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Opinion: How rampant bureaucracies help pump up global housing bubbles
December 18th, 2009
By Hugh Pavletich
The recent New Geography article “There is no “Free Market” Housing Solution” by Ian Abley of the British based Audacity website is confusing.
Mike (Mish) Shedlock who runs the highly regarded Mish’s Global Economic Trend Analysis website has already commented on Mr Abley’s understanding of capitalism and the behavior of housing bubbles. “Mish” responded with “All Bubbles Pop, No Matter What Color They Are”.
Mr Abley makes the statement that I am obviously on the wrong track in suggesting “free market” solutions will work. He states –
“By hoping for a ‘free market’ solution to the problems of unaffordability, Hugh Pavletich of Demographia assumes that it is politicians, businessmen and professionals who have distorted the market for reasons of narrow and immediate self interest.”
Then in considering solutions he opines –
“The only way to stop national or regional housing bubbles recurring is the establishment of the freedom for everyone to build a home on cheap agricultural land without any government or professional hindrance except in matters of technical building regulations.
The logic is difficult to follow.
I am not “of Demographia”, but the person who initiated and co authored the Annual Demographia Housing Affordability Survey (2009 5th Annual Edition released January) with Wendell Cox of Demographia. My website is Performance Urban Planning .
Indeed – if there is any “tribe” I can be pigeonholed in to, it would be in to that of the late great Premier Deng of China, who said “I don’t care if the cat is black or white – just so long as it catches mice”.
Now we know from the Annual Demographia Surveys (of the 265 major metros of the Anglo world) and the Harvard University JCHR Median Multiple Tables of the major United States metros going back to 1980, that normal affordable urban housing markets should not exceed three times household gross annual income (not 2.5 times as Mr Abley suggests).
Indeed – within a recent article “The curse of politically engineered research” I defined in the clearest and simplest terms possible, what a normal affordable housing market is –
“For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household income. 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. The fringe is the only supply or inflation vent for an urban market. The critically important Development Ratio’s for the new fringe starter housing should be 17 to 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.”
The reality is that in Houston and the other affordable urban markets of North America, new single level fringe starter stock of approximately 235 square meters (2529 square feet) on lots of approximately 700 square meters, is being provided for $US140,000 – $US30,000 for the serviced lot with the balance of $US110,000 for the actual house construction. These comprise double garage, 4 bedroom with master ensuite, separate dining and ducted air-conditioning.
Let’s consider the latest Houston Association of Realtors October Report, where from October 2008 through October 2009, sales volumes have increased from 5,010 to 5,716 (14.1%), dollar volume $US0.942 billion to $US1.092 billion (15.9%), listings 49,016 to 45,424 (-7.3%), total pending sales 3,579 to 3,673 (2.6%), average single family sales price $US192,453 to $US198,639 (3.2%), median single family sales price $US141,950 to $US149,000 (5.0%) and, finally, months of inventory 6.3 to 6.1 months.
A quick glance of the beautifully presented HAR Monthly Report (the most professional real estate association in the world incidentally) clearly illustrates that the Houston market is picking up without inflating (the crucial link between incomes and house prices is being maintained).
Compare this with the housing casino of California as I explained within a recent New Geography article “Housing Bubbles: Why are Americans Ignoring Reality?” . Wendell Cox of Demographia within “California: The Housing Bubble Returns?” illustrates how another bubble appears to be getting underway in California.
Mr Cox within his article sets out how Los Angeles has inflated from its low point by 19.2%, Orange County 17.4%, San Diego 20.3%, San Francisco 34.3% and San Jose 24.3% – with the average of the greater number of examples Mr Cox illustrates, being 19.4%.
Within my article I illustrate how California, with just 37,700 new building permits expected through 2009 ( population 37,000,000) and a building stock of 13,2 million, will have the lowest build rate per 1,000 population of any growing economy within the Anglo world – just 1 /1,000. Well below replacement and worse indeed than the appalling British numbers.
So the old destructive and unnecessary bubble game is underway again in California, while in Houston and Texas and throughout middle North America, their housing markets are remaining “normal”, with their economies focused on creating real wealth.
My view has always been that we should learn from sound, affordable and normal housing markets, such as Houston and others, to see what we can adopt or adapt to suit our own local political conditions.
This is exactly what the Japanese did with respect to automobile manufacture after World War 11, when they visited Detroit. They didn’t return home to build Hummers – but instead developed their skills further, to become the global leaders in the manufacture of reliable, more efficient and competitively priced automobiles.
Mr Abley appears to have a poor understanding of the real causes of our housing difficulties – which incidentally are the major drivers with respect to the climate fiasco.
I explained this at length within a March 2008 paper “Getting performance urban planning in place” and within a recent article “The curse of politically engineered research”.
Regrettably – what we have experienced could best be described as Parkinson’s Law on Prosac – and the attendees initial list at the climate conference in Copenhagen, is an excellent current example of this.
Never mind that the research underpinning it is dubious as Steve McIntyre of Climate Audit and increasing numbers of other professionals are illustrating. And that science has been corrupted in the process, as Daniel Henninger of the Wall Street Journal illustrates within his recent article “Climategate: Science is dying”. Martin Cohen does too, with his superb UK Times Higher Education Supplement article “Beyond Debate?”.
Bjorn Lomborg is advocating a more practical approach and reminds us how little has been achieved with Kyoto.
Both the urban land use and climate issues are simply cases of public bureaucracies out of control.
The realities of Parkinson’s Law are poorly understood – but they need to be understood – and fast.
All public bureaucracies will, if allowed to, due to public apathy, media negligence and poor quality governance (yes – in that order) naturally grow and do whatever it takes, to expand their influence and control.
Private sector bureaucracies do as well – but competition is their cure.
Understandably – the out of control public bureaucracies on the “growth path”, will seek outside supporters and finance them where required, to bolster their influence and control.
Conversely – these public bureaucracies will go out of their way to either ignore or attack outsiders they see as a threat. They are particularly attracted to Malthusians of all strips and political hues – environment groups, community groups, protectionists business groups – whatever.
Today, the modern Malthusians are being encouraged, supported and taxpayer financed by public bureaucracies, to assist the latter in their determined pursuit of greater control.
So the focus must be on reforming these public sector bureaucracies and instilling the appropriate performance disciplines, so that they know clearly that their role is to serve the wider public interest.
* Hugh Pavletich runs Performance Urban Planning
Tags: California, Climategate, House prices, Houston, Hugh Pavletich, Performance Urban Planning
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December 18th, 2009 at 9:36 am
Imagine, if you will, a 235 sqm house on 700sqm land for 200k in places like Albany or Dannemora on the outskirts of Auckalnd . Yeah right, more like a cool mill.
It would cost 600k just for the land.
December 18th, 2009 at 9:37 am
Of course its never to do with free marketeers, greed, stupidity and irrational markets….this is of course why such posts are classed as fringe and rightly so. Probably the greatest melt down we have seen is due to the above as seen in action over the last year based on the past 30 years.
I take it your prices as quoted today are for new US builds today? which of course have tanked….if not, please try comparing apples with apples.
The message it seems never changes just the political compass….”The reason
socialismlaisezz faire has not succeeded is because we were notsocialistlaisezz faire enough”or,
“The reason
we areI am not all rich yet iswe areI have not exploited enough of theplanetfinite resource yet.”Its not so much worn thin, as out….
“Never mind that the research underpinning it is dubious as Steve McIntyre of Climate Audit and increasing numbers of other professionals are illustrating. ”
Professionals? any climatologists in there? uh no…..
Maybe some context….an editorial from a lot of newspapers,
“The following editorial was published today by 56 newspapers around the world in 20 languages including Chinese, Arabic and Russian. The text was drafted by a Guardian team during more than a month of consultations with editors from more than 20 of the papers involved. Like The Guardian most of the newspapers have taken the unusual step of featuring the editorial on their front page.”
http://www.guardian.co.uk/commentisfree/2009/dec/06/copenhagen-editorial
and general comment….
http://www.guardian.co.uk/environment
Oh look some mainstream science shooting down the
deniersloons.http://www.newscientist.com/blogs/shortsharpscience/2009/12/50-reasons-why-global-warming.html
Really its quite simple, real science has moved on, its now “how bad” not “is it”…what will scupper “us” not destroying our own planet will be greed and stupidity….we have done it to the financial markets which has crippled the real economy, hopefully we wont do it to our eco-sphere and our society.
regards
December 18th, 2009 at 9:46 am
I bet my horse that those very same bureaucrats are the ones with LAQCs taking full advantage of all the very loopholes they invented…..otherwise why the only response to a deflating bubble is to inflate it even more ??
December 18th, 2009 at 10:08 am
nice one kin,yup the manipulation continues.
December 18th, 2009 at 10:12 am
Hey guys, wouldn’t the materials alone ($100k ish) to build a 237m2 house be about 2.5 x median wage (I thought median wage in NZ was 37k I may be wrong). Doesnt that say more about the fact wage growth has stagnated as opposed to anything else.
By the way I do think local and national govt need to do far more to cut red tape and expense to help bring down build costs for new housing.
December 18th, 2009 at 10:56 am
mark – “Doesnt that say more about the fact wage growth has stagnated as opposed to anything else” – I agree, and this point gets overlooked a lot here. One way to reduce the income/price ratio is obviously to get the price down, but getting incomes up achieves the same. I’ve always thought it would be a combination of increasing incomes and declining “real” house prices – i.e. stagnating “nominal” prices.
For the 30 years since NZ records began from 1962 to 1992, both house prices and incomes grew at around 10% per annum. In the 17 years from 1992 onwards, house prices have grown at around 6.7% pa whilst incomes have only grown at around 3% pa.
Increasing incomes would also help slow the exodus to Ozzie. Quite hard to achieve however, in this global age where companies can easily move their operations to China…
There’s also building smaller places, reducing council fees, removing RMA & District Plan constraints etc etc to look at. Buying land, subdividing it, paying council fees, installling roads, streetlights, stormwater, sewer, water, power, telephone etc is an expensive excercise……
December 18th, 2009 at 11:22 am
Sounds like growth becoming unsustainable to me!
I like your points Steven.
December 18th, 2009 at 11:33 am
I think most people accept or largely accept what Hugh’s saying, but the bigger issue is how to slay the bureaucratic monster? I wonder if it would be actually possible without massive adjustments in our economy and social fabric. Personally, I think the affects would be devastating for both the public sector and private enterprise, and it would hammer the private citizen who’s bought into the social contract whereby he/she relies on a lifetime of mortgage payments for “security.”
December 18th, 2009 at 11:47 am
Also, how do we expect the bureaucrats to be the progenitors when they’re actually the root of the problem? You had the same issue with the breakdown of the Soviet Union. The NZ public sector is hardly the place where you’ll find people willing to upset the apple cart, so the odds are that we will continue to muddle through adding patches to the system instead of overhauling it from the bottom down. As others have pointed out, there is no political will, no energy, and no courage to tackle this head on.
December 18th, 2009 at 12:43 pm
So who is going to buy the farms surrounding our towns for the millions that they are “worth” in order to cut them up, unregulated, in order to make a profit at 30-50k per section. I would love to see how they can do it.
I would have thought that the cost of regulation and compliance would be built into the purchase price of the land that a developer buys, however it seems that the land has an existing value as farm land. Therefore is it the landprices associated with farms that is the real problem?
Only real answer seems to be that we must leave the farms and cut down the bush in order to build new house cheaply. Cut the wood on the spot, mill it, treat it and then use it to build the houses in it’s place. Mind you the guy that gets to build in the place of a Rimu, Kauri or Matai will have to pay more as surely his house will be nicer/better/bigger than the guy who gets the piece of tea tree scrub. :rocks:
Got to love all this stuff…..wonder who will be blamed tomorrow? Make sure you are not standing infront of the mirror when you point your finger……
December 18th, 2009 at 3:31 pm
Good stuff Hugh. I moved from Nelson to Texas in 1992, sold my house here for NZD $173,000 and bought a similar one there for USD $18,000. It makes no sense.
People our house prices are far more expensive than the real USA (ie not the mad parts).
December 18th, 2009 at 4:02 pm
Steven at 9.37 am.
Clearly one of “them”.
Doesn’t actually refute anything Hugh says, just attacks the messenger and regurgitates a whole lot of environmentalist lies.
Here’s a video of one of his type getting comprehensively demolished by a someone with the facts at his fingertips:
http://www.breitbart.tv/lord-monckton-debates-greenpeace-activist-on-streets-of-copenhagen/
December 18th, 2009 at 6:39 pm
Murray Says:
“For the 30 years since NZ records began from 1962 to 1992, both house prices and incomes grew at around 10% per annum. In the 17 years from 1992 onwards, house prices have grown at around 6.7% pa whilst incomes have only grown at around 3% pa.”
Lets not forget up to the late 70s/mid 80s new homes did not come with garages, paths, landscaping, 2x bathrooms, en suits, floor coverings, curtains…and the And bureaucratic BS.
Remove all these…even if we keep the bureaucratic BS, homes would be far more affordable again..
1st home buyers could once again buy and over the next few yrs , put in paths , garage etc.
Once again its quoting stats without any concept of basic changes in the product over the yrs
December 18th, 2009 at 8:14 pm
Nil carborundum, Hugh. The priesthood – whether of climate, city councils, central gubmint or ’sustainability’ advocacy groups – doesn’t like the notion of revolting peasants.
Fact is, if one looks at the current NZ cost of a 100-120 sq m transportable, you get a fair idea of build costs – around $850-1200/sq m, for the must-have bits, and including all appliances etc.
It won’t be a McMansion, but will be a good deal more cosy than those echoing ice-box villas most of us grew up in.
What will achieve this, much to the chagrin of the sustainista, is the looming permanent reduction on tax revenues. Bureaucrats at all levels will be simply starved out of existence. See Ireland for a current working example.
After all, despite being iceboxes (technology available then, mainly), those old viillas were built:
- without permits or inspections
- without any certification, licensing or compulsory guild/union membership for any workers
- without scaffolding – ladders were the go
- without site fencing, despite the roaming dinosaurs, wolves, wildebeest and moa
- without planning (just try to find the drainage plan for a pre-WWII house – easier to start digging to find the inspection plates and bends…)
- without fuss
So, apart from using better technology, why not just revert to the proven historic ways of doing this?
Oh, and follow the established Patterns….they’ve worked for millenia.
To the deposed planners, bureaucrats, etc: get a job in or supporting one of the four essential areas: food, shelter, transport, security. All else is overhead, unaffordable, and (whisper it quietly) Unsustainable!
December 18th, 2009 at 9:24 pm
Readers should be aware that Im not attacking public servants at national, regional or local level, but dispassionately pointing out the realities of Parkinsons Law and the consequences we are currently living with, simply because we do not have reasonable performance measures and disciplines in place.
My view is that most people on the public payroll are trying to do their jobs as best they can, but it is the system that is failing them and us. The good people on the public payroll should welcome the opportinity to assist all their fellow Kiwis, in finding solutions to these issues.
So please encourage your mates in local government to contribute their thoughts to this thread as well. My general concept of how we should move forward is contained within the paper from March last year “Getting performance urban planning in place”. I would suggest you read also in particular 080428 “How urban planning degrades housing construction productivity” and others too you wish to on my website. I also welcome constructive ideas by email at hugh.pavletich@xtra.co.nz .
New Zealand has a proud tradition of being an innovator in getting in place public policy solutions. And I certainly dont have all the answers – by a long chalk.
Around 20th January I intend writing a further article for interest co nz – assessing the Governments performance to date and being more specific with respect to solutions. So I look forward to suggestions from interest co nz readers.
Many thanks,
Hugh Pavletich
December 19th, 2009 at 9:57 am
Hugh Pavletich Says:
“My view is that most people on the public payroll are trying to do their jobs as best they can, but it is the system that is failing them and us. The good people on the public payroll should welcome the opportinity to assist all their fellow Kiwis, in finding solutions to these issues.”
It is these same people who have over the yrs built their little empires, beauocarcies adding bits and pieces here and there, and added their own little bits of ” “The curse of politically engineered research”.
Hell that attitude you describe can be applied to and basically sums up the cause leaking house syndrome.
December 19th, 2009 at 10:53 am
HP fails to understand the way beaurocracy beavers away to generate the need for more beaurocracy. Each department head determined to be indespensible and in need of more staff.
Rule one: Never do today what can take longer and require extra staff.
Rule two: Generate new red tape every day, especially stuff that demands more staff in the department.
Rule three: Never say something is easy or that it can be done quickly.
Rule Four: Always remember the rules.
December 22nd, 2009 at 6:00 pm
Wally,
Hugh has actually quoted extensively from “Parkinson’s Law” on the exact points you make above. But I too think he is too gracious to these people.
Hayek’s “The Road to Serfdom”, and Schumpeter’s “Capitalism, Socialism and Democracy” both say, among other things, that bureaucratic power attracts and promotes exactly the OPPOSITE kind of person that the utopians anticipate to fill all the roles; that is, bullies and self interested power grabbers rather than selfless, impartial servants of the people. These authors have been proved right on numerous points in history, which tends to repeat because people simply do not listen to wise heads.
A hefty book that I have not read, but probably makes the same points, is Ludwig Von Mises’ book entitled “Bureaucracy”.
December 22nd, 2009 at 6:05 pm
Ian Abley makes the following “comment” on New Geography that includes the most succinct description of the urban limits/housing bubble mechanism you will find anywhere (although I disagree with his labels and misguided condemnations of free markets):
1 – I am concerned to look at capitalism.
2 – In theory everyone is free under capitalism to accumulate capital
3 – In practice there are those who accumulate capital only by employing the majority who are free to sell their labour
4 – People are mostly employees, not capitalists – they are not free in a political sense (A)
5 – It takes capital to build a house, but a house is not productive capital like a factory
6 – Most people never have that sort of capital themselves – they are not free in an economic sense (B)
7 – Finance capital has developed ways to allow people to buy a home (on a mortgage for example) making a percentage in the process
8 – People attempt to borrow the cost of constructing the home, plus the cost of the land
9 – If they cannot organise the construction and land themselves, they must also borrow to pay for developer profits
10 – Farmland is invariably cheaper than the centre of cities – land is a positional good
11 – Where cheap farmland is available on the peripheries of cities the major cost is the cost of construction
12 – Planning makes farmland unavailable through the denial of development rights
13 – People must buy land alongside developers from within the planning system – they are not free to ignore the law (C)
14 – Land values are inflated within the planning process above any value as a simple positional good
15 – Developers can raise the finance to pay for planning inflated land values in ways most people cannot
16 – People increasingly cannot afford the price developers will pay for land – they are not free to build (D)
17 – This inflated cost can be turned into a larger burden of household debt through the mortgage system
18 – People have to live somewhere – they are not free to avoid indebtedness (E)
19 – The existing housing market inflates within the containment of the planning system
20 – Existing homes on planning approved land are valued higher than the cost of building new construction
21 – Developers make more profits from planning gain than they could make as a percentage on the cost of construction
22 – Planning gain is recognised by developers, planners, and land owners who have land that will gain planning approval
23 – The negotiation over who shares in planning gain becomes institutionalised within the legal planning system
24 – People have no choice but to buy new homes at inflated prices and realise the planning gain through their debt
25 – The government sustains the legal planning system, and uses environmental arguments to do so
26 – The legal system of denying development rights to farmers sustains the inflationary process in the housing market
27 – The fund of finance capital lent across the population requires house price inflation to remain secure
28 – To avoid indebtedness (E) the price of housing should relate to average household incomes (Demographia)
29 – If people were free to build on farmland (D) they could easily do so in affordable ways
30 – One way to do this is to break the planning law (C) which widely happens in the developing world
31 – However they would find it near impossible to borrow finance to break the law, and so would not be free (B)
32 – Government is not about to loosen the planning system and threaten the security of the finance system
33 – People remain unfree – as employees (A)
34 – Employers face few effective political demands for higher wages to make housing affordable
35 – More household income is spent on inflated house prices
36 – Households have found ways over the years to withdraw equity from the inflated values of their homes
37 – People also know that as employees they must retire from work, and paying off a mortgage is attractive
38 – Once paid off the home is a retirement fund
39 – For many people too, when mortgage rates are kept low, housing equity can be acquired by trading up
40 – Mortgage lenders have enjoyed their fund of finance capital being expanded in that process
41 – The popular trade in the stock of housing has turned into a housing bubble
42 – Those bubbles can burst
43 – Governments have found ways to avoid the bursting of bubbles being too prolonged or severe
44 – Quantative Easing to stabilise the finance system with its fund of mortgage lending was politically accepted
45 – The price of Quantative Easing in future will be cuts and taxes
46 – Taxing housing equity gains – misnamed a “Capital Gains Tax” – may interest governments in future
47 – Households will be squeezed in their equity in the name of avoiding housing bubbles
48 – Planning gain sustained through containment and tax squeezed from inflated equity is essential to government – the financial sector would collapse without the inflationary planning system
49 – If people were legally free to build on farmland (C) they would still not be economically free to build (B)
50 – Even if finance were available people would not be politically free (A)
I like that you want to free people legally (C). You also expect that people will be free economically (B)
I’m just making the point that the “free market” is the freedom of capitalists to make capital. Today that means accumulating finance capital from the denial of the legal freedom on any land. (C)
Your meaning of a “free market” is a technical one concerned with affordability and demographics.
That’s fine – so long as we can agree that is what you are interested in.
Sorry if that seems confusing. I was aiming at precision.
I wanted to attempt an explanation of why this is all encouraged, and popular, at various levels of society.
I would be pleased to get some legal freedoms to build to meet demographic demand. (C) I’m simply saying that to do that we have to confront the political and economic interests that have found their twenty-first century ideological self-justification in environmentalism.
Regards
Ian Abley
http://www.audacity.org
http://www.newgeography.com/content/001261-there-no-free-market-housing-solution#comment-1643
Scroll down for Ian’s followup comments and my qualified disagreements with him.