"THE LAST GLOBAL HOUSING BUBBLES"
Hugh Pavletich
Co author
Annual Demographia International Housing Affordability Survey
DEMOGRAPHIA (http://www.demographia.com/)
Christchurch
New Zealand
September 18, 2008
Artificially created urban housing bubbles are very popular with the wider public and politicians. The reason for this
is because for most people, bubble or fake wealth is the closest they will ever get to creating significant (in reality
- "fake") wealth in their own lives.
It is however an illusion.
Creating real wealth is extremely difficult - requiring exceptional commitment, energy and skill. So the "easy road" to
fake or bubble wealth has wide appeal.
For politicians - bubble or fake wealth creates excess tax revenues - allowing them to engage in excessive spending.
The finance sector welcomes them too - to load households up with excessive debt - effectively turning their customers
in to "mortgage slaves". (Refer "Herb (http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider) Greenberg Blog Archive Straight Talk on the Mortgage Mess from an Insider".)
The "fiction" of fake and bubble wealth is further reinforced in the media - as commentators' and economists inform the
public that housing "inflation" is "growth". Indeed economists have to date been more than willing to explain to the
public the "wealth effect" of housing inflation.
But as the saying goes - "there is no such thing as a free lunch".
All bubbles eventually burst - which is what we are currently experiencing globally within distressed and inflated urban
housing markets - creating massive economic, social and political disruption.
The reason for getting the Annual Demographia International Housing Affordability Surveys underway in 2004 ( (http://www.demographia.com/dhi.pdf) "2008 4th Edition") - was to illustrate in the clearest terms possible - that urban housing markets should not exceed
three times gross annual household income - and that if they do, there is likely some regulatory impediments to the
supply of new housing that needed to be dealt with.
"Bubble bunnies" (from all walks of life) were more than happy to scoff at the notion - that the important relationship
between household incomes and house prices was a "fiction" - and that bubble pricing would continue indefinitely.
But as explained within the recent Planetizen Op Ed "The Housing Bubble: The Planner's (http://www.planetizen.com/node/34208) Role and Lessons Learned" and "Getting performance urban (http://www.demographia.com/pav-performance.pdf) planning in place" the focus must be on quickly getting policies in place at local level - with the assistance of
State / National Governments - to allow affordable housing to be built as soon as possible on the urban fringes.
The fringes are the only inflation or supply vent of an urban market. Local Government simply does not - or should not -
have the right to deny the construction of affordable housing on the urban fringes.
In many distressed urban markets - getting housing construction performance back to internationally acceptable levels of
affordability will take many years. Generally "bubble markets" have severely degraded the performance of their housing
construction industries as explained in "Scoop: (http://www.scoop.co.nz/stories/print.html?path=PO0804/S00406.htm) Urban Planning Degrades Housing Productivity".
Indeed - in a number of the distressed urban markets globally (United Kingdom, California, New South Wales - Australia),
in employing the "build rate per thousand population" measure - housing construction levels have likely already fallen
below those of the Great Depression - when adjusted for population. (Refer "Scoop: (http://www.scoop.co.nz/stories/print.html?path=PO0808/S00303.htm) Housing: The Disaster Zone Of California")
The collapse of the housing bubbles globally will also bring to the fore, the urgent need for "structural urban
economics" training within the economics, planning and property appraisal / valuation professions globally as well.
It would appear too - that many within the finance sector globally are in urgent need of this training.
The only way to develop "market sense" is by practical experience - something these professions will not likely
experience during their working lives. So it will be important going forward for them to be educated to better
understand relevant measures and indicators - so that in particular - they clearly understand the difference between
"real" (at or below three times gross annual household income) and "fake" or "bubble" housing value (above three times
gross annual household income. (Refer Scoop: Understanding (http://www.scoop.co.nz/stories/BU0808/S00149.htm) Housing Bubbles and Scoop: (http://www.scoop.co.nz/stories/print.html?path=PO0808/S00311.htm) Does The Economics Profession Understand At All?)
ENDS