How Phoenix housing boomed and busted

When analysing the US housing bubble, four states stand-out for the way in which home values rose into the stratosphere before crashing and burning: California, Nevada, Florida and Arizona (see below chart).

Given the first three markets were covered in previous posts (see above links), I now want to analyse the Arizona housing market – with particular emphasis on its largest city, Phoenix – to determine why prices bubbled and then burst in such a violent manner.

In the lead-up to the crash, Phoenix’s economy was booming. New jobs were being added at a fast pace and per capita incomes were growing strongly:

With confidence riding high on the back of seemingly solid fundamentals and rising asset prices, along with easy access to credit, Arizona households borrowed heavily. Per capita debt accumulation surged in the mid-2000s to levels far in excess of the national average:

But Phoenix was living on borrowed time. With the national economy turning south in the wake of the sub-prime crisis and the collapse of Lehman Brothers, Phoenix home prices, which had already been falling gradually, began to slide fast. After home prices peaked in May 2006, it took another 18 months before Phoenix’s unemployment rate began rising:


The rest is history. Home prices continued falling, unemployment kept rising, and nominal per capita incomes fell for the first time in at least 40 years.

And the pain is widespread, with around one in seven mortgages 90 days in arrears – well in excess of the national average:

So what went wrong? Could anything have been done differently to prevent the housing bubble/bust?

Certainly, if credit was less readily available, households would have been constrained in their ability to bid-up prices. But easy credit was only part of the problem. Another key driver of the rampant price escalation and then collapse was the way in which land was supplied for housing.

Throughout the 2000s, Arizona was one of the fastest growing metropolitan area in the United States with more than 1,000,000 population (see below chart).

However, despite there being ample developable land on the urban fringe to accomodate this population growth, the actual quantity of land available for development was heavily restricted on two counts:

  1. The State of Arizona passed statewide planning laws in 1998 and 2000, which included the implementation of high impact fees on new development and urban containment devices. In a 2006 study of land-use policies in the 50 largest metropolitan areas of the US, the Brookings Institution ranked Phoenix as ‘growth management’, which is the same ranking as Florida and California.
  2. The overwhelming majority of potential developable land in Arizona is either owned by the state and federal governments, preserved for conservation, or otherwise off-limits to development.

On the second point – the lack of available land for development – the below graphics highlight the land supply situation in Phoenix.

First, a pie diagram, extracted from the Arizona State Land Department Annual Report, showing how only 17.5% of land in Arizona is privately owned:

Second, a map showing the lack of developable land around Phoenix:

There is evidence that the Arizona State Land Department, whose mission is to “optimize economic return for the Trust beneficiaries”, heavily restricted sales of land to the market in an effort to maximise revenues, causing builders and developers to bid-up land price in period auctions to ensure their supply of land for construction (called ‘land banking’).

Whereas the price of land for housing sold for around $40,000 per acre immediately prior to the bubble, at the peak average land prices fetched nearly $200,000 (see below chart).

And with the state rationing the supply of fringe land, average residential land prices rose throughout Arizona:

Obviously, this land price inflation was a principal cause of the house price escalation as well as the delayed supply response to the rapidly growing population and rising house prices (see below chart).

Had land around Phoenix been freely available for development, developers would likely not have paid such high prices for the land sold by the state government and Phoenix home prices would never have risen to such heights or crashed as violently.

Phoenix is yet another example of where excessive government interference in the supply of land has combined with easy credit to create a speculative bubble followed by a painful bust.

unconventionaleconomist@hotmail.com

www.twitter.com/Leithvo

51 Responses to “ “How Phoenix housing boomed and busted”

  1. LBS says:

    Gees Leith sounds famliar to another country I know of.

  2. endrortsonhousing says:

    “the Arizona State Land Department, whose mission is to “optimize economic return for the Trust beneficiaries”, heavily restricted sales of land to the market in an effort to maximise revenues, causing builders and developers to bid-up land price in period auctions to ensure their supply of land for construction (called ‘land banking’)”.

    Sounds like the ACT “Land Development Agency”, whose mission is to maximise revenues for the ACT government, with the same consequences in terms of land banking and insane costs for tiny blocks on the outskirts of Canberra. (Meanwhile there are sheep paddocks as far as the eye can see).

    A crying shame – imagine what this country could have achieved if not for the artificial diversion of trillions of dollars into inflating land prices for the last decade:

    A decent railway between Sydney – Melbourne – Canberra – Brisbane perhaps?

    A sovereign wealth fund to provide decent super for everyone (not just real estate agents and mega mortgage mugs)?

    Makes me so frustrated that this issue is not likely to get any traction on the political agenda until overtaken by external events (aka market movements).

  3. Hugh Pavletich says:

    Leith – congratulations – a superb effort.

    Arizona (with California, Nevada, Florida and others) is a classic example of -

    “If you get the land price wrong – everything else is wrong”

    For housing markets to stay affordable at or below 3 times household incomes (refer Demographia Survey http://www.demographia.com ), new starter housing must be allowed to be supplied on the fringes (the inflation vent) at 2.5 times the median household income of that particular market – at Development Ratios of 20% serviced lot, the balance the actual house construction.

    Its that simple.

    The fringes are the only supply / inflation vent responsive enough, to ensure that housing bubbles are not triggered.

    The core of the problem is Local and State Governments losing control of their costs – then starving land supply and rocking in quite inappropriate Levies, to milk the housing market for all its worth.

    I wrote about this recently within “How housing bubbles are triggered” (just google it).

    In a nutshell – Governments simply must not be allowed to strangle land supply, and further to this, must be required to finance infrastructure appropriately, along the lines of the Texas Municipal Utility District bond financing model.

    Housing is after all, a basic human right. The housing market should not be treeated as some sort of casino.

    No doubt the Authorities in Arizona are spending a lot of time down in Texas, learning how to do things properly, so they dont repeat this mistake.

    And too – following the recent lead by Florida in banning Smart Growth at the State level.

    The problems and solutions are simple.

    We do not need the complex and deliberately confusing academic stuff, too often deliberately delaying getting political solutions in place.

    Hugh Pavletich FDIA
    Co author – Annual Demographia International Housing Affordability Survey
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

  4. raveswei says:

    I spend couple of weeks in Phoenix in late 2007 and I can say that there was no issue with land restriction. Phoenix is pure example of newly developed extremely low density urban sprawls – American style, extending miles and miles out into desert–with no limits or restrictions.

    After few conversations with locals I could only say that mass hysteria supported by easy credit was the major cause of the bubble. Land restrictions better to say perception of restrictions has been affecting mass psychology to some extent, but that is far from being the main cause. Land prices jump is not the cause but rather a consequence of housing bubble explosion. Developers were bidding up because they were able to sell for almost any price they asked, in many cases much before construction is completed.

    For land restrictions to be a major cause of bubble, we would expect that land restrictions first create shortage of new developments and that subsequently drives prices up. That was not the case in Phoenix (as a matter of fact almost nowhere where bubbles inflated). Instead, numerous developments were built, oversupply was growing but prices were going up fed by positive feedback until debt reached some limit and feedback became negative.

    I think you are missing or underestimating human psychology that is always the main cause of any bubble and easy credit that is always main fundamental beneath.

    • georgie says:

      This psychology you speak of is a major factor when it comes to a property bubble. If people feel or believe prices wont go down or crash they will buy into property.

      Myself being part of Gen Y, I see it day in and day out as my friends and peers tell me that they are saving for a deposit to buy an investment or a house. They believe the investment is long term, and so even if the property market falls a bit in the long run they will end up ahead. (which is true)

      So whats happening, especially in Sydney is prices are stagnating, they won’t fall off a cliff unless there is a large economic external shock. People are continuing to buy good quality homes, investors are rare only looking for 10%-20% discounted properties.

      Also you have to look at the situation of if there is a large economic shock where will people put their money? The equity markets will be butchered, and mum and pop investors who work 40-50 hours a week are not educated in investing so they pour their money property as its always seen as a safe investment. People won’t leverage at the standard 10% but if they do have money property is a pretty safe investment especially in Sydney.

      Its all about perception and what is “safe”.

      • Hugh Pavletich says:

        Georgie – thats exactly what they thought in California, Nevada, Arizona, Florida, Ireland and elsewhere.

        By definition, bubbles are unsustainable. The only unknowns are (a) what will trigger their collapse and (b) exactly when.

        Then it becomes very crowded indeed as people panic – too late – to exit the market.

    • Why didn’t Texas, Georgia or the other non-restricted states bubble then?

      Fringe land prices do not explode in value without some kind of constraint being in place. Clearly the Arizona state government rationed the amount of lots available for sale, which combined with speculative behaviour, led to the huge surge of prices.

      Price rises of this order of magnitude simply do not occur in markets where there is open competition between land owners.

      • Hugh Pavletich says:

        Texas has got it exactly right, in that Governments are NOT ALLOWED to meddle in land supply.

        If allowed to meddle in land supply, it is simply too tempting for Governments to milk it for all its worth, as a convenient revenue generator to feed their bureaucratic ambitions.

      • mrobbo says:

        So Leith, is it true to say Texas has it just right?? ie No excess supply of property or speculation by developers or investors to create a bubble and no land constraints to limit the supply of homes driving prices up.
        Seems to good to be true.

        Nice articles by the way

      • davel says:

        Good article, but I think Ravs point has merit.

        How do we know that the supply of land was restricted by the authorities? High prices are not evidence of that. What if the supply of land remained constant, but the number of bidding developers multipled due to the profits to be made?

        OTOH, the fact that Phoenix shows sprawl is not evidence of loose land policy, because this is just how Americans choose to live in many cases.

      • “What if the supply of land remained constant, but the number of bidding developers multipled due to the profits to be made?”

        In a normal market, the supply of land would not remain constant when demand rises/falls. It would adjust accordingly, mitigating price movements.

      • davel says:

        True of course, but government agencies dont tend to respect normal market models.

        That doesnt mean they’re “artificially restricting supply”, it just means their rules and regulations havent adjusted to the changing world.

        I’m not disagreeing with the thrust of your article BTW.

      • PhilBest says:

        Davel, in fact what has happened is that local governments all over the world have gone nuts trying to “restrain urban growth”. If you’ve missed this, you would have to be on a different planet.
        The global warming alarm is a contributor – allegedly restricting urban growth will reduce CO2 emissions. Not true, but that is the allegation.

      • raveswei says:

        You cannot simplify psychology to only one element – perceived restrictions. There were quite a few reasons that I can see why there was no housing bubble in Texas. In 2000s. First of them is huge income and wealth inequality in Texas – investment property makes sense only is there is a larger base can afford higher prices. Demand for a decent home in texas is much more limited than in Arizona Second reason recent memory of ugly housing and credit bubble burst in 1980s that severely damaged economy for long period. Housing bubble in USA started during the period when oil business based in Texas had huge privileges from Bush being in office. Texans saw better opportunity to invest in oil than in housing. Average upper middle class Texan invested majority of money into oil – different bubble. Their intentions were the same; they were driven by the same force greed and perceived “shortage”.

      • The majority of markets in the US – those without growth constraints – never bubbled despite the same access to ‘easy credit’. Explain to me why?

  5. Hugh Pavletich says:

    raveswei – Leiths fringe land supply price graph above tells a different story.

    You need to explain why bubbles were not triggered in Texas and other middle North American markets, identified within the Annual Demographia Surveys.

    These affordable markets had easy credit as well. They simply had the capacity to respond quickly and meet demand. In the case of Georgia and Atlanta in particular, there was indeed serious overbuilding. Little wonder the Median Multiple for Atlanta two years ago was 2.1, last year 2.3, as the glut of stock is being cleared.

    Overbuilding is far less of a problem than artificial scarcity induced bubbles – as clearly happened in Pheonix, as Leith illustrates.

    With all due respects, the evidence is staring us in the face.

    • mikeyc says:

      Hugh,
      If land supply was the problem how come the market crashed like a Chinese high speed train? Surely if there is a real shortage of homes prices would stay up, maybe not at the heights of the peak but not head into death valley either. IMHO the key factor at work here is rampant speculation, not a shortage of houses. That’s why the home building numbers went through the roof and promptly fell off it when the market turned. If there was a land and house shortage then we wouldn’t now be seeing so many vacant properties in these supposedly “planning constrained” markets. The herd mentality of property wealth is as much to blame as supply and easy credit.

      • Hugh Pavletich says:

        Mikeyc – housing bubbles can only erupt if there is scarcity or the perception of scarcity.

        Put in very simple terms – you cant drive up the price of a fringe house in Houston to $US200,000 – because a builder will immediately be able to supply one for $US150,000.

        Buyers do not make $50,000 “gifts” to speculators, when they can buy something at a true market price nearby.

        In commerial terms – developers / builders are speculators greatest enemies. They just keep undercutting them!

        That wasnt able to happen in Phoenix – as Leiths article above brilliantly illustrates. So a speculative frenzy was triggered as AFFORDABLE new supply could not meet demand.

        As a commercial development practitioner of 30 years experience, I never pay bubble value for anything. This is why I shut the development business down mid 2004 and focused instead on public policy issues.

        The money in real estate is made in the buying.

        There is nothing worth buying in Australia and New Zealand at the moment – and there hasn’t been for quite some time now.

      • This has NOTHING to do with physical shortages, but short-run supply elasticities and land racketering. When land/housing is slow to respond to increasing demand, prices rise sharply. The price increases can then lead to speculative buying and ‘panic buying’ from first home buyers who attempt to ‘get in now before they miss out’, leading to further prices rises (and so on). When demand untimately falls for whatever reason, prices plummet.

        Allowing free and open land markets, where the supply of fringe urban land is free to adjust quickly to changes in demand is the key circuit breaker (‘inflation vent’) between the positive feedback loop of increasing (decreasing) demand leading to higher (lower) prices leading to increasing (decreasing)demand…

        I explained the economics behind this process here: http://www.unconventionaleconomist.com/2011/01/truth-about-us-housing-market.html

      • Rumplestatskin says:

        Leith,

        What happened with rents? Unless the same patterns holds for rents then prices can only be explained by demand side factors.

        My position is that traditional supply and demand arguments are only (partly) valid for rents. Prices are simply the capitalization of rents.

        Price to income metrics are therefore not particularly useful. Rents to income is much more valid. The reason is that hidden costs of property ownership, such as taxes, rates, utilities etc, get factored into the capitalization rate. Price is just one of the many costs of property ownership.

      • Cam. You make no sense. A large divergence of prices from rents is THE DEFINITION OF A BUBBLE!

        You are not going to pull the old “Texas home prices are low because of its high property taxes” bunkum are you? Remember what happened last time

      • PhilBest says:

        Prices are NOT simply the capitalization of REAL ESTATE MARKET rents, they are the capitalization of ECONOMIC “rents”. ECONOMIC “rents” are NOT simply the same thing as actual rents paid to landlords. You have probably been confused ever since that economics lesson back at uni when they taught you about ECONOMIC “rents”. If I remember rightly, I think one of Alan W. Evans excellent books on land economics, points out that this confusion is common, with tragic consequences for the validity of a lot of economic analysis.

        The ECONOMIC “rent” of urban land in a bubble situation, is being extracted as much or more in “capital gains” as it is in tenants payments. In fact, ECONOMIC “rent” is commonly extracted in a bubble situation with NO TENANTS AT ALL. The corrupt officials in China who have already pocketed capital gains on developments that have been “flipped”, have extracted ECONOMIC “rent” already, EVEN IF there are NO TENANTS, and quite possibly whatever tenants will occuply those developments eventually, will pay rents to the “landlord” that won’t remotely relate to the capital gains that have already changed hands.

        “Planning gain” is simply another name for “(Quasi)MONOPOLY (ECONOMIC) RENT”. I find it ironic that left wingers today, even ones who claim economics expertise, are all cheerleaders for “planning”, when their idol Karl Marx was obsessed with “monopoly rent” in the urban land market. He was actually right ONLY as long as a landowner “class” CONTROLLED the conversion of rural land to urban.

      • PhilBest says:

        From the book “30 Second Economics” (Ed.) Donald Marron:

        “Rent Seeking”:

        “From large multinational firms to civil society groups representing the elderly, individuals and organizations lobby governments not simply in pursuit of the public good, but also to tilt the field in their favour. The aim of such behaviour is to capture ‘rents’ resulting from the price distortions and policy measures that come with government intervention. Variable economic resources tend to be expended on the lobbying process, because competing special interest groups attempt to influence the content of policy. In response bureaucrats do not act in the general public interest, but behave in the same self-interested manner as other economic actors and encourage ‘rent-seeking’. The result of this is the risk that the policies implemented in response to such lobbying will favour specific interests rather than serve the broader notion of the public good. It is those individuals and organizations that have more power in the political arena that benefit most from this process. The patterns of growth and distribution by which economic performance can improve are thus hindered by the artificial redistribution of resources through non-economic means. Thus, in the aggregate such a process of rent seeking reduces overall economic efficiency.”

  6. PhilBest says:

    This is the first time I have been disappointed in “Raveswei”.
    But even famous academics like William Wheaton and Susan Wachter have made the same mistake.
    Just because lots of houses got built, they say “supply” was “unrestricted”.
    But Steven Malpezzi, who has been a co-author with Susan Wachter in the past, has got it right. He says in more than one paper, that “PRICE” is a “single sufficient indicator” for whether “supply” is elastic enough or not.

    The problem is whether the “supply” response is EARLY enough to prevent speculative expectations for price inflation, to set in. The level of “planning gain” is a crucial factor.
    The supply process in Texas explicitly generates NO “planning gain”.

    What has happened in markets like Phoenix (and Ireland, Spain, Las Vegas, Miami, and Australia) is that the governments themselves are one of the main actors in the market chasing a share of “planning gain”. In fact, this is like a primary motivation for them. Revenue from “planning gain” – often “fees” for “infrastructure” – becomes a vital, non-tax source of revenue for them. Then when the bubble bursts, the government is in trouble along with everyone else.

    “Overbuilding” combined with high planning gain, is the worst of all worlds. High planning gain with “undersupply” (as in Britain and California) is not quite as bad, but still bad because the ENTIRE housing stock is still inflated in price. (The quantity “overbuilt” in markets with overbuilding, is still only a small fraction of “total housing stock”).

    In contrast, “overbuilding” with NO “planning gain” actually does very LITTLE damage to an economy – this “harm” has been ridiculously overblown by the advocates of restrictive planning.

    • PhilBest says:

      The Irish have already made the mistake of assuming that they needed to tighten the regulations still more to prevent “overbuilding”. All this does, is ensure ongoing, worsening shortages of housing, increasing unaffordability, increased volatility, increased risk in the “housing” industry and decreased participation and employment in it, reduced social mobility, rising inequality, reduced economic competitiveness, loss of industry offshore, etc etc.

      The Irish “solution” is like tightening the tourniquet round the neck of their economy, just as they already have tens of thousands of dollars worth of nationalised debt from the FIRST phase of the economic crisis to pay back, caused by the tourniquet in the first place. I predict Ireland is FINITO.

      Britain too, is finito, for the same reason. Their productivity is already 20% to 40% below their main trading partners thanks to 50 years of urban growth restraint. Thatcher failed to reform this.

      It is worth noting that “free market reforms” that do NOT include “urban land supply” cause MOST of the PAIN to land on the LABOUR FORCE. While the “land owning sector” sits pretty and if anything, becomes even more of a “leech” on the economy.

    • raveswei says:

      Supply response can prevent bubble only if real shortage is the issue. If enough people perceive future shortages and are ready to pay more because of that perception, quick supply of new homes at the present will not change that perception and it will not prevent bubble.
      Unit development in Melbourne was not restricted, people perceived future shortages; supply response was quick and massive but it didn’t stop prices to skyrocket in 2009 and 2010. Why?

      As I said before, restrictions play role in a perception that starts bubbles, but very soon after, bubble gets into positive feedback inflating itself. That’s why bubble starts usually coincide with new supply restriction rules or increased demand (baby boom or immigration boom). In Phoenix, both things happened at the same time creating environment of perceived future shortages that created big bubble.

      • “Unit development in Melbourne was not restricted”.

        WTF? Go and talk to any developer and ask them how difficult, time-consuming, and expensive it is to bring new supply to market. Might explain why 1 bedroom apartments typically sell for over $350k and why Melbourne’s supply response has come many years too late (i.e. highly unresponsive) – just like in Miami.

      • PhilBest says:

        Raveswei, I think we are close to agreeing after all.

        You say “….restrictions play role in a perception that starts bubbles, but very soon after, bubble gets into positive feedback inflating itself. That’s why bubble starts usually coincide with new supply restriction rules or increased demand….”

        You might be right that a price bubble has to be PREVENTED by very elastic and fast-responding “supply”, but it cannot be REVERSED once it has started?

        But here is how it could be REVERSED at ANY TIME. IF the government was prepared to co-operate with ANY developer who wanted to bring “affordable” housing onto the market, like a modern day William Leavitt; and the modern day William Leavitt was allowed to buy farmland where the owners were NOT anticipating capital gains, and turned this into subdivisions with new McMansions selling for $140,000 each – obviously the participants in the bubble would be unable to sustain their expectations.

        The problem is that any developer wanting to do that, is not able to, because the “planners” are empowering land owners to “hold out” – or the monopoly land owner is “holding out” and forcing developers to have a bidding war with each other to secure the land. Hugh Pavletich will tell you that some developers HAVE wanted to do this – supply affordable new housing – and the GOVERNMENT has deliberately not allowed them to. This is usually because the government (at whatever level) is enjoying a share of “planning gain” and is not prepared to give this up.

        The amount of land for urban growth is actually very small compared to farmland. The prices of farmland are only inflated within a kilometer or two of the existing developed area – there is still plenty of farmland being sold at farmland prices, not urban bubble prices, to be used as FARMLAND still by the new purchaser. And this farmland is still within easy driving distance of the existing developed area.

        Planners say they do not want “leapfrog” development to occur like this. But ironically, IF it IS ALLOWED, most of the time it actually does not NEED to happen, because the possibility that it IS allowed stops “investors” from trying to “corner” the land supply closest to the existing developed area. Because, as Hugh and Leith point out, there is no point trying to corner the supply at high prices when another builder can easily undercut you by $200,000 just 1 km further away.

      • PhilBest says:

        Also ironically, the “leapfrog” development often ends up happening dozens of kms away instead of 2 kms away, when the planners stop it happening 2 kms away. (Then the planners try to ask a higher level of government to grant them “regional” powers to stop development dozens of kms away too).

        But one thing that has long been understood in “land economics, is that CLOSER “leapfrog” development is ultimately more efficient in the long term, because developers can more intelligently decide on the best use of land after the urban area has grown beyond it, compared to when they are expected to develop land “contiguously”. The following papers all discuss this:

        Max Neutze, (1987) “The supply of land for a particular use”; Urban Studies Vol 25 (5)

        S. Titman, (1985) “Urban Land Prices Under Uncertainty”; American Economic Review, Vol 75 (3) (June).

        Richard B. Peiser, (1989) “Density and urban sprawl”, Land Economics, Vol 65

        J. C. Ohls and D. Pines, (1975) “Discontinuous Urban Development and Economic Efficiency”; Land Economics Vol 51 (3)

        M. Fujita, (1976) “Spatial Patterns of Urban Growth: Optimum and Market”; Journal of Urban Economics Vol 3 (3)

        J. E. Moore and L. Wiggins, (1990) “A Dynamic Mills heritage model with replaceable capital”; Papers in Regional Science Vol 61 (1)

  7. Hugh Pavletich says:

    BUILDERS AMAZING CAPACITY TO SUPPLY

    I cant think of a better example than Dallas Fort Worth through the 1980′s boom years. Its population then was about 3 million and in one of those years 111,000 consents went through.

    A consent rate of 37 / 1000 population per annum.

    Ireland went crasy banging in bubble stock all over the countryside at 20 / 1000 at the peak and Spain was doing much the same thing at 15 / 1000.

    These last two were creating “bubble stock”. There is a world of difference between “bubble stock” and “market stock” – where the latter is built to normal and critically important Development Ratios.

    Australia I think at the moment is building about 7 / 1000 population – New Zealand a woeful 2.5 / 1000.

    We can thank the Levitt Brothers “the fathers of the production industry” following WW11, for the modern construction industry we have today. Go read up about them via my website links.

    Hugh Pavletich
    http://www.PerformanceUrbanPlanning.org

  8. hamish says:

    If it can avert bubbles, I think a bit of overbuilding is a risk well worth taking. Also, given that it is housing that would end up being built eventually anyway due to our growing population, it’s hard to object on environmental grounds as well.

    Green belts in this country all just end up getting built over in response to this population pressure. Which is another case of state and federal policies acting at cross purposes. The states with Premiers like Bob Carr thinking they can contain the sprawl of their cities with consolidation policies, which are futile in the face of a Federal government intent on running a high migration intake. Carr even blocked the building of the long planned Welcome Reef dam, and the raising of Warragamba’s wall to increase it’s capacity on “environmental grounds”, but in the face of that steadily growing population, it meant ending up getting an energy intensive de-sal plant instead. Great outcome for the environment that one.

    • PhilBest says:

      “Sprawl” is actually a logical way to gain a balance between enjoyment of “green space”, providing affordable housing, and REDUCING congestion with dispersed employment and an efficient inter-suburban/inter-nodal road network.

      People who think of “sprawl” in terms of greenfields being built all over with concrete and houses crammed in beside each other, need to re-look at the beauty of “large lot” suburbs in many US cities. Not to mention “Landscape Urbanism”.

      It is also far from a foregone conclusion that there is ANY “worse” impact on “the environment” from having a given number of people living spread out, compared to having them clustered together like battery hens. One house on one acre has minimal impact on that one acre. Human gardening and tree planting INCREASES “biodiversity”. What’s not to like about it?

  9. Baldrick says:

    Has it occurred to anyone that given that Governments have been railroaded into drinking the free-market Koolaid, they are simply doing the “sensible” thing and maximising commercial gains? Add to that the fact that services such as public transport to support the sprawl also falls into their remit, why would they allow endless growth? The fact that governments are expected to pay for services which their constituents do not wish to pay the going rate for creates the incentive to make money elsewhere. And if developers are paying insane prices for land on the outskirts of cities why would a govt refuse?

    • PhilBest says:

      And if young households are borrowing insane amounts of money, why would banks refuse?

      We can’t just go round the circle forever pointing the finger. We have to ask who, ultimately, is responsible, and whether boom-bust volatility is desirable.

      This stuff is a bit like a drug to its participants. None of them want the “high” to end; all of them protest that the “high” is really the normal state of affairs and pragmatists are wrong.

      The public transport thing is like a religious belief. Even in the 1920′s in the USA, private vehicle owners had to be restricted by law from picking up paying passengers because it was putting the trams out of business. Public monopolies and unionisation and “mass” transit is now a sacred cow with no rational justification.

      There are examples of “public transport” services that are unsubsidised, which were allowed to come into existence in the first place only after a legal fight because the responsible authority claimed they could not afford it.

  10. david collyer says:

    “After home prices peaked in May 2006, it took another 18 months before Phoenix’s unemployment rate began rising”

    Yes, folks, this is always the way. Land prices turn BEFORE unemployment and recession.

    That’s why the Land Values Research Group tracks it. The Kavanagh-Putland Index predicts recession this financial year:

    http://www.prosper.org.au/2011/10/26/imminent-recession-forecast-by-kavanagh-putland-index/

    • PhilBest says:

      Interesting.

      Rodney Dickens in NZ has also done charts that show that the “Property cycle” PRECEDES the “Business Cycle”, and he argues that failure to understand this is the main reason for forecasting failures.

  11. N.C. says:

    So let me get this straight – if we just leave it up to the market, we’ll all get cheap houses… with about a 90 minute commute into town? No thanks.

    If, on the other hand, you combine some sensible planning restrictions with a broad based land tax – well, now you’re talking.

    That probably wouldn’t impress the speculators though.

    • “So let me get this straight – if we just leave it up to the market, we’ll all get cheap houses… with about a 90 minute commute into town? No thanks.”

      No. With strict planning controls you tend to get longer than average commutes for several reasons:

      1. You get greater ‘leapfrog development’ into far flung towns as people move well beyond the boundary in the search for more affordable housing (explained here); and
      2. Those that commute into/around the urban area suffer greater congestion as the population is more concentrated than it otherwise would be.

    • hamish says:

      The hope is, that with cheaper housing you would be able to afford to live much closer to your work if you are one of those 10-20% who works in the CBD, and thus wouldn’t need to do a 90min commute. I doubt you would get a detached house cheaply within a few km of the CBD, but good units would be affordable. At the moment nothing is, so you have to travel.

      I work in the CBD, but I can’t afford to rent or buy anything nearby, so I am forced into commuting – though with a recent move it’s only 30min, but I have compromised on the quality of the property to be that close. Some of my colleagues travel up to 2 hours each way from the central coast to Sydney because they can’t afford Sydney prices.

      • Hence my comment about ‘leapfrog development’. Your friends are forced to commute from far flung towns well beyond Sydney’s growth boundary. This effect has increased ‘sprawl’.

      • PhilBest says:

        Hamish,

        It is an important point, that everyone should be hammering the urban planners over, that the higher the AVERAGE/Median urban property price, the FEWER people can afford to live closer to the CBD.

        Look at the graph on Page 12 in THIS paper:

        http://alain-bertaud.com/images/AB_The%20Costs%20of%20Utopia_BJM4b.pdf

        See what has happened to “where most people live” in Portland since they established an Urban Growth Boundary?

        What Leith says about leapfrog commuting is actually only half the story. Even WITHIN the growth “boundary”, the “density distribution curve” is distorted TOWARDS the boundary. You can actually see this happening with the naked eye in most Australian cities – relentless clustered homes just inside the growth boundary, while closer to the CBD there are LARGE-lot suburbs with next to no redevelopment to higher densities taking place. Even if redeveloped at higher densities, inner suburb homes will be totally unaffordable to most.

        IF the land prices were as low as they should be in a true free market, sure you would get low density suburbs sprawled beyond the current “boundary”, BUT firstly you will reduce the 100-km leapfrog stuff and secondly you will enable MORE high density redevelopment NEAR the CBD that MORE people can AFFORD.

        The easiest places in the world to buy a home “closer to work” regardless of where it is in the city, are the cities of the USA with median multiple house prices of around 3.0. LOWER “monocentricity” also makes it EASIER to afford a home “closer to work”. The more monocentric a city, the more that location “closer to the CBD” is “sorted by income”.

        It is heresy to suggest it, but it is the inconvenient truth for urban planners – the most sprawling cities in the USA that they despise the most, are actually the world’s most efficient urban economies; AND the gap between them and the “planned” cities is widening the longer time goes on. The secret to this efficiency gap is that “location efficiency” is “democratised” in the one case, so that everyone participates in the efficiency; and “rationed by income” in the other, so that “sustainable living” is something that the elites do, and sneer at the proletariat for not also living in million-dollar condos, and discuss ways to penalise the proles still further with petrol taxes etc.

      • hamish says:

        “You can actually see this happening with the naked eye in most Australian cities – relentless clustered homes just inside the growth boundary, while closer to the CBD there are LARGE-lot suburbs with next to no redevelopment to higher densities taking place. Even if redeveloped at higher densities, inner suburb homes will be totally unaffordable to most.”

        That describes Sydney quite well. Tiny blocks filled with house on the fringes, yet plenty of established suburbs with huge blocks closer in. The ‘leafy North Shore’ being the best example of this. In fact the new blocks are smaller than you are allowed to subdivide to in some of these older suburbs.

        I’ve had the thought that fringe blocks should be quite generous in size, and laid out with the thought towards future subdivision should the city grow that far. These tiny ~400sqm blocks are too small to do easy subdivision on in the future, in effect already being subdivided.

        Another thought I’ve had is the land bubble is bad for the arts. Because there are no cheap spaces available, it’s harder for artists and musicians to develop and practice their skills. Sydney had a thriving music scene in the 70s & 80s, in part facilitated by the then cheap run down inner city areas giving them the time and places to play. Change in tastes, and poker machines are also other big reasons for that scenes demise, but I’m convinced creativity has also been priced out of this city.

      • PhilBest says:

        Hamish, your acute observations are most helpful.

        Yes, in most of these planned cities with inflated land prices, the “bohemian” class is either long gone from the vicinity of the CBD, or they are hanging in there grimly 10 to a room in dilapidated “heritage listed” buildings that the landlord is not allowed to redevelop.

        When there are Universities near the city centre, the students will be whinging about the costs (and/or poor quality) of accomodation nearby or the costs of travel from where accomodation IS “affordable”.

        I have even read somewhere recently that certain Universities in London are suffering vastly reduced student intakes because there is simply nowhere the students can actually live and make ends meet. Of course London has had a Green Belt since 1947.

        But have the young and trendy Uni students ever bothered to protest urban planning? No, they will be found canvassing for Greenpeace, protesting about “the rape of the earth mother”, protesting against roads and cars, and protesting against “urban sprawl”. And protesting against their evil landlords, of course.

      • hamish says:

        Phil, there is also the possibility that the ‘bohemian class’, by creating an exciting diverse, and edgy community, is what initially attracts the yuppies to gentrify an area. Or it could actually be the first stage of the process itself. Regardless, as more monied people are drawn into an area it drives prices up, and eventually kills what was initially attractive about the area, so perhaps there is a certain inevitability about it.

      • PhilBest says:

        It remains true though, that cities with a certain urban form; i.e. “dispersed” and with an unregulated fringe; have low, stable urban land prices and very “flat” curves of real estate pricing from fringe to anywhere.

        So when a location is increasing in popularity from a very low price base, it seldom becomes “unaffordable” in the process. This is why cities like Dallas and Houston are actually a lot higher in the stakes of art and bohemianism and “vibrancy”, than the boosters of “planned” cities make out. The boosters of “planned” cities inevitably fall back on rankings of “livability” and so on, that are done BY wealthy yuppies solely FOR wealthy yuppies.

  12. Norton says:

    I was looking for property to buy in the Phoenix area in 2006. I don’t think that constraints pushed the prices higher…I think it was the demand of next-door Californians trying to sell their bubble homes and buy something more reasonable in Arizona so that they could pay off their mortgage and actually OWN the house.

    True Story: We visited an open house just outside of Phoenix in “Gold Canyon”, owned by a real estate broker and his wife. The place was beautiful and spacious but only had well water supply and the price was high….over $400k. The owner was talking about all the benefits and in a final burst of hyperbole, confided that, “It’s going to go quick. There’s not much more desert to build on out here.” ….lol

    • “It’s going to go quick. There’s not much more desert to build on out here.” ….lol

      Precisely my point don’t you think? The perception of scarcity caused by a restriction of developable land caused buyers to leverage to the hilt in order to ‘get in now before they miss out’.

  13. joed says:

    Leith, good article. Is there not a pretty close mapping to the Melbourne market.

  14. NMorris says:

    If you look at the real house price graph, the bubble was from Aug 04 to Aug 08. It’s pretty hard otherwise to complain about Phoenix, it had growth with moderate house price rises. Managing things except for a four year housing bubble caused by crazy world economic interest rate and finance flows actually sounds pretty good. I don’t hear people talking about the other bubbles that have come and gone, like the dotcom bubble, the NINJA lending bubble.

    Yes, we get the point, restricting land availability will have upwards pressure on prices when there’s a feeding frenzy and crazy lending, but saying it’s the primary culprit and land use planning goes out the window to allow unrestrained consumption is unreal (and besides, can only work in a very few places). I think it’s time to move on to discussions about how to solve Australia’s manufacturing crisis and delivering a sustainable and robust energy system.

    BTW, if you look at the map of Arizona, Phoenix now seems to take up a pretty large proportion of it.

    With rising populations, shrinking areas for nature, increasing demand on our planet, the ideal of every person being able to afford a large house on a quarter acre block and a pool and aircon and three cars and cheap fuel and no costs associated with it are just no longer viable.

    Yes, restricting land for development increases the cost of land and houses (ask Hong Kong and Singapore). But lots of places suffer it by reason of geography, but they deal with it and they get on with their lives.

    Criticizing the UK for restricting land is a bit rich when you look at the percentage of arable land that is now built on, even with a far greater building density in their cities than we have here.

    Lovely dry economic arguments without looking at the other realities of the world are fun. But they risk economists being sidelined as the bunch of guys in the joke about being marooned on a desert island and say they would survive by “First assuming a large supply of canned goods, and second assuming a can opener”.

    Apologies for a rant.

    • PhilBest says:

      You ARE new here. This site deals in rational, scientific, observable reality, not quasi-religious hysteria.

      HOW MUCH land in the world/ each region/ each country, is “urban”? The following data is from the Lincoln Institute’s “Atlas of Global Urban Land Consumption”.

      Worldwide: 0.47%. Sub-Saharan Africa: 0.12%.

      Between 1% and 2%: USA, India, Bangladesh

      Between 0.5% and 1%: China, Indonesia, Pakistan

      As a percentage of ARABLE land:

      Worldwide: 4%. Sub-Saharan Africa: 1.5%

      Between 4% and 8%: USA, Egypt, France

      Between 2% and 4%: China, Russia, Spain, Mexico

      Between 1% and 2%: India, Bangadesh, Canada, Vietnam, Ethiopia

      Less than 1%: Afghanistan, Sudan

      For the UK, their figure is 5.73% of total land, and 23.39% of arable land. For the Netherlands, the figures are 10.68% and 38.34%.

      The issue of “food security” is a vexed one. Some nations eg Japan, could use this as an excuse to invade other countries. As a rule, it is cheaper for land-pressured countries to buy their food from land-rich food exporting countries anyway. As long as international peace prevails.

      There is no correlation at all, between a nation’s ability to feed itself, and its wealth. Wealth is always correlated with the extent of “value added” industry in a nation. Even a nation that has to mostly import commodities, but successfully exports value added goods, will be far wealthier than a nation that produces mostly commodities whether for domestic consumption or export.

      Even nations like the UK and the Netherlands, could “grow” their urban areas and keep urban land prices affordable, (and their industries competitive) for centuries before they finally did “run out of land” – if they ever did. Demographic busts and reduced immigration are highly likely in both cases.

      Urban growth is far more equal in its social and socio-economic effects, and far less unsightly, if densities are LOW and there is abundant “green space” conserved, around and beyond which urban development is permitted. “Green belts” and Urban Growth Boundaries result in “a green and pleasant land” for the enjoyment of a wealthier minority, and “overcrowded squalor” for the majority of lower income people.

      Britain’s system actually lacks the “pretty” peri-urban “sprawl” of Paris and Rome and other continental cities, and even the extremely “green” LOW density sprawl of Atlanta and other US cities, where the amount of “green” visible on Google Earth is visibly several times greater than the amount of rooftops. On the ground, the result is a highly “democratised” enjoyment of local greenery.

      Overcrowding, everywhere it occurs, is due to excessive density (a factor of low relative mobility), not overpopulation per se. China; India, Bangladesh, Pakistan, Indonesia; all are about as NON-sprawled as Victorian era first world countries, and have similar urban-to-total land ratios i.e. 1% to 4%. All these countries could raise public health and living standards immensely by “sprawling” to at least Europe’s level.

      Europe is the world’s most densely-populated CONTINENT, even though its citizens are not as crammed together as Asians; and Europe is also the wealthiest. This would seem to prove the thesis of economists like Colin Clark and Julian Simon – humans are “The Ultimate Resource”:

      http://www.google.co.nz/search?q=julian+simon+ultimate+resource&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

      Look at the Lincoln Institute’s “Atlas of Global Urban Land Consumption” for the figures on Australia, for yourself. It is about the most extreme absurdity in the world, that AUSTRALIANS would be stressing about “paving over paradise”.