Why not copy Houston?

Following on from my recent articles on land-use regulations and housing affordability, I want to take readers through Texas’ deregulated urban planning system, and how this system has assisted in providing Texans with housing that is among the most affordable in the Western world despite very high population growth.

Adam Smith would be proud:

Possibly the best description of Texas’ urban planning structure is provided in the Brookings Institution’s Review of the Land Use Regulations in the Nation’s 50 largest Metropolitan Areas. According to this report:

The Texas metropolitan areas…have in common an unparalleled openness to growth and development. It all starts with zoning. Texas counties are not allowed to adopt zoning, nor can they adopt binding comprehensive plans. Cities are authorized to zone unincorporated land within specified distances of their city limits (up to five miles for the largest cities), but any land outside that extraterritorial jurisdiction is regulated only by minimal subdivision regulation.

Texas’ pro-development land-use policies are clearly evident from the below charts, which also come from the Brookings Institution Research Brief. First, consider zoning regulations in each of the 50 largest US metropolitan areas:

As you can see, Texas, shown at the centre-bottom of the map, has next to no zoning requirements restricting industrial, commercial and residential construction. Furthermore, it does not try to limit urban expansion via containment devices such as urban growth boundaries (see below chart).

Because of Texas’ liberal land-use policies, which enables new homes to be built quickly and cost effectively, Texan house prices have remained fairly stable, whilst states with highly prescriptive land-use policies have bubbled and then bust (see below chart).

Accordingly, first home buyers in Texas can purchase new large high quality family homes for under $200,000 – about half the cost of a comparable home in any of Australia’s capital cities (see my earlier article, Planning Gone Mad).

A January 2008 report by the Dallas Federal Reserve, entitled: Neither Boom nor Bust: How Houston’s Housing Market Differs from Nation’s, explains Texas’ achievements beautifully. Here are the best bits:

In the first phase of the U.S. housing market boom and bust, many large cities (primarily on the East and West coasts) saw a prolonged run-up in prices. Demand for housing, driven by low interest rates and a growing economy, combined with supply restrictions—such as zoning laws, high permitting costs and “not in my backyard” regulations—to contribute to rapid price appreciation…These price increases then fed off themselves. Rising prices—whether for gold, corn or houses—often foster a bubble mentality, contributing to speculative demand…

Atlanta [Georgia], Dallas and Houston [Texas]…weathered increased demand largely with new construction rather than price appreciation because of the ease of building new homes. While some are dismissive of this developer-friendly attitude that allows such rapid construction, the approach clearly carries significant benefits for the homebuyer…

The Houston Example:

Houston saw tremendous job and population growth over the last decade, ranking it high among the 12 largest U.S. metropolitan areas in both metrics…

Given that Houstonians had access to the same new types of mortgages as the rest of the country and that Houston has had greater population growth than other large metros, we might expect price appreciation to be stronger in Houston than elsewhere. However, the opposite has been true.

Houston’s large supply of land means that demand growth primarily results in more construction, not higher prices. Construction levels are limited by the availability of two kinds of developable land: the previously undeveloped, generally found on a metro’s outskirts, and the redeveloping, usually in a city’s interior. In both cases, Houston’s policies are relatively permissive, making the metro friendly toward development.

The most fundamental difference between Houston and other cities lies in how they provide (or in Houston’s case, do not provide) water, sewer and drainage to developments on the urban fringe. In Houston, developers can create a municipal utility district, or MUD, to provide these services on their properties and can finance these with tax-free bonds. Houston requires developers to build MUDs in such a way that they eventually could be connected to the city’s corresponding infrastructure, but they begin as self-sufficient enterprises.

In other cities, developments must be connected to the city’s water and sewer lines, confining new projects to nearby or adjacent land since the cost of building lengthy lines is prohibitive. In metro Houston, by contrast, virtually any large parcel of land can become a new suburb, especially given the metro’s expansive highway system…

But Houston does not just have a larger supply of available land on its outskirts. Unlike all other large U.S. cities, Houston lacks zoning laws restricting industrial, commercial and residential construction to specific neighborhoods…

Much of the land in metro Houston is not assigned a specific use. So much land is available in Houston that the cost of each incremental unit rises slowly and keeps the average cost below that of more restrictive metros. Even in the face of significant population growth, this large supply keeps land prices in Houston stable, which over time contributes to lower home prices…

Indeed, Houston and other metros such as Dallas and Atlanta that have relatively more permissive development policies have lower housing prices than more restrictive places do.

At $155,800 [currently $152,500], Houston’s median house price is the third lowest among the 12 largest U.S. metropolitan areas and is less than half the average for these cities. Houston’s median price is lower than even the national average, which includes inexpensive rural areas.

By comparison, the median house price in metropolitan San Francisco, where zoning laws and building codes are very strict, is $825,400 [as at third quarter 2007]. This result—more zoning bringing higher prices—is a robust one. Economists Edward Glaeser and Joseph Gyourko find that house prices across the country are positively related to the degree of zoning and regulation…

With plenty of unzoned neighborhoods remaining, Houston house prices, on the whole, are restrained near construction costs. In summary, Houston’s low-and-slow home prices have made real estate a relatively accessible and safe investment for the area’s residents even as other cities’ markets have become expensive and volatile. The early phases of the current housing downturn—the boom and bust in prices—were barely felt in Houston.

Indeed, despite the biggest economic downturn since the Great Depression, Texas’ house prices have barely moved – a testament to its liberal land-use policies that enables housing supply to quickly adapt to changing levels of demand. To illustrate this point, consider the below chart showing single family house prices in Houston:

How’s that for price stability and affordability? Now let’s compare these stable prices to single family home sales:

As expected, supply appears to have adjusted quickly to meet changing levels of demand, keeping prices stable.

Another positive side-effect of Houston’s (and Texas’) affordable property market is the apparent dis-inflationary effect that lower property costs are having on other areas of household expenditure. According to the ACCRA Cost of Living Index, Houston’s overall after-taxes living costs are 9% below the nationwide average and 19% below the average for large metro areas (see below table). This outcome has been achieved despite Houstonians having above average incomes.

 

A vibrant city:

Often when I discuss Houston with colleagues and friends, people assume that it is just another boring, sprawling, car-dependent American city that lacks culture and style. Perhaps its because they associate Houston with George W Bush. Or perhaps it’s because they see it as the centre of the ‘evil oil empire’. I’m not sure. But whatever the case, this view certainly does not accord with that of Houstonians, who are generally relaxed and happy (perhaps because they have so much disposable income?)

A recent article from Continental Magazine, entitled Cultural Capital, certainly challenges these beliefs. What’s more, it dedicates much of Houston’s economic and cultural achievements to its relaxed urban planning system. Consider the following extracts:

Houston’s link to energy has less to do with what lies under the ground and more to do with what stands on top of it. Some 2.3 million people, from virtually every point on the planet, have made their way to this upbeat, unzoned, 600-square-mile metropolis. A mishmash of cultures and counter-cultures, Houston takes as much pride in its punk chamber music and Sudanese rock as its world-class opera and ballet, offbeat folk art extravaganzas, and top-rated museums. It’s this openness to the new and the exotic — and even the outlandish — that has made Houston an emerging cultural capital…

For the uninitiated, “inside the Loop” refers to the neighborhoods that fall within the loop of Interstate 610. They include the Heights, with its historic Victorian homes; bohemian Montrose and Rice Village; the humming high-rise downtown and the buzzing hubs of Midtown and Washington Avenue; leafy, suburban Afton Oaks and Braes Heights; and the laid-back ethnic neighborhoods on the East Side. For those who are overwhelmed at the thought of traversing a 600-square-mile city on a daily basis, there are plenty of options to structure a life close to home.

That’s part of the beauty of Houston’s laissez-faire approach to city planning, says Beth Wolff of Beth Wolff Realtors, a board member of the Greater Houston Partnership. Uninhibited by residential-only development restrictions, the nation’s largest unzoned city has grown in a diverse, dynamic way, Wolff says, with walkable neighborhoods that offer businesses and homes in the same area. It’s easier in Houston than in other cities to set up a catering or chiropractic business in your home. Facilitating entrepreneurship while creating vibrant and diverse neighborhoods is a positive by-product of a city without zoning restrictions.

At the same time, for those who feel more comfortable in a strictly residential environment, there are many suburban-style options to choose from. Inside the Loop, the upscale River Oaks neighborhood, with its multimillion-dollar mansions, is deed restricted, as are West University and Braes Heights, making it impossible to build something out of character. Inside and outside the Loop there are “towns within a town” – zoned communities such as Bellaire, West University, and the Memorial Villages. There are also excellent retiree options such as the Buckingham, in the Memorial/Westheimer area, and Sweetgrass Houston, a Del Webb 55-plus lifestyle community opening in February in Fort Bend County.

“With the size and the international nature of the city, we can accommodate pretty much whatever it is you want, whether it’s a 1920s bungalow or a smart house with the latest technology,” Wolff says. “You can live on a golf course or around a lake, or in a loft in the business district. It’s a wonderful opportunity to find whatever you’d like.”

To Zenfilm’s Wells, the city’s free-for-all nature, affordability, and enormous diversity have all been key to its thriving, creative energy. “Right now I have several thousand feet of studio space that I pay less than a dollar a square foot for,” he says. “Houston’s no-zoning landscape allows entrepreneurs to start businesses in their living room. By the same token, because of the cost of living, it’s a lot more manageable for artists to find a place to live and work, to find a following, to find a community as an artist. That’s why we have such a blooming cultural community, which is a wonderful vehicle to hitch our star to.”

Why are Australia’s policy makers asleep?

From where this blogger sits, the Texan model of urban planning seems far superior to the dysfunctional, prescriptive mess currently presiding in Australia’s capital cities and regional centres. Having the opportunity to purchase a new family home for well under $200,000 is a dream come true for many Australians, many of whom are instead required to load-up on debt to buy equivalent homes at twice the cost.

So why aren’t Australia’s planners and policy makers undertaking study tours to learn from their counterparts in Texas, instead of throwing endless sums of taxpayer dollars into demand-side measures – like the first home buyers grants and negative gearing tax concessions – which throw the demand-supply balance further out of whack and make homes even less affordable?

I think the answer can be found in the following chart:

That’s right, Australia’s governments have become ponzi merchants: attempting to keep the Great Australian Housing Bubble going by pumping demand and restricting supply in order to preserve government finances.

We deserve better.

Cheers Leith

Comments

  1. Loving this blog man! Seriously, keep it up! I'm studying a double in Econ and Finance, and find that reading your blog, Steve Keens, and some Austrian blogs, provide some much needed background and perspective on the neoclassical economics we're taught. If you can, I'd love to see more technical analysis like Steve Keen does, as it helps me understand the situation, and gives me some valuable practice.

    Do you have a post on the ideology/school of economics you're a proponent of?

    I'd be interested to know how strong the explanatory variable "regulation" is with predicting house prices, and more of the stats on that. I'd also be interested to know how regulation is quantified.

  2. I think there are other alternatives too. In Germany and other European markets there are highly regulated markets and land shortages. Prices are kept down by titling laws in favour of tenents. Less job mobility and the requirement to install your own kitchen even when renting means that Germans see rentals in the long term. This reflects a culture which see housing as a human right and not something which should be at the mercy of speculators. If, as in Germany, it became almost impossible to evict a tenent, then perhaps we would attract the sort of long term investment needed rather than the speculation we get now. After all, I think Berlin, right in the heart of Europe, would be considerably cheaper than most of our capitals.

  3. Birch Creek Trader

    Great post Leith – Houston sounds like a happening place to live!
    Its funny, all those positive attributes you mentioned, and in the back of my head, I'm thinking "aha a bubble is forming", which usually happens when there is so much development..
    Houston is the exception that proves the rule I guess. I scratch my head at the stupid zoning and creation of Zombie Colorbond Jungles (people call them suburbs) that are popping up all over the country.

  4. Comparing Houston to San Francisco seems a little unfair, as SF really is severely constrained geographically. None of Australia's major capitals are, though, so that comparison seems apt. (Sydney is quite rigidly contained by National Parks, but the area enclosed by those is immense.)

  5. THE HOUSING AFFORDABILITY ISSUE IS A NONSENSE

    Leith – many thanks for a most informative article.

    The evidence is staring us in the face. Why are we so blind?

    Whatever happened to our "fair go" culture?

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

  6. Thanks Leith,
    I'm a Melburnian who's been living in Houston for over two years now, and I thought you captured Houston's spirit well. I can't help but compare house prices between home and here and long that something back in Aus will change.

  7. Robert Sherlock

    I am an Australian living in Texas

    Deed Restricted communities are created by the developer (the capitalist) and the restrictions cover anything from minimum house size to minimum amount of trees, junk and signage. The developers change these on different developments to accomodate the market or there their own values. The government does not need to waste resources on regulation, zoning and planning when the free market does a better job.

    For instance "The Woodlands" in North Houston is a development that has recieved many green awards and the development focused on bringing large companies to set up headquarter and built a community around nature and commerce. Many people never leave the area as everything found in any city can be found their. Turning Green into Green – The developer sold his share in the development for $543,000,000.

    Homes in this suburb range from 100k-10 million with a median of $215,000. Median income is $125,000.

  8. Another great post Leith. I can't imagine how much of your spare time you dedicate to the research required to flesh out these issues in such detail for the benefit of others. Well done and thank you.
    Whilst we know that the current system is self-serving, I don't believe that the whole solution is to be found in Houston either. Adopting a laissez-faire planning system would, in a high population growth environment, enable an even stronger wave of urban sprawl than we have seen here already – Sydney and Melbourne already have populations of 4.5 & 4 million respectively, versus Houston’s 2.3 million.
    Houston’s deregulated system has some obvious appeal including the easy facilitation of supply, as well as flexible land allocation for a prudent mix of residential, business and commercial. Both of these encourage the creation of lifestyle hubs (or communities as we like to call them), thus (and ideally) minimising downstream transport infrastructure impacts. The closest we get here in Australia are places like Caroline Springs in Melbourne’s west, except that they forgot to provide (read: weren’t allowed to) anything other than superficial, personal consumption based service businesses. This results in anybody who wants a job (and usually both parents NEED a job to afford the house!) has to crawl in to their car each morning and travel in bumper to bumper traffic to the places where they actually let businesses operate.
    The biggest challenge to my mind is that both our system and Houston’s to a slightly lesser degree, all assume the abundant supply of energy and construction resources at affordable prices, and I don’t need to tell you or your readers that this is an erroneous assumption if we are serious about planning the communities in which we will live for the next 20-50 years.

  9. Good post Leith. I think your final conclusion about the ponzi nature of our state (and local) governments hits the nail on the head. Affordable housing is just not going to happen in Australia when governments are addicted to the tax take.

    It would be interesting to see how planning regulations in our major cities have changed over time. Perhaps there is a close correlation to the increase in house prices and the advent of stricter planning regulations.

  10. And when the oil runs out, how will those people living many many miles from Houston be able to get to work, school, shops etc?

    There are reasons for zoning regulations. I'm not saying they're being applied for anything like the right reasons in Australia, but urban growth boundaries are a Good Thing.

    (See Urban Growth Boundary article on Wikipedia, specifically as it is implemented in Oregon.)

    The hard part about planning is how to encourage redevelopment of brownfield land, of which there is plenty in exactly the areas you want people living. If greenfield land is too cheap, you end up with people a long way from services.

  11. I wonder about the impact on the environment without any controls or regulation on development. Do the cities you mention have environmental problems or are they on par with the reletively excellent environmental protections we have in AU?

    Also, without some degree of control on commercial/industrial development, I wonder if there'd be much heavy industry in the 'burbs. I can see the 'not in my backyard' attitude festering..

    It really pains me to read that the only way to have affordable housing in Australia is to allow big development companies to do as they please, i thought this was already the case in NSW??

  12. It's not like Houston hasn't had house price issues in the past, specifically in the '80s. Houston is landlocked, BTW, it is NOT a coastal city.

    Houston is also extremely car-dependent, as is almost all of Texas. Sprawl that would undoubtedly result from relaxing land use regulations merely reinforces this; if the public insists on public transit a council and regional district quickly finds itself in trouble.

    This has been the case, even in Vancouver, where developments far from the downtown core have led to significant strains on the public transit infrastructure. Traffic is a mess due to the reliance on large bridges to facilitate transportation to various parts of the city. The whole region ends up paying for those who choose to live far from city centres then demand public transit access from their local representatives.

    Perhaps a made-in-Australia solution reducing land use restrictions and red tape can be made to work. It could, for example, require public transit infrastructure levies and penalties for larger lot sizes. That's not restrictive in terms of providing housing quickly but provides properly aligned incentives for externalities in the interest of a denser, sustainable, and more livable cityscape. It's always going to be a question of who pays for expansion: new residents, the city as a whole, or a combination of both.

    There are other ways of handling housing bubbles; citing land use as a solution without investigating other methods isn't being genuine, but I'm expecting they will be acknowledged at some point.

  13. Sorry Leith, I can't agree with this analysis because the causality between liberal policies and housing affordability hasn't been established properly.

    The fact that it works in a certain region isn't proof that it always works this way. I need only point at Europe, like someone else already has, to show an example of heavily regulated zoning policies without the ridiculous prices such as in Australia.

    I agree with most of your analysis on this blog but your regulation vs. affordability analysis relies too much on the Texan examples.

    Urban sprawl perhaps isn't as much of a problem elsewhere because there are many more city centre's (CBD's) in other countries?

  14. You've clearly never been to Houston yourself. I can see that Jacqui might disagree, but I think Houston (personal experience here) is a shithole. Unless you have a car… Sure, there's *the* tram line, but walkability? No. And don't even think of catching the bus. Try riding a bike through Houston. I have. Not fun, unless you enjoy being abused and nearly run over by people in "trucks" (think Ford F450, with just 1 person and no trailer), who think you don't have the right to live, let alone ride a bike on a road.

    Why don't you compare Houston with Austin, TX? Austin is around 1/30 the size of Houston in population, has the same unrestricted planning controls, but the prices are around 50% higher than those of Houston. Why? Because Austin is a desirable place to live. Houston sucks.

    Seriously, I would much rather Australian cities copy the example of Paris, Amsterdam or Vienna over Houston.

  15. Leith

    Again top effort and thanks for highlighting the issue of state property taxes. Living in Perth and being involved in the development industry here, the major constraint to land supply is govt and local authority policies which make it difficult to achieve a rezoning and are inconsistent in their application due to competing requirements between planning, environment and engineering.

    The catch cry of govt planners is always 'Proper and orderly planning' when they don't have an answer or solution to a problem. It's a convenient phrase to hide behind to deflect attention from critical development issues.

    I go back to your last article and comments made that developers work in concert to limit it land supply in order to drive up prices and reduce competition. Certainly in Perth nothing could be further from the truth and speaking to colleagues on the east coast they are in agreement.

    Govt sees us as their natural enemy and more often than not will do all they can to delay the development process which adds to the cost borne by the end user and leads to the land supply shortages and the ever increasing and shortened boom/bust cycles I believe will damage the market due to speculation. Of course the only winner in delaying the development process is the state govt and local authorities who can derive a couple of years of 'bonus' tax revenue!

    I read on here how developers are making big profits by limiting land supply. Our preference is always to release as much as possible to the market which the market will buy. It's never in our interest to sit on developed lots or not develop lots where there has been significant infrastructure investment made as these costs need to be repaid quickly.

    Hugh Pavletich is of the opinion developers sit on land to boost profits. On a smaller project 200-300 lots if this was the case the developer would go broken due to holding costs and finance charges. On larger projects 500+ lots staged releases are a reality in as much to protect the value of those buyers who purchase in the early stages of a project when demand is uncertain. Many buyers wait until a project is successful before buying in.

    When acquiring a project we model the feasibility based on future projections relating to time, cost and sales revenue. This means there is less certainty in the future than at the time of acquisition. If I was acquiring a 1000 lot subdivision (assuming of course I could find a parcel of land which the govt would allow me to rezone)and knew I could develop and sell all 1000 lots at once for a reasonable return I would. I would rather have the certainty of the project than sitting on land as happened in the last market downturn when values dropped significantly.

    Of course if Hugh wants to talk about developers sitting on land perhaps Leith you could do an expose` on the govt land agencies such as LandCorp in WA or LandCom in NSW who control massive tracts of land on behalf of the govt and act as developers in a non-competitive environment free of funding costs and state taxation requirements to maximise revenue return to the govt.

    I for one would prefer the Houston type model here for Perth and I know many other developers would as well. The opportunity to create more affordable as well as more diverse and interesting projects which respond to the market is something most credible and professional developers aspire to.

    Cheers,
    Kim

    Ps. Leith I saw your cousin Peter here in Perth over the new year. I mentioned your blog and suggested you guys should get together to take your thoughts to the wide community via his column in The Australian.

  16. So,
    Because we have such prescriptive use of land in Australia, we dont have development to ease speculative demand. Without this vent, (and ponzi schemes like negative gearing) we have an undersupply of housing leading to higher prices. Therefore there is no bubble?

  17. Leith … excellent research and clear publication of findings.

    I have heard the Switzerland has quite a good model, while different to Huston I'd be very interested to compare the 3 (Texas, Australia and the Cantons). At the risk of putting in a request it would be great to see this (and I don't have the exposure to the right resources myself)

  18. Good article Leith, always nice to see two of my recent comments in the subject matter 🙂

    Like Uriah, loving this blog!

  19. Leith, you say that government has been "pumping demand and restricting supply in order to preserve government finances".
    It would be much better to say that government has been "poking demand and choking supply". I think that has a better ring to it.

  20. Timmy from Trug.

    Great article Leith,

    I am always in a big fan of ANY comparison between better performing planning ideologies against ours.

    One small question however – it seems that some of Houston's success falls on the fact that developers are expected to provide services – from your post:

    "Houston requires developers to build MUDs in such a way that they eventually could be connected to the city’s corresponding infrastructure, but they begin as self-sufficient enterprises."

    What I am wondering is that services such as this come at quite a substantial cost (from an Aust. perspective anyway) and how that would not be in any way just be 'built into' the cost per block etc.. – this question is then continuant to the next thought – governance.

    From your post it seems that Houston appears to create a fertile environment for development with little hindrance from external city governing body – bully to them it seems to be working. But how is all this development (ie. new small cohesive towns) governed from a municipal standpoint ie. rubbish removal, utilities maintenance and additional planning once established? – I ask honestly as I cannot see a developer (once again at least from an Aust. standpoint) investing much in these aspects once the contract of sale has been signed.

    Keep up the good work chief,

    TF

  21. Hi Leith,
    This is the easiest forum to contact you via, this is not directly related to the Houston topic but the current flood emergency in Queensland.

    Could this initiate the long awaited bubble burst?

    -10% of the Australian population live in the affected area.

    -Disaster on a level not seen before in Australia, economically. Fires, cyclones all tend to affect far more localized areas and smaller populations.

    – Flood insurance is fickle in most policies WHEN covered and many morgage holders and home owners will be left with nothing if their policies don't cover them, a likely scenario for a significant percentage of those affected.

    -Housing in flood areas depreciated by damage.

    -Crop loss on a scale probably not seen in Australia before, following close on the heals of the drought which pushed farmers and their communities to their limit.

    What are going to happen to the mortgages on houses lost/damaged which aren't covered. Could this be the tipping point especially when one considers the affect on business and local infrastructure costs as well.

    Look I could go on but the evidence is there for all to see, on a scale not seen before. What a terrible price those communities have paid, as bad as it already is I hope for their sakes it doesn't get worse. I think all our thoughts are with them.
    Regards
    Damian

  22. I am most impressed with the quality of the comments following Leith's article.

    Kim – I applaud you as a developer and your attitutes to these important issues. But we need these attitudes coming through within the industry associations, such as the HIA, UDIA, MBA and the Property Council.

    With the greatest of respect though – on one major point you do contradict yourself in expressing the "need" to keep new pricing elevated, so as not to disapoint recent home buyers.

    I do hope you encourage others within these industry associations to "cut the nonsense" and start dealing with these serious issues – head on.

    And its well past time the Social Agencies and the Church's acted responsibly too, supporting others, allowing affordable housing to be built. The Research Director of the Australian Catholic Bishops Conference sent out an excellent communication to Church / Social Agencies just prior to Christmas. I hope this sees the light of day shortly.

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

  23. Leith van Onselen

    Nice comments once again everyone. I'm stuffed after a busy day, so cannot respond in detail to everyone. Just a few points:

    Jesse – I have written extensively on demand-side issues and solutions. In fact, the early months of this blog were dedicated almost exclusively to these issues. Check out Bringing it Home and Australian Housing Bubble for a nice summary of these issues.

    Housing bubbles require both restricted supply (artificial and/or physical barriers) as well as easy credit to form. Take away either of these and you won't have a housing bubble. Personally, I'd prefer if our governments attacked both sides of the equation.

    AnonNL – there is loads of literature from well-respected economists and researchers linking artificial supply-side constraints with unaffordable housing and housing bubbles. Email me if you want a list of some of these sources.

    Nathan – I have travelled many parts of the USA but not Houston. You might think it sucks, but many Americans obviously don't feel the same way. After all, they are moving there in droves. Even if Austin is 50% more expensive than Houston because of its 'desirability', that would still make it about half as expensive as Australia's capital cities, due largely to Texas' liberal land-use policies.

    Aaron – the greater Houston area is much larger than either Sydney or Melbourne. It has around 6 million people.

    Uriah – I don't know what school of economics I subscribe to – probably a bit of each. I like anything that's intuitive and evidenced-based. If it's illogical and can't be proven empirically, then forget about it.

  24. "I have written extensively on demand-side issues and solutions."

    What I meant is there is reason to believe that it is possible to prevent speculative bubbles in the presence of loose credit, strict land use guidelines, and red tape. It involves reducing the difference in benefits from owning compared to renting, and clawing back any gains investors make from speculation on property. Ensure property is no more than a place to live and give landlords a fair wage for their ongoing operations, and the casino closes down.

  25. Hi Keith,

    I am aware of economics 101 and the relation between supply and demand. 🙂 Maybe I should rephrase:

    I don't think regulation will inevitably lead to housing bubbles. What is important though is the quality of planning and cutting down red-tape making it as easy as possible for developers within the confinements of the regulations, not harder. Less or no regulation will only lead to sprawl, strain on environment, decline of the inner cities etc.

    Again I point to Europe (The Netherlands) where planning and legislation is an absolute necessity. Now, it's not perfect and you will hear developers complain about similar things (consultations being especially long-winded and notorious), but at least it hasn't led to a housing bubble (well, not of the insane proportion of the one in Oz). Dutch government has a very active role in increasing the housing supply, the quality of housing supply and liveliness of cities. It obviously uses statistics and data about demographics as input to plan ahead of the trend.

    The Dutch have basically build a number of new cities from the ground up in the last couple of decades (with Almere being a notable/notorious example).

    Here's an interesting article about Dutch planning:
    http://www.codatu.org/english/publications/proceeding/conference/codatu11/Papers/alpkokin.pdf

    Noteworthy:
    – clear division of tasks, mandates responsibilities between the three levels of government.
    – integration and collaboration between layers of government (unlike 21-council-Adelaide) and different sectors of government.
    – a ministry of spatial planning and environment.
    – long term planning.
    – investment in infrastructure.

  26. "You might think it sucks, but many Americans obviously don't feel the same way. After all, they are moving there in droves"

    Many Americans are obese, but that doesn't make it desirable.

    I'd really like to see a comparison including the Swiss Cantons, as Obakesan suggested. Why not include Vienna in that as well?

  27. When looking at house prices in Houston, one can't ignore the collapse in the 1980's due to the fall in the oil price. This crash, led to vast oversupply of houses due to lack of jobs etc… as residents simply walked out of their homes.

    I think you need to increase your graph range to 1980 to get a better indication on house price stability in Texas. The oil price, like the myth perpetuated about 'Australian property will always rise' is not always high like it is now.

    Look at any 100 year price chart of the oil price.

    While the second major collapse due to GFC in 2007 didn't cause a huge property collapse, the oil price is still well above its average price per barrel.

    It wasn't long ago (Ten years) that petroleum companies in OZ budgeted at $20 a barrel.

  28. Robert Sherlock

    Houston did have a heavy reliance on resources in the 80's It has reduced its % of GDP as Australia has increase its. Look at the iron ore price over the last couple of years 170% increase in one year, has made the oil bubble of the 80's that created the Houston bubble look like nothing.

    Ingredients for mega bubble:
    Booming income (increases demand)
    Available credit (increases demand)
    Restrictive policies (decreases supply)

    Austin is a big city 0.8 million one eighth of Houston's 6 million. Texas had half a million people move their last year. There are some bad areas of Texas but there are some areas that are unmatched anywhere.

    Note Houston's (the city) GDP is about a third of Australia's (the country) GDP. Houston as a country would be 22nd largest GDP.

    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 cheap house there for $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 which has less traffic lights and bigger roads. Note at IKEA in Houston the freeway has a total of 22 lanes.

    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.

  29. AnonNL: I don't think regulation will inevitably lead to housing bubbles. Well, no, because 'regulation' is a term so broad as to be useless. Bubbles occur because there is systematic discounting of downside risk: either because of expectations of greatly increased income from a given asset or expectations of capital gain. Land use control generates expectations of capital gain, since supply is inhibited from responding to demand creating a pattern of rising prices. That makes housing bubbles likely. But a city losing population, for example, is unlikely to have a housing price bubble 🙂

    Cutting off the migration tap would make urban planning in Australia much easier: I don't see that happening, or even being seriously advocated (and I am certainly not doing so).

    Still, 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. (There are regulations, and then there are regulations.)

    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 use 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.

    Anonymous, 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.

  30. To continue on the theme of the difficulties of forecasting, a nice piece on the problems of forecasting is here. Another is here, on Paul Krugman getting things wrong, and wrong in the same direction (this is not a shot at Krugman: I would put him up very high in the ranking of capable predictors, particularly compared to your average urban planner — the issue is forecasting and prediction itself).

  31. Lorenzo,

    Yes, that's exactly what I meant. There are so many factors at play that you simply cannot say regulation equals housing bubble. I agree that it makes it more likely (supply vs demand thingy) but certainly not inevitable.

    Letting go of zoning and regulation altogether may lead to more affordable housing but I dare not think of the many, many other problems it will aggravate. You cannot look at development with a small focus on housing affordability only. Government has to take into account what sprawl will do for infrastructure, environment, social fabric etc.

    After talking to Aussie home owners about property prices and a possible housing bubble I was struck by how ingrained the need to buy a house is over here… as if one's honour depends on it. I also noticed how successful the spruikers have been in installing the "houses double every ten years" mantra. People are convinced paying mortgage is cheaper than rental so I will have to do some real comparison for myself. I'm a skeptic… if that would be the case no one would even know the meaning of the words "negative gearing".

    I think culture and sincere belief in risk-free property is what's fueling the bubble… more so than zoning and regulation.