unless forced to), as the writer explained within a paper of some two years ago "Getting performance urban planning in place" (refer Chapter “The good – the bad – and the ugly”). Housing bubbles generating excessive mortgages, are in essence a welfare scheme for the finance industry, until it all turns pear shaped, when taxpayers are forced to bail them out.

The “masters of the universe” (as they consider themselves within the finance sector – for reasons only known to themselves) are in reality, the “master welfare beneficiaries” in bubble housing markets.

It is clear Mr Wolf understands the core problem are the United Kingdom’s antiquated planning laws, artificially strangling the supply of land, providing the conditions for destructive housing bubbles to erupt.

And most importantly – he is of the view this political problem must be solved.

As Mr Wolf states “Those who do not learn from history are doomed to repeat it”. California, where the Global Financial Crisis erupted, appears to be currently leading in repeating the mistakes of history.

The article goes off on a tangent in part, in suggesting property taxes may assist in dampening land prices. Properly – property taxes or property rates should be directed to properly services for what should be obvious reasons of social equity and efficiency. Other public services should appropriately be financed from income and consumption taxes – preferably the latter.

Fringe urban land supply and appropriate infrastructure financing and Local Government performance are the key issues.

The primary focus in the United Kingdom should be on the “artificial scarcity value” differences between raw fringe urban land and true rural land values – and how to reduce the former as soon as possible, to allow affordable new housing to be built. There is no justification for these artificial scarcity values – in social, economic and environmental terms.

Our urban markets / cities are the engine drivers of a modern economy. Policy makers should not abuse them in treating them like casinos.

As the Annual Demographia International Housing Affordability Survey's make clear – normal housing markets do not exceed three times gross annual household incomes. If they do – it is likely a sure sign there are artificial scarcity values, created by Local Authorities on the fringes. The major reason why this occurs, is because of Local Authorities poor quality governance and inability to control costs (as this recent UK Daily Mail article graphically illustrates), so that they cannot cope with normal growth.

An affordable housing market is defined as follows –

For metropolitan markets to rate as “affordable” and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household incomes. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Schedules of the latest Demographia Survey for guidance). The critically important Development Ratios for this new fringe starter housing should be 17 – 23% serviced lot / section cost – the balance, the actual housing construction. Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3 through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

This definition is common sense most people readily understand.

The former long term Governor of New Zealand’s Reserve Bank Dr Don Brash understands this clearly, as he explained within the introduction to the 2008 4th Edition Demopgraphia Survey, as did the global housing expert and planning academic Dr Shlomo Angel (author of "Housing Policy Matters" and co architect of the UN and World Bank Urban Indicator Programmes) within the 2009 5th Edition Demographia Survey and Dr Tony Recsei, environmental scientist and President of Save Our Suburbs, Sydney, Australia within this years 6th Annual Edition.

Ian Abley, James Heartfield and others associated with Audacity United Kingdom, have made enormous contributions to these issues over the years – and are highly respected colleagues of other leading researchers and advocates around the world.

Due to training failures within the economics profession (and planning and property appraisal / valuation too it must be said) these past two generations (refer writers articles " Housing Bubbles And Market Sense" and " Are Economists Political Liabilities?" and " Americans Slow Learners About Housing Bubbles") of economists have been rather slow in grasping the importance of simple structural urban economics.

There is however belated progress being made within the economics profession.

The co author (with Professor Kenneth Rogoff) of the important book on the fascinating history of bubbles "This time is different", Professor Carmen Reinhart stated within a recent New York Times article "Economists Who Did Their Homework (800 Years of It)" –

“You know, everything is simple when it’s clearly explained,” she contends. “It’s like with Sherlock Holmes. He goes through this incredible deductive process from Point A to Point B, and by the time he explains everything, it makes so much sense that it sounds obvious and simple. It doesn’t sound clever anymore.”

“But” she says, “economists love to be clever”.

The professions performance through the Global Financial Crisis however was not “clever”.

Due to the entrepreneurship of the great William (Bill) J Levitt (the “father of affordable housing”) some sixty years ago, where internationally the residential construction industry was wrenched from the “horse and buggy” era to the modern one we know today, affordable housing supply can meet demand if allowed to by Governments.

We do not for example have an “automobile affordability problem” and low interest rates did not create a bubble in the pricing of automobiles, computers or other goods we buy.

The economic profession generally has yet to wake up to this.

Of the six countries covered by the Annual Demographia Surveys (USA, Canada, Ireland, UK, Australia, New Zealand), the United Kingdom housing is the worst in terms of size, age and quality. Although the United Kingdom is considered a first world country, its new residential house size at just 76 square metres (818 square feet) is now slightly smaller than the Stalinist slab housing the East Germans have been fleeing from since reunification. In 1920, the average size of a new British residential unit was 120 square metres (1,300 square feet).

The United Kingdom current build rate at around two units annually per thousand population, is below replacement. Build costs per square foot are now around four times what they should be. That is in comparison with affordable North American markets, when adjusted for local household incomes.

The average age of a first home buyer in the United Kingdom today is thirty seven years.

Following five years of public conversation, the New Zealand Coalition Government is committed to dealing with these issues (refer hyperlinks to Ministerial Statements on writers website Performance Urban Planning), with the Environment Minister Hon Dr Nick Smiths Urban Technical Advisory Group Report completed end of June this year.

With this important Report, a suite of Ministerial Statements is expected to be released shortly from the Environment, Local Government, Infrastructure, Housing and Building Ministers. This is to ensure a comprehensive approach is taken to the difficulties Local Authorities are experiencing, in failing to meet their responsibilities to ensure that affordable housing is allowed to be built.

Importantly too – politicians internationally are learning the political costs to themselves of destructive housing bubbles and enticing households in to excessive mortgages, as the Fitch Ratings Research commissioned by the Sydney Morning Herald found following the 2007 Australian Federal Election.

The new British Coalition Government has made an outstanding start in getting fiscal disciplines in place. But to ensure that the foundations for a sound and speedy recovery are created, it must deal with the current political impediments to the provision of affordable housing – with urgency.

ENDS

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