Why not copy Houston: A follow-up

Tuesday’s post, Why not copy Houston, has again attracted many interesting comments and ideas.

The intention of this post was to provide a case study of an alternative urban planning system – Houston – that appears to have achieved far superior outcomes to Australia’s highly prescriptive approach. In particular:

  • high quality housing that is less than half the cost of equivalent Australian homes;
  • price stability – since Houston’s homes never bubbled then busted, unlike the supply-restricted US states;
  • low levels of household debt – due to the low cost of Houston housing; and
  • macroeconomic stability – resulting from Houston’s price stability and low debt levels.

As expected, commentators varied in their views about Houston’s deregulated urban planning system and whether such an approach is, in fact, preferable to Australia’s.

Although all comments were constructive, two commentators, in particular, have caught my eye – one for his extensive knowledge of urban planning issues and the other for his inside knowledge of Houston. Since many readers might not have read these comments, I thought I’d share them via a separate post. 

Thinking out loud:

First to Lorenzo, who runs a blog called Thinking out Loud. As it turns out, Lorenzo has written some excellent articles on restrictive land-use policies, their impacts on housing affordability, and their propensity to facilitate housing bubbles. All three articles are well worth reading. You can download them here, here and here.

Here is a sample of Lorenzo’s recent comments. The themes raised are discussed in greater detail on his blog.

…Credit and credit policies can aggravate a housing bubble, they can aggravate any bubble. But something must set up the expectations of capital gain, and the systematic discounting of downside risk, which is at the centre of a bubble.

Having planning policies that continually retard the ability of supply to respond to demand, creating a sustained pattern of rising prices, generate those expectations and discounting…

Such policies also generate rising revenue from land taxes and political donations from developers who have to “buy” access to the political system to get their needed approvals and who can them “game” the system…

In Australia, all States and Territories eventually adopted the British/Californian system of land-rationing, none of them retained the Texan/German system of open markets in land use. The result is housing price bubbles, as in the UK and California, not the much more even house prices of Texas and Germany.

Remembering that Texas has less land, more people, higher population growth, higher average incomes than Australia and crams a bigger proportion of its population into its five largest cities but both much lower (relative to income), and much more stable, house prices.

Credit and tax policies cannot explain these differences, no matter how much they may have aggravating effects. Land rationing does, whether that land rationing is done by regulation or, as in Ireland, by a land cartel [January 7, 2011 2:02 PM ].

…house prices are a supply and demand issue, and Texas has high demand, so if its housing prices are relatively low, then clearly supply is able to keep up with demand. It is not as if Texans have low average incomes: indeed, their average incomes are higher than Australians.

…The expectation of capital gains is created by the regulation. If we had the German situation of “the right to build” we would probably also have the German home ownership rates, which are much lower because there is no expectation of capital gain and people have long-term leases since landlords are not constantly re-assessing their rent/sell calculations.

Also, the various forms of price-increasing quantity controls retard the provision of infrastructure, because it makes purchase of land for infrastructure much more expensive, encourages government to sell land set aside for infrastructure for the revenue while NIMBY (not in my backyard) and BANANA (build absolutely nothing anywhere near anyone) become worse as people defend their expected capital gains much more strongly. California is worse at providing infrastructure than Texas (then again, there is a long list of x’s that California is worse at than Texas). [January 8, 2011 2:23 PM]

…California, the UK, Australia and New Zealand all use similar structures of requiring official approval for all building activity. The results are not pretty. However regulated Germany might be, restricting actual housing supply is not a feature, given the right-to-build in the Federal constitution….

More generally, the notion advanced in comments that some perfectly interacting set of planning and taxing rules will nicely cancel out all the ill effects of attempting to control supply is not supported by experience. One has to remember that the land use regulation being critiqued is regulatory power being used to serve particular interests. It is hard to stop that: and the more potential the regulations have to “create value”, the more likely that is to happen. “In the race of life, back self-interest, it is the only horse that is trying” is a principle that, if anything, is more applicable to regulatory and political structures not less.

There is also the difficulty in getting pervasive planning to use information effectively. One of the basic reasons controlled systems tend to be more chaotic is that the range and use of information is narrower than in more open systems.

As for planning on the basis of “peak oil” (i.e. predicting the future of technology), good luck with that. Equivalent urban planners in London in 1890 would no doubt have worried about projections about the likely level of horse manure the city would have to cope with by 1930, given its rate of expansion…

…regarding Texas and oil: yes, of course, the general health of an economy affects the housing market. The point to draw from the graph, however, is the lack of any great surge in housing prices, even though Texas was sharing in general prosperity (or even better), under the same monetary policy as other states and under the same federal US pushing-housing-credit policies.

The issue is not “planning”. It is not even “regulation”. It is control of supply via official discretions. That has a very bad track record around the planet, and not only in land use. [January 10, 2011 10:14 AM]

…paying for infrastructure up front is a nonsense: but the entire point is (as so often with regulation) to protect incumbents and raising entry costs (e.g. by upfront payment for infrastructure) does precisely that. Everything that slows down/increases the cost of adding land-for-housing acts to increase the value of land-already-with-housing.

Also, the more official discretions matter, the more people will pay for access to officials. Much of this is about generating political donations, getting developers and others to “pay” for access to decision-making officials.

…Making land more expensive makes it harder to provide infrastructure by raising the cost of the land, encouraging selling off land originally reserved for infrastructure because of its massively increased revenue value, and — because people have more expectations of capital gains to defend — increasing the NIMBY (not-in-my-backyard) and BANANA (build-absolutely-nothing-anywhere-near-anyone) effects. It is no accident that California — with its highly restrictive land use regulations — gave us BANANA politics. [January 10, 2011 12:20 AM ]

Thank you for your contribution, Lorenzo. I couldn’t have said it better myself.

The insider:

Robert Sherlock is an Australian from Perth whom now lives in Houston, Texas. Robert has been invaluable in providing an insider’s perspective on Houston’s planning system and municipal set-up. Here is some of what Robert has had to say.

Sprawl is needed until you limit population growth. If you don’t limit population you should not limit sprawl.

I personally live in Texas which has a larger population and population growth than Australia and I am fine with its sprawl. Its sprawl is much more organised as the government has little involvement.

Infrastructure costs are too high in Australia, the argument is not who should pay but how to reduce [these costs].

The easiest way to reduce infrastructure costs would to get rid of Zoning and planning approvals should be between 1 and 30 days.

Get rid of most environmental regulations as they just encourage developers to do the minimum. [NOTE: The most environmental development that I have seen (received awards) is The Woodlands in Texas, The developer saved trees and promoted nature, he sold house and land packages from 100k and yes he made money he sold his portion of the development company for $600m!]

Each development (Estate) should be able to build its own sewerage treatment plant and water well, just like Texas, and the owner pays for this through MUD taxes [explained below].

This is why land is cheap in Texas, as demand increases supply increases in weeks not years. [January 11, 2011 7:04 AM ]

The Woodlands in North Houston is designed to be an employment base so many of the residents can walk, ride, take a free water ferry, or a 5 minute car ride. It is heavily treed, the developer is an environmentalist! It is 40 minutes away from the CBD but most people never regularly leave. It has 108 holes of Golf! The average family has an after tax income of over $100,000. And you can buy a house for only $100,000!

Houston has sprawl but the employment centers are not just in one location. The Houston medical center is the largest in the world and employs nearly 80k people, Two major separate airports (where parking is $1!), the tenth largest shipping port in the world, and a huge coastal petrochemical region, and the space center. The freeway system is much better than Australia’s. It takes me so long driving around Perth compared to the much larger Houston…

Australia does not have a housing shortage just an affordable housing shortage. There are a lot of houses for sale but no one is buying as they are just too expensive.

Note only the cities that had “Housing Shortages” in the USA had bubbles and they were the cities that crashed. [January 14, 2011 8:27 AM ]

Robert was also kind enough to email me with details of how infrastructure and services are provided and funded in Houston. In a nutshell, here’s how it works:

  • Utilities are installed and maintained by the companies (electricity, telephone etc) since they receive the revenue.
  • The developer has to install the roads.
  • Large subdivisions are allocated areas for parks and schools
  • The developer installs the sewerage and water and gets it back from the Municipal Utility District (MUD)
  • MUD is a special-purpose district that provides public utilities (such as electricity, natural gas, sewage treatment, water, and waste collection/management) to the residents of that district.
  • MUDs are formed by a vote of the area, and represented by board of directors who are voted on by the local people.
  • The MUD borrows money via the bond market to pay for building (via the developer) and operating (via the MUD) these services. The MUD bonds are then repaid via taxes on the home owners of around 1% of the home values per year.
  • Schools are also built and funded via bonds and repaid via the same taxes on the homeowner.

Note that Texas does not levy infrastructure charges up-front. This is yet another reason why Texas is able to provide housing at far lower prices than in Australia.

Once again I’ll ask the question: why the hell aren’t Australia’s politicians, planners and policy makers conducting study tours to learn from the Texans?

Cheers Leith

Comments

  1. We already have a mess through development occuring in the wrong places.With the flooding in SE QLD that should be obvious to blind Freddie.And that is only a small part of the mess.
    Advocating less control is the height of stupidity.There should be more control.Given the monumental cock up which is the USA today I can't give any credibility to someone who thinks they are a good example.
    The fundamental problem is population growth through an insane immigration policy,and,to a lesser extent,Bonus Babies.

    If you really want to do something constructive about affordable housing then start on the important basic issues and work up.

  2. Leith van Onselen

    And yet that development in SE QLD happened under the Government's watchful eye… And Thirra, the US states that are most to blame for the 'monumental cock-up' are the supply-restricted states (e.g. California, Florida, Nevada and Arizona). Funny how Texas is travelling just fine. Wonder why?

    I agree with you on population growth. Just like housing, it is one giant Ponzi scheme.

  3. Good discussion. I'm glad Germany's example has been brought up. Also note, as has been mentioned, Houston has many areas in which land use is significantly restricted. The important difference is that it varies on a micro level, as I believe is the case in Germany.

    Also note Lorenzo's citation of long-term leases as allowing (forcing) housing stock to track its fundamentals (i.e. rents).

    I really think if you're going to make an impact on Australian authorities to change their policies and elicit positive debate amongst the electorate, you need to use a non-American example. Using an American example, while wholly valid, will be ample ammunition for opponents to throw an emotional wrench in the gears. Highlighting the example of Germany will quench this at the outset. Just a suggestion.

    Keep up the good work.

  4. Leith,

    Comment from the Delusional Economics blog.

    "Mercury4 said…

    Thirra – people were encouraged to build there by the authorities, otherwise the land would not have been zoned residential – would it?

    We can rely on those in charge to lead ordinary folks up the creek, in large ways and small.

    Some of Brisbane's trendiest suburbs have been revealed as the most prone to flooding.

    Brisbane City Council this morning released new computerised mapping…

    The maps, which have never been released in Brisbane, show how flooding affects every street in the city."

    January 15, 2011 8:42 AM

    http://delusionaleconomics.blogspot.com/2011/01/frontline-of-economy-rub.html#comments

    Replying to a comment by Thirra, no less.

    Federal govt, States and LGA's "Putting The 'C' In Complicity In A Subdivision Near You".

    Cheers

  5. Perhaps Houston is cheaper because its a God awful hole with no redeeming features?

    Food for thought.

  6. Leith

    Call me a cynic. With reference to your question at the end of the article wondering why Australia's politicians, planners and policy makers aren't undertaking study tours to Houston, I think our over-regulated planning policy framework with multiple approval processes involving numerous, competing and often irrelevant govt agencies to effectively achieve the same development outcome as initially proposed (albeit 3 or 4 years later) is the best govt job protection scheme going around.

    Cheers,
    Kim

  7. Anon @ 10.17 AM

    We need to start "Putting The 'C' Into Class Actions".

    Head of the queue? Perhaps the buyers duped into their first home purchase at the top of the market while interest rates were at their lows.

    Steve Keen has a nifty graph showing the impact of the Federal Government first home buyer bonuses. "We didn't know" may not be a sound defense as these bonuses have been used four (4) times to ramp the market.

    The file is named 04051_1640_DebtWatchNo2.

    http://www.debtdeflation.com/blogs/2010/04/06/debtwatch-no-44-april-2010-house-prices-are-not-normal/

  8. Leith: thanks for the plug, glad to contribute!

    Thirra: First, as has been pointed out, the land use was already controlled. Badly, as it turned out. Creating artificial scarcity suppresses other price signals by making them relatively less significant. It becomes more of a matter of building where you are permitted to, not where it would be more sensible to.

    I am reminded of the official who said they would support the abolition of rent control when the housing shortage improved, As one economist sarcastically noted, that was like saying you would stop banging your head against the wall when it stopped hurting.

  9. Hmmm

    Funding via bonds?

    Sounds good, but I also know that US Muni bonds are in a pretty bad way at the moment.

    How are Texan Muni bonds fairing??

  10. "Why the hell aren't Australia's politicians, planners and policy makers conducting study tours to learn from the Texans?"

    (1) they are in the pockets of developers.
    (2) they actually think they know better than dumb Texans.
    (3) in many cases they are beholden to councils with developers or big land owners as members.
    (4) they like the evergrowing revenue stream from rising land prices.
    (5) they have an electorate with numerous people who are obsessed with real estate investment.

  11. Just a friendly reminder that home prices in the other 'supply restricted' cities have returned to levels similar to Houston. If supply was truly restricted, how could prices fall so much?

  12. Robert Sherlock

    Select US bonds are not doing well because home owners are underwater and thousands of homeowners in one area are not paying their taxes. That large scale defaults are really in those once "Supply shortage" areas like Las Vegas.

    Texas is very simular in climate to Queensland, but they can handle its large amount of rain.

    Lost of forest, rivers, lakes, trails and has a coast along the warm waters of the gulf.

  13. @Cameron Murray, Leith commented on this here:

    "Readers should note that unresponsive housing supply is a different issue to the 'undersupply' of homes or 'housing shortages' commonly mentioned by mainstream commentators. The former relates to the speed and cost at which new (generally fringe) housing supply is built, whereas the latter refers to the physical quantity of homes available for the population.

    In my view, Australia does not have a housing shortage."

    The argument is that more elastic supply is better than less, and if there is enough elasticity then bubbles become more difficult to form since all who want to buy are able to do so by building instead of bidding up existing stock.

  14. Great discussion but depressingly I have to return to the comments made by heywood – there is no getting away from the addiction cycle that is currently in place. The solution (if that is the correct word) will be anti-intuitive and (just like the problem) will require many years of a different type of thinking.
    We as a nation are not able to engage in that sort of dialogue – http://www.australia2020.gov.au/
    anyone?

    So we are left with "The crash we have to have!"

  15. Cameron Murray asks: "If supply was truly restricted, how could prices fall so much?"

    I will answer that. Because the buying power of the strongest loser in those areas has fallen considerably. Banks will now lend buyers much less than before.
    Under abundance price tracks cost of production. Under shortage price tracks buying power of the strongest loser.

  16. Leith van Onselen

    Thanks Jesse and David. I will add that when supply is restricted, there is more incentive to keep homes and land vacant since perceived scarcity (shortages) creates an expectation of continued capital gains. Investing (read speculating) becomes all about capital gain rather than cash flow.

    I'm sure if the Australian land market was contestable, like in Texas, 6-8% of Australia's capital city homes would not be being held vacant as they are now according to the last two Census' ((click to view chart). Owners would not have antcicipated never ending capital gains under the mis-guided belief that land is running out. And instead they would have invested for cash flow.

    I kid you not, 3 houses within 100 metres of my house (Melbourne's Inner-East) have been vacant for over 5 years. No joke. They are all mortgage-free deceased estates and their baby boomer owners are holding onto these properties purely for capital gain. Only in a supply-restricted market do you get this type of behaviour.

    So no, Australia does not have a shortage of physical properties. But we certainly do have a shortage of accessible and affordable properties.

  17. "Only in a supply-restricted market do you get this type of behaviour. "

    In all fairness, desirable areas of Dallas were bid up to the tune of 30-40%. If a particular built-out neigbourhood garners a good reputation, it will be bid up relative to the unknown community wrought from a new development, no matter how many are spawned. Think established blue chip stock relative to an upstart.

  18. The key message is that artifial scarcity induced housing bubbles are unnecessary and undesirable.

    They are created by a lack of elementary performance disciplines within State and Local Governments, where they lose control of their costs and the capacity to cope with normal growth.

    The bigger the local authority, the worse the problems. Not surprisingly, these out of control bureacratic beasts need new avenues to feed their financing needs. Strangling fringe land supply and imposing grossly inappropriate levies is the way they are playing it in Australia and elsewhere. Leiths graph within his last article on the growth of property revenues as a % of State revenues spoke volumes.

    This is why I have advocated the need for clearly understood performance disciplines within the State and local government sector. It would appear the Federal Liberal Coalition shares my view on this, if its housing policy is any guide. This document needs to be read closely and discussed.

    If housing demand increases – with lax lending to boot – it should simply lead to over production of affordable "market stock".

    The open land market of Atlanta, Georgia is an excellent illustration of this, where the 2010 Demographia survey illustrates it bottomed out at a 2.1 Median Multiple. Prof Paul Krugman explained the lax lending situation of Georgia within a March 2010 New York Times article "Georgia on my mind".

    Texas however has Mortgage Consumer Protection Laws, where people are not allowed to exceed a LVR of 80%. Go read the CNBC article "The Lone Star Secret" for further information on this issue. Houston and Dallas Fort Worth Median Multiples within the 2010 Demographia stayed in the high 2.0' Median Multiples.

    So finance was simply the "fuel" – not the trigger for housing bubbles, as I explained within "Americans slow learners about housing bubbles".

    So economists are talking rot when they say housing is "inelastic". Its fine in normal affordable markets.

    And there is a world of difference between new "market stock" and "bubble stock".

    New "market stock" is of the type people want, where they want it, within critically important and sound Development Ratio's (refer Definition of an Affordable Housing Market" on my website).

    "Bubble stock" in contrast is of the wrong type, where people dont want it and well outside sound Development Ratios.

    Property commentators fail to be clear on this important issue of bubble and market stock, when assesing housing needs. When housing bubbles collapse – its the bubble stuff that gets smacked very hard (condo's in Miami for example).

    Housing should not exceed 3 times household incomes or 1.5 times Gross Domestic / State / Metropolitan Product.

    By my rough calculations, there is roughly $A2.2 trillion of bubble value in the Australian housing market – near $NZ300 billion in New Zealand. Lets just say, deflating housing bubbles are very educational – particularly for bubble bunnies, who choose to learn the hard way.

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