The Economist on housing supply

I was disappointed with The Economist’s recent special reports on housing. Whilst the reports captured the psychology and the demand-drivers of bubbles well (discussed in an earlier post), they failed to adequately capture the role of supply-side constraints. As far as I could see, the only reference to the supply-side of the housing market were the below paragraphs from the article When the roof fell in:

Work on the relationship between housing supply and bubbles by Edward Glaeser of Harvard University and Joseph Gyourko and Alberto Saiz of the Wharton School suggests that places with relatively elastic supply have fewer bubbles, of shorter duration, than those where the supply is more restricted.

In many respects the recent boom bears this out. Differences in supply constraints can explain much of the striking disparity between American states, from the modest run-up in prices in Texas, where land is easily available, to the huge surge in places like Nevada, where land-use regulations are tighter.

But elasticity is not always a good thing. When the housing market can respond to demand by adding to supply, there is a greater risk of overbuilding. In theory, booms in elastic markets do not last for long because as new housing becomes available it puts pressure on prices, puncturing expectations of further appreciation and popping the bubble. For the 1996-2006 cycle in America Messrs Glaeser, Gyourko and Saiz find that places with more developable land did have shorter booms.

The Economist’s first three paragraphs on housing supply are largely correct. However, in relation to comment that “elasticity is not always a good thing… there is a greater risk of overbuilding”, I would argue that a few thousand empty homes is a small price to pay for avoiding a damaging housing bubble/bust whereby an entire housing market gets drastically over-inflated and then crashes back down to earth.

Consider Atlanta, Georgia. It built too many homes but it’s Median Multiple (median house price divided by median household income) reached a peak of only 3.0 during the recent US housing bubble, before dropping back to 2.3 in 2010.  Now compare Atlanta to the supply-restricted markets of Phoenix, Arizona and Las Vegas, Nevada. Their Median Multiples reached 4.7 and 5.9 respectively, before crashing back down to 2.7 and 2.6 respectively in 2010.

In my opinion, the losses of huge amounts of housing equity in the supply-restricted states are far more damaging than the building of excess homes in supply-responsive states with only small losses in overall housing equity.

After making some worthy observations on the relationship between housing supply and bubbles, The Economist then undoes its good work by citing the experience of Spain and Ireland – two markets that both overbuilt and experienced painful housing bubbles/busts – and use these to discredit the supply-side argument:

But when it comes to the biggest house-price bubble in history, theory does not get you very far. In some places the boom was big enough and irrational enough to suppress price signals from lots of new supply. Instead, availability of land simply fed speculative activity, which has made the popping of the bubble much more painful.

In a report last December the Bank of Spain reckoned that the country has a glut of 700,000-1.1m unsold homes, which will continue to weigh on prices this year. Bernstein Research estimates that these unsold houses will take four to five years to clear, and even that may be too optimistic given high unemployment, the threat of a sovereign-debt crisis and fewer immigrants. It could have been worse: Spanish banks have repossessed huge amounts of land that had not yet been built on, and residential-mortgage standards are rather conservative. But the oversupply means that prices will keep falling. They have dropped by only 16% from their peak in real terms, and Bernstein reckons the eventual fall will be more like 30%.

Ireland’s building boom also went over the top. The government relaxed planning laws, the banks threw money at anything involving cement, and investors gobbled up houses in the expectation that prices could only go up. An Irish government report last October into the country’s “ghost estates” identified more than 2,800 housing developments where construction had been started but not completed. Between them these estates had planning permission for 180,000 units, which roughly translates into a new residence for one in every 25 Irish people.

The Economist couldn’t have chosen two worse examples to discredit the argument that more responsive (‘elastic’) supply helps mitigate the formation of housing bubbles. Had the Economist undertaken a little research, it would have discovered that both Spain and Ireland operated highly restrictive land-use regimes that prevented their markets from quickly responding to increasing levels of demand (from easier credit, population growth and rising incomes) with construction of low-cost/good quality housing where people actually wanted to live. Instead, low quality/high cost ‘dormatory-style’ housing was built in undesirable locations.

A recent paper from the Spanish Institute of Economics explains how the planning system of Spain is highly restrictive and subject to high degrees of political interference and corruption:

Land use regulations in Spain adhere to an extremely interventionist and highly rigid system. A key characteristic is that, although an individual might own the land, the government is empowered to control and implement all processes of urban development. Landowners are not permitted to develop their land without the prior agreement of the local administration…

Municipalities draw up a ‘General Plan’, which provides a three-way land classification: built-up land, developable land (the areas of the community where future development is allowed), and non-developable land (the rest of the territory – agrarian and other uses, where the development process is strictly prohibited, at least until a new plan is accepted). The existence of a ‘development border’ [i.e. urban growth boundary], a line between plots of land on which developers are allowed to build and plots where development is banned, is a key feature of Spain’s land regulation system. In periods of high demand this border creates a rent differential which might fuel the bribes developers are willing to pay to local politicians in exchange for shifting this border to their advantage…

A further feature of this border is that once it has been fixed it is very difficult to remove. The reason for this is that the establishment of the border creates certain rights for the landowners, and the only way to change these would be for the government to acquire the land…

In short, the system of land use regulation in Spain is characterized by its high degree of interventionism and its extremely discretionary nature… The profits of land developers, therefore, depend on many largely discretionary political decisions – the primary one being the fixing of the ‘development border’, the line separating land on which development is allowed from that where it is prohibited – and this provides strong incentives for this lobby to offer bribes to politicians.

And the effect of Spain’s restrictive urban planning structure was summarised as follows in the RICS European Housing Review:

Municipalities where there are few competing development localities have an incentive to restrict land supply in order to encourage increases in local land and property prices and, so, maximise their tax take. There have been complaints that some municipalities, especially in the areas of greatest shortage around the major cities, were adept at this activity in recent years and held back land supply. One consequence was the leapfrogging of development to more distant locations and resultant long commuting times.

It was a similar situation in Ireland where the Government granted planning permits too late in response to rising demand, resulting in the building of large numbers of standardised, small, poor quality homes in satellite locations far away from the major cities. A 2005 paper by the UK’s Policy Exchange explained the Irish supply situation well:

According to Dr Stevenson of UCD Dublin, development for new housing actually took off much too late. “In the early years of the boom, we did not see much building in Ireland”… Because supply was late to meet demand, by the time construction activity actually took off it was too late to deal with the backlog in a reasonable way. All that planners and developers could do was try to satisfy the huge pent-up demand quickly. The result was a quick fix, not a thoroughly reasoned solution…

First, large numbers of flats – something the Irish were not used to – went up, in the form of large apartment-blocks. Second, whole new housing colonies were built, often consisting of hundreds of virtually identical semi-detached or terraced houses lacking any individual character. However, these were often far away from existing amenities, hardly provided any amenities themselves, were poorly built, and served as dormitory towns for existing cities (mainly Dublin). They were also much smaller than comparable houses built twenty or thirty years ago…

To sum up, in the words of Dr Brendan Williams: “The quantity of our supply is very, very good. The quality leaves a lot to be desired”…

Much of the hasty development that Ireland has seen over the past few years could have been avoided if supply had reacted earlier and in a more flexible way to rising demand. But in the early years of the boom, central government had still not realised how important it was to encourage housing development, and local councils, left alone without an independent tax base and lacking the incentives as well as the means to engage in proactive planning, did not plan for enough new houses.

Then, when it was almost too late and prices had already skyrocketed, the government realised the dangers of this situation and encouraged building. But, as Ronan O’Driscoll put it, “the government only thinks in numbers and units” – thus failing to understand that good, flexible and strong supply means more than just “throwing in a few hundred two-storey, three bedrooms semis” (Liam O’Donnell). And this “thinking in numbers” was passed down from central government to local planners, who could basically declare that they had done their jobs properly if they could only show that their numbers had gone up. The quality of these developments does not appear in the statistics and is hard to quantify anyway.

And the outcome of Ireland’s restrictive urban planning regime was summarised by Michael Warby in the March issue of Quadrant:

In Ireland, local government areas with the highest vacancy rates were the most liberal in releasing land, while the areas with the lowest vacancy rates were the most restrictive. This led to the worst of both worlds, as housing estates were built where they were permitted, rather than where the demand was, while quantity controls in the more desirable areas still drove prices up. The post-bust result is empty estates of unwanted housing.

Market stock versus bubble stock:

The Economist appears to have made the classic economist’s mistake of focussing only on the quantity of homes built relative to the population, and ignored the cost and responsiveness of supply, as well as qualitative factors such as the quality, size and location of the new housing. In doing so, it has assumed that the supply-side responses in Spain and Ireland were adequate, and wrongly suggested that responsive (‘elastic’) supply is not particularly effective in preventing housing bubbles.

It’s important at this juncture to distinguish between ‘market stock’ and ‘bubble stock’. As explained by Hugh Pavletich, co-author of the Annual Demographia Housing Affordability Surveys, new ‘market stock’ is housing construction of: (a) the type the market wants; (b) where it wants it; and (c) within sound Development Ratios (e.g. 20% land cost and 80% construction cost). By contrast, new ‘bubble stock’ is: (a) where people don’t want it but the planners force it to be (e.g. high rise poky apartments within the urban boundaries or poorly located homes in satellite cities outside of the urban boundaries); (b) of the type real buyers – not speculators – don’t want; and (c) outside sound and normal Development Ratios (e.g. 50% land cost and 50% construction cost).

Texas and Georgia, which have consistently provided family homes for $150,000 on the urban fringe of their major cities (comprising $30,000 land cost; $120,000 construction cost) are clear examples of ‘market stock’. By contrast, the expensive poorly-located construction in Ireland, Spain, Miami, etc are examples of ‘bubble stock’.

The project times for high rise ‘bubble stock’ can also take many years, which impedes the ability of supply to respond adequately to demand. By contrast, normal ‘market stock’ in the form of single family homes is typically much quicker and more responsive, provided there is a ready supply of serviced lots on the fringes (not the case in Australia).

Little wonder then that due to the long lead times inherent in high rise ‘bubble stock’, much of the new supply was completed just as the global housing bubble burst. Miami was a classic example of this. The Gold Coast in Australia looks to be playing out the same way.

Ultimately, the question of whether there is adequate housing supply has little to do with the physical number of homes built relative to population growth. Rather, what is important is the relative gap between new home prices and the cost of construction. Whenever you have a major gap between the two – as exists in Australia where small land lots typically cost around $200,000 – there must be regulatory or physical barriers inflating land values and driving a wedge in the market.

Cheers Leith

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Unconventional Economist
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  1. Robert Sherlock

    A great article, goes to the important point that doesnt seem to make sense, that in a restricted housing market more houses that are needed will be built!

    Because of the high costs and long time frame developers can only rapidly develop houses in Australia during a price boom. During the boom they do it at a pace that is not linked to a stable demand and much of the demand are from “investors” chasing capital gains.

    Iron Ore bubble is the same, demand went up, supply could not match and then construction of new mines only started once price exceeded a certain high point, it looks like supply is going to increase over the next few years as demand is dropping. Then price drops causing the mines (that are only feasible at high prices) to close.

    • It makes perfect sense why this happens. When demand is tight, price increases disproportionately and creates the perception of above market rates of return, to which capital is of course attracted to.

      Due to the lag impact on investments in this sector, supply does not immediately improve, meaning that demand continues growing and encourages still more price growth and further capital to be poured in to exploit perceived returns.

      Unfortunately for a number of these countries and US states, due to the changed economic environment, this excess investment funded land and housing supply has come online just in time to confront almost non-existent demand, oversupply in existing market stock and falling asset prices…a nice combination which adds further gravity to the downward spiral.

      • Aaron, your last paragraph is pretty much the outcome envisaged here, as witnessed early in the Sunshine Coast and Gold Coast.

        I dare say Victoria is next with its massive supply coming on line and the vast number of apartments under construction.

        Sydney will likely suffer price declines because of the lack of responsive supply, not to overbuilding.

        • Prince, you’re probably right about Victoria being next and I think it may be happening now…The HIA Chief Spruker (read economist) Harley Dale delivered a briefing in Feb in which he claimed that annual sales of residential building blocks have dropped by 74% versus this time last year (though it’s hard to validate this number without the data.)

 (slide 24)

          Still, we’ll know shortly.

  2. Yet overbuilding in markets without “supply restrictions” can be almost as destabilizing. A Georgian family buying a house for a reasonable price-income will still experience price declines due to overupply. Significant overbuilding leads to commensurate labour force and finance distortions. Atlanta’s prices are down 12% from their peaks, hardly stable prices at all, is ground zero for FDIC’s infamous “Bank Failure Friday”, and has an unemployment rate over 10%. These are hardly things to cheer about as proof of an abject success of supply side freemarketism.

    The elephant in the room seems to be access to credit. Solve that, as some countries and states have done, and bubbles are loath to form.

    • True. Atlanta houses have fallen in value by around $50k peak to trough. But compare this to Phoenix, Las Vegas, California, Florida and other supply constrained bubble markets which are down well over $150k. Which situation do you think is worse? Seems fairly obvious to me. And don’t use the unemployment card – most states are suffering high rates. The point is that responsive supply mitigates damaging housing bubbles. But it is not the only solution – credit also needs to be controlled.

      As I have said many times, Texas appears to have the best system. Due to its responsive supply and mortgage consumer protection laws, it has achieved a better outcome than Atlanta – no price bubble and no overbuilding. They got both the supply and demand side right.

      • “The point is that responsive supply mitigates damaging housing bubbles”

        Responsive supply mitigates higher prices. But it did little to ameliorate over-investment in an asset class which is a bubble in its own right. Texas’s unemployment rate is below the national average, as are the majority of states, while Georgia’s is now above. Through the bubble Georgia’s UE rate was below the national average.

        Local banks in Georgia have experienced a disproportionate amount of the fallout, as have Georgia’s workforce that heavily geared itself towards construction and financing.

        From what I can tell, the damage from credit bubbles has had the largest effect on an economy by far. I don’t know if it’s fair to say that Georgia has come out much better from its land use policies: its foreclosure rate is high relative to peer states.

        Now having said that, what US states other than Texas have consumer property lending protection legislation?

        • Surely you are not suggesting that Georgia’s situation would have been better had they operated a more restrictive planning regime?

          The point is, even with the high concentration of sub prime and predatory lending in Georgia, house prices only reached a peak of 3.0 times incomes in 2006 (i.e. were still affordable). And prices in Atlanta haven’t experienced anywhere near the price volatility of Las Vegas and Phoenix (two comparable in-land cities).

        • “you are not suggesting that Georgia’s situation would have been better had they operated a more restrictive planning regime”

          I argue the effect is close to immeasurable if lending is restricted. Well, let me put it this way: is there an example of a state or county with strict lending protections and restrictive land use policies that experienced a bubble?

    • Why do you write with a negative connotation for price declines in housing? It just shows it was too expensive before, for whatever reason, and is now becomming more affordable – definitely a good thing.

      • And paradoxically, tightening up credit standards (i.e increasing deposit requirement to 20% minimum) use fundamental valuations (Value = annual marketable rent divided by risk free rate of return (e.g government bond), not market valuation) and increasing interest rates actually makes homes more affordable.

        Responsive supply plus restricted credit supply = properly priced housing

        We’ve got it arse-about in this country.

        Tightly regulated housing supply and a free-for-all moral hazardous credit supply.

        • Do you see it changing any time soon? If not, then you can’t really be expecting any significant fall in house prices. House prices are supported by many fundamentals, two of which are restricted supply and freely available credit.

          • I expect a significant fall in house prices.

            I think it’s primarily a simple argument that is often overcomplicated.

            People think of demand as the number of immigrants coming to our country plus our birth rate, and supply as the amount of land made available by councils. This is looking only at certain factors which INFLUENCE supply and demand, but by no means the total supply and demand figures. In this fairytale world, prices could only go up, because population increases and land stays the same.

            However, they have no understanding of the impacts of speculative investments on a market.

            When prices look like they’re going up, more people hold on to houses. It’s just common sense. After all they are making good returns, so why sell? More people also buy houses (everyone else is making good money so why not join in?).

            This translates to saying: an upward trending market itself creates less supply and more demand, so it makes the prices go up even more.

            This causes the prices to go too far, and ultimately in need of a correction.

            When prices stop looking like they’re going up, and that they may even go down (least affordable housing in the world, end of grants that stimulated the market, return of higher interest rates, fear of commodity bubble in China, [I could keep going but I think you get the point]) more people sell their houses (why would they hold an asset that won’t give any ROI?) and less people buy houses (why invest in something that gives you no ROI?).

            This translates to saying ‘when a market is perceived to have peaked the speculative buyers will switch to sellers. Prices will then fall to find a support level.

            This is bread and butter stuff to a day trader. They are very used to ideas of peaks and troughs, support and resistance levels. It happens every day on the share market. Only a fool would see a share increase in price every day for 5 days and conclude that the price could only go up from there.

            People think the housing market is different because ‘everyone needs a home’ but they are wrong, because 50% of the properties sold in the last 10 years have been sold to investors, not homeowners. The existence of so many investors in the market will make it behave just like any other speculative market. After all, all the price increases we have had in the last 10 years have directly correlated with an increase in investor activity.

            The savvy investor would look for signs of a turning point and get out before the inevitable correction. I dare say, the savvy investors have already sold by now.

            Many others are just starting to catch the idea and accordingly we’ve had more than a 50% increase in supply on in the last 6 months, with 9 times more properties listed in the last week than in a typical week 6 months ago (1877 last 7 days compared to circa 200 6 months ago). There are many other sources you could go to verify similar findings.

            But now these investors will simply be joining a queue to leave the market, and find very few people taking them up on the offer. After all, half of the demand that got prices to the current levels are the exact people who are now switching over to the supply side of the market.

            Were this to all happen frequently and openly, it would merely be price corrections. But when it gets so overly exaggerated in its price increases, with prices often going up four or fivefold in merely 15 years, well you gotta expect the downturn to be more exaggerated too.

            And that is what a bubble is all about.

  3. “Atlanta’s prices are down 12% from their peaks, hardly stable prices at all, is ground zero for FDIC’s infamous “Bank Failure Friday”, and has an unemployment rate over 10%”

    One thing I notice about the oft-cited example of Houston, Texas is the very low median household income – around half that of Australia – and the fact that the rate of both personal and property crime is around twice the US average.

    This leads me to wonder about the quality of life in the outer fringe areas. There does seem to be some suggestion that Houston has a fringe of slum-type areas with high rates of poverty and crime, something similar to the old, run-down housing comission estates in Australia. There also seems to be some suggestion that as you move inward, unit prices weren’t that much cheaper than in Sydney (in comparable suburbs).

    Perhaps having a fringe of poor districts serves to pull down the median overall? Energy-rich states such as Texas also experienced their own bursting house price bubble in the 1980’s (albeit smaller), no doubt leaving an unpleasant memory, not as readily repeated.

    I agree that the elephant in the room is easy access to credit. The vendor may desire to sell for 10 times my income, I may desire to (unwisely) buy for that price but unless I can readily access such risky levels of finance, the sale will not go ahead and prices will not rise that much.

    We know that we restrictions have not been severe enough to prevent us from building all the houses we actually need to live in so the only real issue is pricing. And the ability for prices to rise is intrinsically linked to the availibility of credit. Place some sensible restrictions on that and you won’t have a bubble.

    • There are two different issues here. One is bubbles in housing prices. While quantity controls on an asset are not necessary for asset bubbles, they do make them both much more likely and (evidence suggests) more severe. Restrictions on the ability to borrow to purchase could both reduce the intensity of the bubbles and the exposure of the banking system to a collapse. I make a suggestion about a simple rule to do that here. I do not claim that it would stop asset bubbles, merely reduce their intensity and the systemic risk they generate.

      The other problem is elevated prices. You cannot have effective (i.e. genuinely constraining) quantity controls without having price effects. We have such controls in Oz. How can we tell? Rents.

      Also, median household data is sensitive to the size of households. It is always worth checking the average size of households before comparing median household income data. (Clearly, increased quantity controls will tend to encourage larger average household sizes as people clump together more.)

    • Lefty. According to Demographia, Houston’s median household income was $54,500 in 2010 versus $63,100 in Melbourne and $66,200 in Sydney. I am not sure where you have gotten your figures from. Also, Houston’s median (average) house price is currently only $139,000 ($196,879) (click here to see for yourself). So I don’t know where you came up with the “as you move inward, unit prices weren’t that much cheaper than in Sydney” comment from. Clearly the statistics do not back-up this claim.

      I cannot comment on the crime statistic. You are probably correct – Texas does have lots of guns!

      • Careful Leith! You may rightly have the facts and analysis on housing supply, but the gun argument is a whole other kettle of fish.

        Chronic poverty (and the attendant crime) in the USA is not due to a gun culture, but a social culture: a lack of basic welfare services (particularly healthcare and education), an overwhelming authoritarian bent against (some) drugs, an entrenched entitlement culture and a 200 plus year history of geography, racism and demographics.

        Note that Australia actually has similar crime levels to the parts of the USA not affected by chronic poverty (e.g not in Chicago, Detroit, Washington DC, The Deep South). Even though those areas have 10-100 times more firearms per capita. (e.g Vermont has no gun laws, high gun ownership and almost zero crime. It has also has high GDP per capita and almost zero poverty.)

        Sorry, its my high horse, but let’s not confuse an absence of guns with an absence of crime.

        • True. Switzerland is another example; they take the “armed militia” principle to its limit and MANDATE every male to keep and maintain a government issued gun at home. Crime is VE-E-E-E-E-RY low.

        • Tell me about it Phil! I was in Switzerland last year and loved it (even though as expensive as Australia to live in – was a shock after travelling through Italy!)

          The gunstores next to Prada on the main streets were eye opening.

          Another side effect of the militia rule is the reduced defence spending, something Australia can learn from. Switzerlands “fourth” arm of defence are mountains. Our’s is the sea.

          For full unAustralian activities disclosure, I’m a competitive sport shooter so I have a bias here!

          It’s not a “Joye-ous” bias, however.

    • Robert Sherlock

      “This leads me to wonder about the quality of life in the outer fringe areas. There does seem to be some suggestion that Houston has a fringe of slum-type areas with high rates of poverty and crime”

      The Woodlands in the outer fringe of Houston would have the highest income out of any suburb in any Australia city as well as the lowest median! It is a great place with low crime and a person on minimum wage can buy an entry level house in that suburb. But it is known for its millionares and luxury lifestyle.

      Other suburbs that are out on the fringe include Katy, Kingwood, Sugarland, Kemah google photos and information about this suburbs for yourself. These suburbs in Australia would be reserved only for the millionares but minimum wage can afford to buy the entry level in those places.

      As prices for everything in Australia are three times the price and taxes are much higher I would say that the purchasing power of a 30k wage in Houston would be more than 100k in Australia!

    • Lefty, in the States, it is more common for the lower income areas in cities to be central and the upper income (and hence house prices) areas are in the middle ring or outer areas.

      The jobs in these cities aren’t located in the city, i.e., the central business district and the central city district don’t spatially overlap. Mind you, they don’t in Melbourne either. The CBD is a good 10km or so to the west of the spatial centre of the city, thanks to the massive extent of the city to the south and east.

  4. To understand the high rate of foreclosures and bank failures in low-price, high-build-rate Atlanta Georgia, you need to read THIS:

    Bear in mind it was written in the year 2000: “The Trillion Dollar Bank Shakedown that Bodes Ill for our Cities”

    Leith is quite right; there is a lot less damage done to an economy where a few thousand too many houses are built, compared to where every property in the entire housing stock is inflated in price by six figures. But Georgia’s politically driven “subprime” lending mania resulted in masses of unemployed solo mums and indigents and social pathology cases getting $80,000 mortgages that they then defaulted on.

    While the NUMBERS of mortgages, and of tinpot “community” banks, were high in Atlanta, the values were absurdly low. Seeing new houses were available for $120,000, older stock went for as little as $40,000 even before the crash.

    One of the things that also need to be grasped about Atlanta, is that highly “dispersed” employment and mixed land use, leads to a much shallower gradient to the slope of “land values”. The factor between the least expensive land and the most expensive might be as low as “3”; whereas in a highly monocentric city it might be “100”.

    The “subprime” crisis in Atlanta involved thousands of the most hopeless people in society being given mortgages of $40,000 to $80,000, that even then, they could not service. The “subprime” crisis in California, on the other hand, involved thousands of yuppie couples being given mortgages of $400,000 to $2,000,000 that they could not service. Which is worst?

    • “The “subprime” crisis in Atlanta involved thousands of the most hopeless people in society being given mortgages of $40,000 to $80,000, that even then, they could not service.”

      So Atlanta ended up building cheap fringe housing sold to lower income tiers. That doesn’t sound like a prudent use of land when the occupants couldn’t afford it regardless of the price. It will remain to be seen how the housing quality in Atlanta fares vis a vis areas with higher land costs.

      • My point is a city with high unemployment, high foreclosure rates and low prices seems to have some quality problems: the assertion was made that an older house is trading at close to zero land value. I’m familiar with Atlanta — nice city — but overbuilding is going to have some long-term consequences regardless of land values.

        Again, for an alternative comparison, we should restrict credit for housing and then benchmark a city like Atlanta/Dallas against a city like Phoenix, then make some calls about decentralized/fast-response supply side effects.

  5. “Lefty” said about Houston: “….There also seems to be some suggestion that as you move inward, unit prices weren’t that much cheaper than in Sydney (in comparable suburbs)…..”

    Totally untrue. The land price curve gradient in Sydney is FAR steeper than in Houston. The closer to the “centre” you get, the WORSE overpriced Sydney is by comparison. Houston has $120,000 fringe homes and $150,000 inner city condos; Sydney has $450,000 fringe homes and $2,000,000 inner city condos.

    I echo what Leith said: wherever is “Lefty” getting his “facts” from?

  6. Lefty also said:

    “…..Perhaps having a fringe of poor districts serves to pull down the median overall?….”

    The reason we USE a median, is because it is far LESS prone to being “pulled down” (or up) than an AVERAGE is.

  7. Paul Cheshire and his colleagues at the London School of Economics have been doing some of the best analysis in the world on this issue. They have 5 decades of British “urban containment” policies to go by.

    The interesting thing is that no-one has ever taked about “loose credit” in Britain, or “easy lending standards”; yet their house price cycle has long been the most volatile in the world.

    Some of these other nations we are discussing, are in the early stages. It is quite right that slow “supply” response means that the “building” comes far too late in the PRICE cycle; what has happened meanwhile is mad speculation in the price of LAND. Those thousands of homes have been built, once they are built, on “bubble priced” land.

    Cheshire and his colleagues, also Wendell Cox, Shlomo Angel and his colleagues, Alan Evans and his colleagues, Richard Morrill (to name but a few) all point out that the “supply” of FRINGE land for development has to exceed 20 years if speculative bubbles are to be avoided. “Brownfields” land and “fragmented” land WITHIN the fringe has NO “price vent” effect. It is land at AGRICULTURAL prices that is the “vent”, and this needs to be in amounts that result in “speculative” activity being LESS PROFITABLE than immediate development.

    But back to the “timing” mismatch between rising prices, and housing “supply”: the result in Britain, of this having occurred repeatedly, is the emasculation of the building industry. The “supply” response to each price inflation has WEAKENED, worsening the volatility of the “peak”; and the number of people working in the building industry has steadily dropped, in spite of the fact that Britain has a QUANTIFIABLE shortage of homes numbering in the Millions.

    I have said all this before and more; and won’t repeat it now. Australia doesn’t have to go down this track.

  8. Regulatory barriers and unintended consequences. Barriers to entry on the demand side can become barriers to exit on the supply side.

    In Ireland, Bubble dynamics have had their way on house/land prices. House prices are down 50%-70% and undeveloped land up to 90%.

    A rural lot (that I looked at) for residential purposes comes with the caveat: ” local restrictions apply.” This may partain to principle place of residence, native/expatriate, and type, style, size,of proposed house as well as location on lot. All of this is only the tip of the iceberg. 18 months to 2 years to process.

    Even though the price has dropped by 90% there are no buyers. Regulatory barriers have driven off 90% of potential buyers.

    But wait, there’s more. The farmer who paid for the subdivision is now caught in a bind. Rural commercial tax rates on the farm as well as rural residential tax rates on the unsold rural residential lot.

    So even if I wanted to buy at a 90% discount price and 90% of potential competition warned off, I would still face a standoff with the local council.

    Certainly adds new meaning to regulatory capture. The regulatory armies have beaten both the supply and demand armies to a pulp.
    An 80% mortgage application rejection rate.

    Add to this the new round of exiles that are of prime household formation age.

    This market is FUBAR. A 26 year coma a la Japanese residential housing market awaits. Matching bookends for the Eurasian land mass.