The Truth about the US Housing Market

Last week, the United States Case-Shiller 20-cities Composite house price index took an unexpected plunge, falling 1.3% in October from a month earlier. Prices have now fallen by around one-third (see below chart).

Month-over-month prices fell in all metro areas covered by the index. And in six markets – Atlanta, Charlotte, Miami, Portland, Seattle and Tampa – house prices have reached their lowest level since the housing bust began in 2006 and 2007.

The destruction of household wealth since 2007 has been shocking. According to the Federal Reserve, household net worth has declined $11 trillion from its peak in 2007. Relative to GDP, household net worth has fallen from around 470% in 2007 to around 375% currently. In fact, household net worth is currently near its long-run average level prior to the stock market and housing bubbles (see below chart from Calculated Risk).

Much of the destruction of household wealth is due to the decline in housing values. United States housing values as a percent of GDP have fallen considerably and are not far above historical levels. However, mortgage debt as a percent of GDP remains near historically high levels, suggesting more deleveraging ahead for households (see below chart from Calculated Risk).

As bad as the situation has become, it appears that US house prices have further to fall. A recent article by the Dallas Federal Reserve shows that United States house prices are still 23% above their long-term mean (see below Chart):
The Dallas Fed’s paper notes that the United States’ Government has artificially supported house prices through: purchases of Fannie Mae and Freddie Mac government-sponsored-entity bonds, which has eased mortgage rates; mortgage modification plans, which has deferred foreclosures; and tax credits, which boosted entry-level home sales.
The Federal Reserve’s analysis is supported by Peter Schiff, president of Euro Pacific Capital. Writing last week in the Wall Street Journal, Shiff notes that house prices would need to “decline an additional 20.3% from current levels just to get back to the trend line”. He also argues that the Government is artificially supporting home values through “the home buyer’s tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business”.

The unspoken truth:
As bad as last week’s housing data was, the 20 cities that comprise the Case-Shiller Composite Index are not representative of the entire United States housing market. In fact, the United States housing bubble/bust was confined to only a minority of cities. To illustrate this point, first consider the below chart, which compares the 10-city Case-Shiller Composite Index against the FHFA House Price Index based on 50 states (chart courtesy of Carpe Diem).

As you can see, the United States housing bubble/bust was confined, to a large extent, to the 10 cities making up the Case-Shiller 10-city Composite Index, namely: Boston, Chicago, Denver, Las Vegas, LA, Miami, NYC, San Diego, San Francisco, and Washington D.C.).

So why was their so much variability in house price performance between United States cities, with some cities booming then busting while other cities remained relatively stable? It’s certainly wasn’t due to liberal lending policies (easy credit), since essentially the same lending conditions were available across the United States. It wasn’t because of differences in population growth, since states like Texas, which has experienced the highest population growth over the past 10 years, never had a housing bubble/bust. Rather, the differences in house price performance are accounted for by the way in which these markets regulate land use. 

The below table, which comes from Demographia’s 6th Annual International Housing Affordability Survey, shows the extent to which the various housing markets employ restrictive land use regulations.


Restrictive land use regulation, often referred to as “smart growth”, “growth management”, or “new urbanism”, refers to policies that force people to live in higher densities while significantly restricting the expansion of suburban residential development. Measures include, but are not limited to, urban growth boundaries, areas declared off-limits to development, building moratoria, development fees and charges, and excessively large minimum lot sizes.

Cities that have adopted liberal market-based approaches (‘more responsive land regulation’) have experienced relatively stable housing markets, whereas those that have implemented prescriptive land use regulations have experienced volatile boom/bust cycles.

To illustrate this point, first consider the below chart, which plots the CPI-adjusted house price performance of the cities included in the 20-city Case Shiller Composite index and deemed by Demographia as having “more prescriptive land regulations”.

As you can see, prices have been highly volatile, with all cities experiencing wild boom/bust conditions.

Now consider prices in the cities within the 20-city Case-Shiller Composite Index with “more responsive land regulations”.

As you can see, real house prices have remained relatively stable in the supply responsive cities.

The situation is similar at the state level using FHFA housing data. First, consider the states with “more prescriptive land regulations”:

Now consider states with “more responsive land regulations”:

Again, it’s the same story, with the highly regulated states experiencing wild boom/bust cycles whilst prices in the market-oriented states remained relatively stable.

Economics 101:

The economic forces underpinning the above findings are perhaps best explained through basic supply and demand analysis. Consider the below chart taken from an earlier article on this issue.

Q0 and P0 represent the initial equilibrium situation in the housing market. Initial demand is provided by D0, whereas supply is shown as either SR (restricted) or SU (unrestricted), depending on whether land supply constraints exist.

Following an increase in demand, such as a significant relaxation of lending standards, the demand curve shifts outwards from D0 to D1. When land supply is restricted, house prices rise sharply from P0 to PR. By contrast, when supply is unrestricted, prices rise more gradually from P0 to PU.

The situation works the same way in reverse. For example, if there was a sharp fall in demand following a contraction in credit availability or a sharp rise in unemployment, causing demand to fall from D1 to D0, then prices fall much further when land supply is constrained.

The key point is that increases (declines) in demand can bring sharply rising (falling) house prices when supply is constrained. However, when land supply is not regulated, it adjusts to demand and house price volatility is reduced.

These observations are consistent with those of Glaeser and Gyourko, who summarised the findings of a number of studies in this area:

Recent research also indicates that house prices are more volatile, not just higher, in tightly regulated markets.

…price bubbles are more likely to form in tightly regulated places, because the inelastic supply conditions that are created in part from strict local land-use regulation are an important factor in supporting ever larger price increases whenever demand is increasing.

…it is more difficult for house prices to become too disconnected from their fundamental production costs in lightly regulated markets because significant new supply quickly dampens prices, thereby busting any illusions market participants might have about the potential for ever larger price increases.

Learning history’s lessons:

As long as commentators focus primarily on the demand-side of the housing market, whilst ignoring supply-side constraints, they will never fully understand the drivers of housing bubbles and busts. The resulting incorrect diagnosis will inevitably lead to poor policy prescriptions and outcomes.

By all means, let’s crack down on the destructive speculation, predatory financing and financial alchemy that has fuelled the world’s housing bubbles. At the same time, let’s not ignore the supply-side barriers that have enabled the credit-fuelled demand to feed into skyrocketing house prices which, in the case of the United States, later collapsed once the artificial demand evaporated.

Readers seeking detailed information on issues pertaining to the supply-side of the housing market are encouraged to visit the Demographia and Performance Urban Planning websites. Also, please be advised that the 7th Annual Demograhia International Housing Affordability Survey will be released on 24 January 2011. It’s sure to be another great read.

Cheers Leith

Unconventional Economist
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  1. Leith,

    Thanks for airing the land use issues so effectively, very interesting. I understand Texas at least has other regulations that limits speculation.

    Incidentally, Corelogic came out with an urgent update late November warning of the house price downturn, so "unexpected" is a bit of a stretch, CS is three month average too I think.

    If you track the higher lows formed on the Dallas Fed chart chances are it won't be the full 23%…add a little Bernanke induced inflation and looks like the bottom may be in sight some time in 2011…unless MERS, robo-signing, empty REMICs, fraudulently represented MBS and gargantuan put-backs, and SOD, combine to create an overshoot.

  2. The Demographia survey conveniently ignored certain European countries that did not experience a run-up in prices but with strict land use policies. It's not necessarily the land use restrictions that in and of themselves cause bubbles to form; such restrictions go hand-in-hand with the willingness and ability of the populous to take on large amounts of debt, and government policy (or lack thereof) facilitating speculation.

    Also restrictive land use policies are often a necessity due to lack of space in desirable locales. In many, though not all, cases governments impose restrictions because it gets them re-elected.

  3. Leith, I disagree deeply with your conclusion on planning rules.

    The Demographia surveys approach the issue seeking to prove that zoning forces up property prices and so overlook other factors such as taxation and bank lending policies.

    I'd suggest those two, demand driven, reasons are actually the reasons why Australian property prices are so high.

    While the Demographia survey is a very useful tool, it seems to me that drawing the conclusion from them that planning rules are the driver of property price volatility or unaffordablity is just the result of cherry picking data points to prove a ideological point.

    Also, I'd question your point about commentators focusing on demand side factors. The vast majority of commentary about Australian property prices in recent years has focused on an alleged housing shortage.

    If you are going to take a historical perspective on the causes of housing boom and busts, it would be interesting to see how zoning influenced say Melbourne in the 1890s or Floria in the 1920s.

  4. Once again, an interesting piece of work. Thank you.

    If it were a simple case that supply side constraint alone had caused this price movement, and the same constraints were a constant (no new housing or new housing built at a constant rate), then theoretically we should not have a bubble as true value would have increased correspondingly (relative scarecity) but reality tells us this is not the case. We now have property prices that are well above any reasonable estimation of their true value based on historical and replacement cost, which suggests that the majority of the home owning population have willingly participated in a mass-speculation…a situation in which something is worth what we believe it is worth, until we no longer believe it is worth it…

    @Anonymous (5:22AM): You are correct when you say that there is more to it than just housing supply and this post was not suggesting that at all, but moreso demonstrating that this is just another valid driver to add to the mix of those already discussed in previous posts.
    Also, it is really hard to talk about demand side price influences without some reference to supply as they are co-dependent variables in any subsequent price movement.

    I would still suggest that the "must own your own home" meme is principly responsible for this whole mess – the banks and governments have merely accommodated us. If we weren't fixated on buying a house, rationality would have set in well before now.

  5. I'd just like to point out that Demographia isn't non-partisan. It's a right-wing lobby organisation that opposes planning laws on ideological principles. In the past they have lobbied on behalf of the car industry and property developers, and they generally oppose public transport because it (supposedly) doesn't work.

    For these reasons I treat whatever they say as inherently biased and possibly misleading.

    I'm surprised that their data is being accepted here without question.

  6. I am consistently amazed at how Australia has a land shortage to build housing. I can understand a shortage of arable land but not land for construction.

    As I live in Victoria it is clear to me that there have been vested interests in many areas penning up demand within boundaries and the dire state of public transport and centralised services further demonstrates this approach.

    I have traveled and lived overseas and when I first arrived in Melbourne in 2002 I was amazed at how livable the city was. After living in the US, the UK Melbourne was a great surprise.

    But over the lat 8 years services have not kept pace with the growth of Users in particular the Public Transport system – or lack of them.

    This I believe has helped to maintain and hold the housing bubble for an extended period. But surely we are very close to a tipping pint as Leith has demonstrated with his Economics 101.

    What will be interesting in Victoria is whether the new Liberal government will have the backbone to change the current rules on zoning… or maybe just maybe they will be looking to perpetuate the bubble and get caught holding the bag when it all goes bang?!

  7. Leith, another nice post.

    If i understand correctly, the issue is the 'degree' house prices rise and fall between different cities due to restrictive conditions, as 'all' prices are subject to lending standards, employment etc.

    Taking parallels in Australia, if all planning was equal between each city, then the degree of rise and fall should be the same, discounting lending standards, employment etc.

    If all the planning restrictions were removed, the natural restrictions may play a role. For example Sydney bound by the sea and the mountains would experience more volatility than Melbourne who has room for expansion.

    Its all hypothetical of course, as it depends on which city and who pays for the expansion of new infrastructure, compared to existing infrastructure.
    As local Governments only plan for short term while in power, existing infrastructure is less beneficial.

    The purchaser normally pays, and over time with easy credit and Government schemes the land prices go up, affordability is then the issue and here we are today.



    Leith, many thanks for a superb article, clearly illustrating why there needs to be a "scarcity trigger" to get housing bubbles underway and that finance is simply the "fuel".

    In normal open markets such as Atlanta, Georgia, where demand kicks in, supply responds and this simply leads to over production. Lax lending also adds additional fuel. This is why in the 2010 Demographia Survey, Atlanta's Median Multiple is 2.1.

    In contrast Texas, where land markets are open as well, has strict Mortgage Consumer Protection regulations, but the Median Multiples for Dallas Fort Worth and Houston for example, stayed within the mid to high 2.0 Median Multiples.

    This illustrates how lax lending in open markets, simply leads to over production, but not scarcity induced housing bubbles. Over production is much less of a problem than artificial scarcity induced housing bubbles.

    On my website I provide a definition of an affordable housing market. It really is just a matter of focusing on the strucrtural issues and "following the numbers" to ascertain where the problems are. And we have massive structural urban problems in Australia and New Zealand that need to be dealt with.

    Hugh Pavletich FDIA
    Co author – Demographia International Housing Affordability Survey
    New Zealand

  9. Hi

    I think your first graph is the most informative and the clearest indicator. I will be interested to see how much further that blue line drops, I suspect it will be back to the 80% mark or so which is what I feel is the historical middle ground. Mean time the household debt levels will grow as a result of this bubble and pop cycle.

    thanks for the information

  10. I wonder if some land restriction and demand factors are common to certain cities eg. building restrictions in medium to upper class locations where there is political pressure to hinder development to preserve a lifestyle, which in turn drives demand. In any case it would be a really headache to disentangle supply factors from demand ones.

    That supply/demand chart made we wince Leith 😉 Reminded me of undergraduate studies! Someone model the housing market with system dynamics please, I'm busy right now….

  11. Re 7th Annual Demograhia International Housing Affordability Survey will be released on 24 January 2010.

    DO YOU MEAN 24 January 2011?


  12. jesse is right to say that the focus needs to be on easy availability of credit as well as restrictive land use regulation. however, if you are looking for the answer to why the bubble in the US was so localized, the latter is the obvious culprit. Easy money was a global phenomenon and can't account for a localized bubble.

    The best analysis I've seen is in Thomas Sowell's The Housing Boom and Bust. In addition to local planning restrictions, he blames Congress pushing Fanny Mae and Freddie Mac to lend to non-credit worthy individuals and legislation to make lending proportional to race numbers, based on the misperception that lending practices were biased against blacks. Banks did lend to blacks at lower rates than whites with the same incomes, but this was because of their lower levels of assets.

  13. To figure out if real estate is supply constrained can't we just look at rents? If there were a true housing shortage shouldn't rents be increasing compared to incomes?

    In Canada, at least, the supposed housing shortage is nothing but: rents are tracking incomes quite nicely.

  14. We need to outlaw lending people money for buying homes.

    It just makes crazy stuff happen.

    If someone can't save the money to buy a house, they should not buy one.


  15. Jesse – land supply. There is simply oodles of the stuff in Australia, with only around 0.13% of its total land area urbanized.

    Around 0.70% in New Zealand, 2.7% in the United States, 4% in the Republic of Ireland and near 10% in the United Kingdom. The UK is about the same size as New Zealand with a population of 61 million.

    Both Germany and Switzerland lead Europe in the housing affordability stakes – with their local control and strict laws allowing housing to be built. Dr Oliver Marc Hartwich, now of the CIS in Australia, but formally with Policy Exchange in the United Kingdom, has done outstanding research work in this area.

    The political impediments to the provision of affordable housing are generally well understood by researchers around the world. As I said in an earlier post, it is simply a matter of "following the numbers".

    If housing exceeds 3 times gross annual household incomes, it is a sure sign of political failure, where local and state governments have lost control of their costs and are failing to meet their community infrastructure responsibilities.

    This is why reasonable and realistic performance disciplines need to be inculcated in to our local government cultures. The sooner the better.

    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    New Zealand

  16. Hugh, thanks for the response. Are the data from non-Anglo-Saxon countries either not available or not comparable for use in the survey? My concern is that wrong conclusions can be garnered about solutions to lowering unaffordable housing prices without citing and investigating all jurisdictions' experiences.

    To wit, this post makes a point about supply-side constraints being a problem in unaffordable markets, when it isn't necessarily the case that loosening land use restrictions is the only solution to cure affordability.

    I haven't read the research from Europe but I will attempt to do so, though I often wonder if cultural propensity for risk-taking enters into the fray as well.

  17. Jesse – thank you for your questions.

    You are correct – the data simply isnt available from Europe (and many other places) at this stage. We would like to include Asia too of course – but it is only this year we are satisfied enough on the data with respect to Hong Kong – so this will be included in the 2011 Survey to be released internationally 24 January.

    Bear in mind it is an enormous job compiling the data from the 6 loosely termed Anglo countries – and both Cox of Demographia and myself do this work on a voluntary basis.

    The purpose of these Annual Surveys, with the extensive associated work, is to illustrate in the clearest terms possible, that households should not be required to spend any more than three times gross annual household incomes to house themselves, with mortgage loads no more than 2.5 times annual incomes.

    Compare the mortgage load situations in the 2010 Survey for those in Dallas Fort Worth and Atlanta, with the "taken to the cleaners" home buyers of Melbourne and Sydney.

    In essense – home buyers with grossly inflated mortgages are making charitable donations to Banks in Australia and New Zealand. No wonder our cost of living and disposable incomes are a mess.

    May I suggest you read closely within the Highlighted Articles Section on my website "Houston: we have a (housing affordability) problem", where I spell it out to Kiwis how they are getting taken to the cleaners, in comparison with their counterparts in North America.

    Jesse – a good question to ask is – why after 7 Annual Demographia Surveys (when this years one is released) haven't the political and industry people in both Australia and New Zealand, arranged Study Tours of affordable North American housing markets, so that they learn (or more correctly re learn) how to supply affordable housing stock to their citizens and customers?

    Its well past time in my view, the political, social and commercial interests in this part of the world started to act responsibly on these hugely important issues. I for one am fed up listening to the constant flow of drivel from these people and their paid "bubble propper" mates.

    Hugh Pavletich FDIA

  18. Hugh

    >There is simply oodles of the stuff in Australia, with only around 0.13% of its total land area urbanized.

    your statistical analysis glosses over the fact that most of this is desert. The amounts which are even close to cities are in fact on areas which were once prime agricultural lands and ignores the issues of infrastructure development costs (water, waste water, electricity, telecoms roads …) and that we already have a massive urban sprawl problem (tell me you didn't notice that living in Sydney, Melb, Brisso or even country areas).

    The simplistic answers to the problem of our population growth are what cause more problems in the future.

    Simply saying "decentralise" seems not to work either as almost no company has its head quaters in places like Orange or Biloela

    Then there is the effects on bussiness called the environment. Come over here and visit Bundaberg or Rockhampton and see what I mean. Floods are not "acts of god" they are statistically expectable (though unpredictable events).

    European ideas being applied to Australia just miss the mark.

  19. Hugh, I find this comment interesting;

    "If housing exceeds 3 times gross annual household incomes, it is a sure sign of political failure, where local and state governments have lost control of their costs and are failing to meet their community infrastructure responsibilities."

    So when a bubble appears, your view is that it is the fault of local governments and planning authorities, rather than that of speculators, borrowers and lenders?

    It's an interesting ideological view that holds governments responsible for market excesses.

  20. Very facile analysis.

    For example: of the bottom cities on the Dempgraphia list, Pittsburgh, St Louis, Detroit, Cincinnati, and Cleveland all have steeply declining populations. Kansas City is growing very slowly. This is why those cities have cheap housing; it has little to do with regulations.

    (This check took me 15 minutes and the data is readily available in Wikipedia.)

  21. I have emailed the authors of the Demographia surveys several times on their severely flawed analysis and comparison of housing affordability across countries. India and China have the most ABSURD real estate bubbles in the history of this world. Most of Asia, Australia and Europe are huge bubbles compared to the USA. Hugh and others behind Demographia fail to even define what a "home" is, but keep wanting to blindly expect this "home" to cost no more than 3 times the median income. In India's metros, even a small apartment costs 50-100 times the median income. A single family home on a very small piece of land costs 200-500 times the median income. It is absurd that apartments in India and China's metros cost USD 500,000.00 and small single family homes cost USD 1 million or more, but that is the reality. It is so unaffordable for most people in India and China that there cannot be any real demand despite the huge populations in those countries. In the USA, even in the so called bubble metros, median home prices are extremely affordable compared to most of the rest of the world.

    Hugh, I am glad that you finally realized this about China, and am waiting for you to discover the even greater absurdity that is India.

    Since Hugh and others that blindly quote 3 times as the affordability multiple of a median home without ever defining what the median home itself is, let me offer my definition of that. In my opinion, a median home is one that provides 150 sqft of living space per person in a family. So that would be a 600 sqft apartment for a family of four. This should be applied across every country to calculate affordability multiples. It is ridiculuous to compare a 4-BR 2000sqft home with central AC/heat/atached garage/great infrastructure house with a 600 sqft apartment, and expect both to be priced at the same 3 times the local median income. And the irony is that the 4-BR palace in most USA metros is just at 3 times the local median income and is actually far cheaper than the 600-sqft apartment in the metros of India and China.

  22. Jesse said:

    "It's not necessarily the land use restrictions that in and of themselves cause bubbles to form; such restrictions go hand-in-hand with the willingness and ability of the populous to take on large amounts of debt, and government policy (or lack thereof) facilitating speculation."

    One can't disengage the demand and supply side factors – they influence each other (bi-directional). The speculation and debt is fueled by the supply side constraints – with less planning constraints there is less speculation, because housing supply is more responsive to demand.

    Anonymous said:

    "For example: of the bottom cities on the Dempgraphia list, Pittsburgh, St Louis, Detroit, Cincinnati, and Cleveland all have steeply declining populations. Kansas City is growing very slowly. This is why those cities have cheap housing; it has little to do with regulations."

    Yes, that's true, but these ciites are almost irrelevant outliers because of that fact. What is truly relevant are the cities like Houston that are growing quickly yet have not had massive house price increases. A result of more liberal planning controls and State-specific restrictions on property lending.

    And to those who lambast Demographia as ultra-right : what is so right wing about the desire to have affordable housing? I think that is actually quite a social minded objective. Thats the problem out there – too many "chardonnay socialists" who subscribe to certain ideology without realising the costs of those beliefs, costs which may run counter to their own beliefs.

    And remember too, famously left of centre US economist Paul Krugman has written on the impact of planning regulations on housing costs, so it is disingenious to label any criticism of planning as being from "the ultra right"


    The simple realities are that housing should not exceed 3 times gross annual household income or 1.5 times Gross Domestic / State / Metropolitan Product.

    Australia currently has something north of $A4 trillion of residential real estate in a $A1.2 trillion economy – about 3.3 times.

    New Zealand has about 5NZ580 billion of residential real estate in a $NZ180 billion economy – about 3.2 times.

    Texas has about $US1.8 trillion of residential real estate with a Gross State Product of $US1.2 trillion – about 1.5 times.

    Even better still – Houston with its $US405 billion economy (refer Bureau of Economic Analysis – US Dept of Commerce) has about $US430 billion of residential real estate – about 1.1 times. Interestingly – the Houston economy is larger than that of Dallas Fort Worth ($US375 billion) even though DFW has about 600,000 more people (about 6.4 million).

    Massive Corporate presense in Houston.

    So in using this 1.5 times GDP threashold measure, Australia has about $A2.2 trillion of illusory bubble value with excessive mortgage bubble debt loads well north of $A400 billion.

    New Zealand has about $NZ300 billion of bubble residential value and in the range of $NZ40 – $NZ60 billion of excessive bubble mortgage debt.

    Aussies and Kiwis should contact their mates in California, Florida and Ireland (as just 3 examples) and ask them what deflating bubbles are like. Its just starting here now.

    For those not convinced by the Annual Demographia Survey's, may I suggest you go to my website and check out down the left column the Harvard University Median Multiple Tables, which show US metros since 1980.

    Down the left column as well is the Time magazine story on Bill Levitt, the "father of affordable housing". This great entrepreneur after World War 11 figured out how to supply housing for $US8,000 to those on SINGLE EARNER household incomes of $US3,500 – about 2.2 times household earnings. This is a terrific read.

    Also go to the Houston Association of Realtors website and check out the housing listed there. Click on Homes for Sale and go through the right side to the Monthly Market Report.

    Note multi units condos / townhouses are considerably cheaper (about $US120,000 median) and there is a huge glut of the stuff.

    And for good measure, go to the Houston Chronicle Real Estate Section to see what they pay per square foot in various suburbs of Houston.

    We are getting shafted big time in this part of the world – which suits the political and commercial elites. Isnt it about time we woke up?

    Hugh Pavletich FDIA
    Co author – Demographia International Housing Affordability Survey
    New Zealand

  24. Hugh,

    I don't know if you read my post from yesterday addressed to you and the others behind Demographia, but you are once again using a fabulous single family home in Texas as your example. I know that you are just (finally) acknowledging that even that fabulous home is very affordable to the residents of Texas, but I again say this. You should be using a 600 sqft apartment in Texas as the example and figuring out the median cost of that. That is what most people in India, China, most of Asia, Europe, Africa, Central and South America live in. You will find that this 600-sqft apartment to be ridiculously affordable in the United States, while ridiculously unaffordable in the rest of the world. It is a total fallacy to say that the United States ever had a bubble, because small homes, manufactured homes etc have always been available for just USD 25,000.00. It is wrong to expect a 2000 sqft 4-BR single family house with central AC/heating/attached garage/granite countertops/good roads around to cost 3 times the local median income.

  25. Hugh, you are absolutely right about the absurdity of Australian house prices but that doesn't change the fact that you are cherry picking data points to prove an ideological view.

    As to @anonymous who asked what's so right-wing about being affordable housing, the answer is "nothing".

    I'm a right winger deeply concerned at how Australian property prices are distorting the nation's economy, I also believe and that Australian planning rules are politically driven, out of control and in need of reform.

    What I don't believe is this lame, pseudo libertarian view out of the US that everything is the government's fault.

    Can we have some rigorous analysis of these claims? We could start by looking at how the Texan planning procedures differ from their Australian equivalents.

    Although I'd still like to see some real proof that planning regulations are the main driver of the bubble we are in.

    I asked yesterday if anyone can show how planning regs drove the 1890s Melbourne boom or the 1920 Florida boom. I would expect Hugh and Demographia have at least some historical data to prove their point.

  26. It's an interesting ideological view that holds governments responsible for market excesses. Bad regulation manifests as market outcomes. That is the nature of the beast.

    Although I'd still like to see some real proof that planning regulations are the main driver of the bubble we are in.
    Germany v UK. In Germany, the "right to build" is part of the constitution, German house prices move at about the rate of inflation. In the UK, all building needs official approval, housing prices are both much higher and much more unstable.

    You can get exceptions, such as Ireland, where a land cartel seems to have been the main supply restricting factor, but a land cartel that acted much as State/Territory governments do in Australia.

    We could start by looking at how the Texan planning procedures differ from their Australian equivalents. Ask Texans involved in housing about the notion of "land release", they will look at you as if you have grown another head or come from a strange planet.

    Great post Leith.

  27. Anon @ 7.44 am 7 Jan

    It would with respect be appreciated if you could lighten up on the ideological nonsense. With the Demographia Surveys and the associated work these past 6 years, we deliberately take a "structuralist approach". The numbers speak for themselves.

    Indeed I have been extremely clear about the root cause of the problems – and suggest you read my paper of near 3 years ago "Getting performance urban planning in place". I state clearly at the outset that these problems are not ideological in nature.

    I have been particularly hard on industry groups (go to my website Highlighted Articles "The need for clarity" where the HIA got it in the neck). Much appreciated I dont think, coming from the former South Is New Zealand President of the Property Council through the first part of the 1990's.

    I am not on the Christmas card list of some economists either – and may I suggest you read my article "Housing bubbles and market sense" to learn why.

    Yes I am in favour of the open land markets of Texas and their Municipal Untility District bond financing of infrastructure. In addition to this, I am also in favour of the Texas Mortgage Consumer Protection laws. Alas – some on the right are none too happy about me supporting this last point.

    Im a great fan of Houston too – which incidentally is a Democrat town (all recent Mayors Democrats). Indeed the current Mayor Annise Parker, a Democrat, is the first openly lesbian Mayor of a major United States city.

    So my interest is – what works?

    May I suggest you get on to the Australian Housing Urban Reseach Institute (AHURI) and its NZ counterpart CHRANZ and ask these taxpayer funded outfits when they intend to stop generating mindless academic eyewash about housing – and instead work with us all in generating sound structural reseach on these issues.

    I am sure they would appreciate being told by you what their fiduciary duties as public servants are, to the long suffering taxpayers feeding them.

    Hugh Pavletich FDIA
    Co author – Annual Demographia International Housing Affordability Survey
    New Zealand

  28. From David V:

    Another poster would "still like to see some real proof that planning regulations are the main driver of the bubble we are in."

    This proof does not exist. Planning regulations are the root cause of Australia's housing crisis. Depending on how you define bubble, something else might currently be the "main driver". I understand that rich people are the main driver of the bubble in Potts Point.