The 1980s Texas housing bubble myth

Over the past few months, I have argued feverishly that housing markets with responsive land supply are both more affordable and less prone to bubbles/busts than markets where land supply is constrained by physical and/or regulatory barriers.

In many of these articles, I have used Texas as an example of a housing market largely free of supply constraints, where home prices have remained both affordable and stable, despite both high population growth and similar, albeit slightly more regulated, credit conditions as other US states.

In the comments threads of these articles, a number of commentors have argued that the responsive supply argument is invalid because Texas experienced a major housing bubble in the early 1980s.

For example, in the comments thread of my recent article, US housing: what happened to the underlying demand?, fellow blogger Cameron Murray said the following about Houston, Texas:

The other evidence to add is that Houston, the poster child of free land markets, suffered a massive bubble in the 1980s and was still recovering from it when that latest national bubble popped.

That suggests that free land markets do not have the price impacts you are suggesting.

Cam and others have made similar claims before in order to discredit the responsive supply argument. To them, the supply-side of the housing market is irrelevant and has little impact on home prices.

It’s time to set the record straight. Did Texas experience a housing bubble? Or did Texas’ flexible land/housing supply assist in ameliorating swings in demand, thereby ensuring prices remained both affordable and relatively stable?

Before answering these questions, we need to define what constitutes a housing bubble? While there are lots of definitions, I define a housing bubble as a situation where home prices grow far beyond the fundamentals that support them, such as incomes and rents. In my opinion, any discussion of the relative value of housing is meaningless without referencing one of these metrics. Otherwise, we revert to anecdotes, second-hand stories, and down right spruiking, none of which proves anything.

So how does Texas stack-up? While I don’t have any information on rents, Harvard University and Demographia have published Median Multiples – defined as the median house price divided by median household income – for all of the US cities.

The below chart plots the Median Multiple for Texas’ major cities against those of California – a state known for its restrictive land-use regulations and physical land constraints (e.g the sea and mountains).

As you can see, during the so-called “massive bubble in the 1980s”, Texas’ Median Multiples remained between 3.0 and 4.0 times, and were also well below those of California throughout most of this period.

To illustrate Texas’ relative affordability and price stability more clearly, consider the below chart showing the highest, lowest and average Median Multiples over the past 30 years.

It is clear from the above data that Texas’ home prices have been both far more affordable and less volatile than California’s over the past 30 years, consistent with a housing market where land/housing supply is highly responsive. It is also difficult to argue that Texas’ housing market in the 1980s was a “massive bubble” when homes remained relatively affordable throughout the entire period.

What makes Texas’ home price performance in the early 1980s particularly impressive is that prices managed to remain relatively stable in the face of significant demand-side influences that should have caused home prices to rise significantly and then crash.

First, oil prices spiked in the late 1970s/early 1980s before plummeting (see below chart). The surge of oil revenues initially acted as a massive positive income shock, helping to lower unemployment to around 4.5% in 1980. But once the oil price cratered, incomes dropped and unemployment spiked to around 8.5% in 1984 (click to view chart).

Second, Congressional liberalisation of loan standards in 1979, which led to the infamous savings and loan crisis, caused a surge of profligate housing lending in Texas as well as some other states (e.g. Arizona).

Finally, during the Texas oil boom, the state’s population growth accelerated. From 1970 to 1980, as oil prices spiraled upward and people flocked to Texas, its population grew by 2.71% per year, while the nation’s increased at a 1.14% pace.

Put simply, the responsiveness of Texas’ land/housing market helped to ameliorate the wild swings in housing demand, thereby ensuring home prices remained both relatively stable and affordable. The same cannot be said for supply-restricted California.

And Texas’ flexible supply has also helped it to avoid the 2000s housing bubble/bust, as evident by the below Dallas Federal Reserve charts.

First, consider the stability of Texas’ home price indices versus the nation’s.

Second, consider the quarterly change in Texan home values versus the key bubble states of California, Florida and Nevada, as well as the nation as a whole.

The key point to take away from this analysis is that the supply-side of the housing market matters. Whilst commentators can debate whether the demand-side influences are more important or not, to simply dismiss the supply-side altogether as not being important is about as useful as eating Chinese food with only one chopstick.

By all means, let’s crack down on the destructive speculation and easy credit that has fuelled the world’s housing bubbles. At the same time, let’s work to free-up the supply-side barriers that have enabled the credit-fuelled demand to feed into skyrocketing house prices and volatile boom/bust conditions. Only then will we achieve stable and affordable housing markets.

Cheers Leith

[email protected]

www.twitter.com/Leithvo

Comments

  1. Thanks Leith.

    Are you able to elaborate about how Texas performed their land expansion?

    Where I’m going with this is Melbourne’s response has been to continuously push the urban boundary – but IMO without adequate/desirable infrastructure & amenity (eg. public transport, schools, shops, hospitals/medical, etc). Perhaps building/developing new “satellite cities” (eg. Sale, Geelong, Mildura, etc) would be a better method of being responsive to housing supply because they could address the shortcomings above and be quite desirable places to live outside of greater Melbourne.

    • Robert Sherlock

      Satellite cities are normally called Master Planned communities in Texas, Kingwood, The Woodlands, Katy, Sugarland, to name a few in Houston. Massive mini cities with employment centers with town centers, commercial,residential green space and parks. All done without any government input. The Woodlands is the best example of this with planning over many decades that has created one of the best place to live in the USA. With one of the highest disposable incomes in the world and yet one of the most affordable. It’s average income to house price ratio it affordability is at at 1.7 so house prices are about 20 months of income.

      And the worlds biggest oil headquarters is being constructed there.
      http://swamplot.com/aerial-views-of-exxonmobils-new-sprawling-top-secret-houston-headquarters/2011-04-15/

      • Thanks Robert – That is incredible, especially if it was done WITHOUT government input. Now that is the kind of development I would support here.

  2. It’s important to re-iterate that parts of Texas saw significant price growth and subsequent drops in the last decade. Violent price movements in parts of major metropolitan areas are unavoidable regardless of land use, and, yes, restrictions on mortgage lending (that Texas has).

    The point Leith is making is that in Texas, land will be generally be quickly available to build based on market demands. If a family insists on owning, there is rarely a need to overpay in Texas, unless they insist on owning in certain exclusive areas.

    I see the elephant in the room as loose credit — areas that had loose credit and non-restrictive land use policies have still experienced significant fallout as the credit bubble deflates. I haven’t seen much analysis of a region where credit is constrained along with land use as a verification of the land use argument. That is, if a region with strict land use and constrained lending experiences price fluctuations, there is more weight to the land use argument insofar as it keeps land prices low. Nonetheless, whatever Texas is doing should make people look a bit deeper.

    Some food for thought: with housing, price signalling looks to be broken. Making land cheap by flooding the market means there will be no price signals in the conventional sense as with, say, Sydney, but will show up indirectly if people build more house than they can “chew”. Reinstating conventional price signalling should be a primary focus in my view.

    I would like to see a government report analyzing various parts of the world and coming up with an argument why Texas’s (and other’s) model, on both the land supply and credit supply sides, would be inappropriate. Maybe that’s something worth pursuing.

  3. Agreed.

    I have come around somewhat more to Leith’s veiw in that we cannot ignore the supply side and focus only on demand. As always, Leith makes a very good argument.

    However, I continue to argue that the whole point is fairly moot – have “restrictive” supply polices prevented us here in Australia from building all the houses we actually need and probably more? No they haven’t.

    The supply side issue is an interesting point but would only be a major stand out issue it it was truly preventing real need from being filled. It has not not done this nor even prevented apparent overbuilding. I would consider it to be a back-seat issue to jesse’s loose credit elephant in the room. Even if supply were harshly restricted, the price simply cannot blow out if credit is more restrained.

    I therefore submit that the best way forward is sensible restrictions on land use to prevent future problems (though the current ones in place should be reveiwed) and tighter controls on mortgage lending.

    • How can you tell we have built “enough” houses? According to a recent report by the National Housing Supply council, at least 445,000 lower income households pay 30 per cent or more of their gross household income in rent; around 170,000 Australian households pay more than half their gross household income in rent.

      There are two parts to this. Rents tell the story on supply and demand. Prices based on expectations of capital gain beyond reasonable income value tell the “bubble” story. Without the restrictions on land supply, not only would rents not be so high, it would be much more difficult for prices to inflate so dramatically and so persistently.

      • The very large disparity between the growth in dwelling prices and growth in rental yields tells the story Lorenzo. Were there a real shortage of dwellings overall, rents should have roared upwards at pace with house prices but they have not. You are making it sound as though rents have boomed – they have not. This isn’t to suggest that some people are not struggling to afford rental costs.

        As far as I can discern, most developed countries seem to have land use policies more restrictive than Texas – would you argue that most of the developed world therefore has a shortage of housing? Like the shortage they had in Ireland? Or the shortage they had in the US? And so on.

        I read a study a while ago that identified large numbers of vacant residential properties in Melbourne. I will link to it if I can find it again. If there is a shortage relative to actual need, it should be difficult to find significant numbers of vacant houses.

      • Using the rents argument is a straw man. The whole supply-side debate, as I have framed it, is not whether we have actual housing shortages, but whether low cost supply is able to quickly respond to changes in demand, thereby dampening price volatility. If the supply response is slow, as it is in California and Australia, you are more likely to get boom/bust conditions as demand first rises (much of which is speculative based on perceived shortages) and then evapourates. This is the key difference between the coastal markets of the USA (plus Nevada and Arizona) and the other markets. Where supply constraints exist, be they regulatory or physical, price volatility has been greater and affordability lower.

      • A straw man for what Leith?

        You and I simply favour two different approaches – you favour a more free market solution while I favour a more planning and regulation-based approach. Both approaches would probably be effective in preventing runaway speculative bubbles. I’m just not in favour of development free-reign because of potential problems down the track.

        Our housing bubble is a recent phenomonen – I don’t think the regulations you berate are. They didn’t as far as I’m aware, suddenly materialise nationwide and elsewhere at around the turn of the millenium. Plentiful and easy credit is what materialised. No excessively easy credit – no housing price bubble.

        If there were truly a shortage of dwellings relative to actual need, then it would lead me to suspect that land was not being released fast enough to meet human necessity and you and I would not be having this conversation.

        But this appears not to be the case – in fact, construction appears to have kept pace with population growth for at least most of the bubble – and I am not convinced by arguments that sharp reductions in planning are either necessary or desirable.

        cheers

      • “Our housing bubble is a recent phenomonen – I don’t think the regulations you berate are”.
        Actually Lefty, many planning tools that strangle available land supply, such as urban growth boundaries, were implemented over the past decade. These artificial barriers helped to ensure that the plentiful and easy credit fed into higher home prices instead of new construction.

        No excessively easy credit – no housing price bubble.”
        The exception to my above comment is Sydney, which has operated more restrictive planning for decades, and has physical barriers to development (e.g. the Blue mountains and state & national parks). Accordingly, Sydney’s median multiple was high (5 times in 1981) even when credit was tightly regulated. By comparison, the median multiples in the other (less supply constrained) capital cities were around 3 times in 1981 (see Figure 2, page 16, here).

        Also, the sustained high median multiples in California over the past 30 years should be evidence enough that the supply-side matters and that addressing credit alone will not achieve stable and affordable markets (though it would obviously assist).

        “I am not convinced by arguments that sharp reductions in planning are either necessary or desirable”.
        Then don’t expect Australia’s housing markets to ever achieve both stability and affordability.

      • No, my point is that the bubble is precisely in the way prices have soared way beyond increases in rents. But that rents in Canberra, for example, are persistently above rents in (for example) inner Western Melbourne is just bizarre.

        And my concern is not so much with rents — though I think there is some issue there — but in precisely the way land restrictions foster bubble prices and, and this is the really dangerous part, encourage debt based on expectations of capital gain beyond rental value.

      • You need to look more at German regulatory structures in particular. It is not regulation per se that is the problem but discretionary control (almost always a disaster waiting to happen) and incentives to drive prices up. This report is enlightening.

      • Utterly clueless.
        Rent for an ordinary house in Sydney has risen from 1/3 an ordinary salary to 1/2 an ordinary salary.
        Of course many cannot afford this and have suffered a loss of quality or moved elsewhere instead.
        There is no reason rents would perfectly track house prices. Rents are paid directly out of salary whereas house prices are paid with borrowed money and hence affected by interest rates and lending standards.
        A supply shortage would cause higher rents and higher prices. This is what happened.

  4. I believe I was one of the people questioning your original article Leith.

    So essentially the amount of houses for sale in Texas in early 80’s was that people didn’t have the money (job) to pay for them as the oil crashed, not because the value of the property changed?

    Could it be that because of the booming oil and gas industry that properties in the crash of 2008 that people in Texas where more insulated and keep their jobs then the rest of the states? Most oil companies still budget on the ‘mean’ oil price not the inflated monthly price due to the numerous variables that effect it. Any extras goes into the bank.

    My father works in the petroleum industry and has vivid memories of visiting Houston and Dallas in early 80’s where every second house had a ‘for sale’ sign. This had changed remarkably by the 90’s where the comment changed that to be that Texas had created some interesting Architecture in comparison to Australia. We decided that this was due to the less restrictive planning laws in Texas.

    That second comment is more in line with my industry. A couple of disgruntled or misinformed neighbours can delay projects for years even if it is proven that the scheme doesn’t affect their property. You’d be surprised at the amount of people who can’t read plans and elevations.

  5. I have come to the view that in regards to rents the real estate industy will push the line of the rent rise, and whilst it may reflect a genuine shortage,I feel that it is more likly the existence of a regular income stream is becoming more valuable when commissions from sales is falling.

    • Being a Chinese I like your analogy “as eating Chinese food with only one chopstick.”

      ps. I am a academic (in Economics/Finance) who follow your blog since mid last year. Keep up the good work

  6. There is a significant counter-example to the argument often advanced by people, that “easy credit” is responsible for these bubbles. That is, the famous housing bubble in Korea in the late 1980’s, where median multiples in Seoul went to 15. This was in the almost total ABSENCE of a mortgage lending market at all – young Koreans typically worked their butts off and saved enough “cash” to buy their first home.

    In fact, national savings in Korea boomed for years as young people worked and saved harder and harder for longer and longer, chasing a rising target and not actually getting to spend their savings on their first home until the prices crashed. The cause: Korea’s new policy on Green Belts, enacted in the 1970’s.

    Reference:

    Lawrence M. Hannah; Kyung-Hwan Kim; and Edwin S. Mills; (1993) “Land Use Controls and Housing Prices in Korea”; Urban Studies Vol 30 (1)

    • Credit growth for Australian housing jumped from just over 10% pre-bubble to 22% at the peak Phil. Australians working their butts to the bone to accrue large amounts of savings (our household savings actually went negative in 2005) was clearly not the driver of what occured here.

      • Housing credit growth exceeded 20% in 1977, 1985, 1989 and 1994. The theory fails.

      • In Korea?

        I was rebutting YOUR theory that “easy credit” IS “the cause” of these housing bubbles; and pointing out that strangled land supply IS the true cause, because it causes a bubble to occur whether or not credit is easy.

        Whether houses are bought by people saving flat out or borrowing flat out, the bubble is caused by land supply regulations.

      • Phil – how do you buy if the bank doesn’t lend you the money. i.e. credit is restrained. Simply impossible.

        Restricted land supply is a factor not a cause.

      • C’mon Phil, there is much more to the South Korean economy in the 1980s than housing supply.

        For example
        “In the early 1980s, South Korea began to privatize its national commercial banks and lifted government
        restrictions on banking operations. In June 1982, the country halted the prime rate for most of its
        policy-related loans. In 1984, it began to permit financial institutions to adopt self-regulated lending
        rates within certain limits. In December 1988, the government announced the removal of control over
        bank and non-bank lending rates.”

        Also, the document you cite adds that “floor space per capita has increased as dwellings have become larger and families have become smaller”.

        Doesn’t sound too restrictive to me.

  7. The sheer wowserism of planners wanting to “halt sprawl” is breathtaking. “Sprawl” happens fastest in its earliest stages and slowest in its latest stages. Fact. Pre-automotive sprawl actually occurred faster than post-automotive, it was less efficient because it was “ribbon” sprawl based on rails, and local mobility was still based on horse drawn public transport. Roads and cars enabled much more efficient contiguous development and infill.

    Did the planners of the late 1800’s to the 1960’s bleat and grizzle about how hard a job they had planning and funding all this growth? 16 fold expansion in 7 decades is like a historical norm. What we are talking about NOW, is sub – one-percent incremental additions to a fundamentally efficient, market driven form that depends on the cost of urban land remaining low, to continue to generate efficiencies AND social progress. Inflate the cost of land and you lose far more efficiencies than you THOUGHT you were going to gain. But the planning profession just hasn’t “got it”.

  8. Robert Sherlock’s comments about satellite cities is right on.

    It is FAR CHEAPER to plan for growth on greenfields, because the sheer cost of land, long since built out, and NIMBY-ism; makes it uneconomic to try and deal with growth in cities suffering from decades of non-planning for it.

    I pick that Texas and other States that keep urban land costs low, are on their way to becoming the powerhouse of the economy in the USA and possibly the world. China, India, et al, are going to collapse if they do not overcome their stupid urban growth constraints that are strangling their progress and embedding inequality already long before half their people are out of poverty. Their urban growth constraints are more based on political power-broking and outright corruption, but the consequences are the same. Come to think of it, political power broking and corruption explains a lot of OUR constraint policy preferences too.

  9. The disparity between rents and house prices is EVIDENCE that there IS a bubble, not evidence that there isn’t one. It is simply that “investors” think they can gain 10% per year just owning property, so why bother with troublesome tenants? And first home buyers THINK they can save money by buying their home NOW before prices go up 10% next year, and 10% the year after, and so on ad infinitum.

    I KNOW that this is speculative mania, but the fact remains that it wouldn’t happen if supply was responsive enough to keep prices from inflating 10% per year in the first place.

    Furthermore, once you have had multiple cycles of boom and bust, rents WILL go up due to an outright shortage of homes. Boom and bust tends to drive builders out of the business. The Poms tend to know the most about this, having been through it all several times since their loony 1947 Town and Country Planning Act.

  10. Keith MacLennan

    Houston is a very interesting market.
    In the 1970’s A V Jenning Housing and Land Group opened in Houston to build home to order.
    The market looked to be very solid and a great place to enter the US housing market.
    Eventually the new home market grew i think to around 30,000 new homes per annum.
    But then the oil & gas boom popped.
    New home construction fell to so close to zero per it did not matter.
    My recollection of events is that prices did go up much and that the abilty to supply land and housing pretty much matched demand.
    Contrast land supply in Perth.
    In the early 2000’s metroplitan englobo zoned residential land with services abutting could be developed with individual titles being issued within 9 months from lodgement of application to subdivide being made.
    Within 5 years it had blown out to 36 months.
    This certainly pushed prices further than they otherwise have moved if residential land could have been delivered to the market in a timely manner.

    • Do you really believe the nonsense in that document Phil?

      For example “More specifically, the cost of land with permission to build has risen, because the permission to build extra dwellings has become scarce.”

      Except in QLD, where the number of approvals given far outweighed the number sold – so much so that the stock of approved but not constructed dwellings increased 200% between 2002 and 2010, from about 12,000 to over 30,000.

      http://ckmurray.blogspot.com/2011/04/no-evidence-of-supply-side-constraints.html

      Phil, do you believe there is an actual housing shortage and we need more homes? Or do you believe, as Leith does, that a possible delay in the supply response to a demand shock leads to greater price volatility, but in the long run does not have a significant price impact?

      • No. Bubble then bust if not preferable path for any economy if there is an option of smooth growth available. Progress is much easier to come by when the economy is not in a constant readjustment phase.

        We agree, I believe, that prive volatility is not desirable and increases uncertainty.

        However, I don’t believe local governments should take any blame for the house price boom of the past decade due to apparent restrictions on supply.

        Even if what you argue, that there is no overall shortage, but merely planning delays slow the responsiveness of supply, there is still no evidence for that as I have shown with approvals data (at least in SEQ) at my blog. Never was the stock of approved dwellings run down due to demand that could not be matched with new supply.

        Also, to get a real feel for whether Houston had a price bubble you will have to look at rents during the 1980s to see whether prices were high. And make sure to adjust for the high property taxes – around 2.7% pa of the market value (not land value) according to the Harris County Tax office – Texas is a single tax State. That might account for the appearance of low prices to incomes (eg, in Florida the property tax rate is 0.5%).

        I’m sure this debate will continue…

      • Cameron, you are SOOOO in denial over this.

        “……Phil, do you believe there is an actual housing shortage and we need more homes? Or do you believe, as Leith does, that a possible delay in the supply response to a demand shock leads to greater price volatility, but in the long run does not have a significant price impact?”

        I beleive that rationing fringe land or supply of permits to almost ANY quantity, leads to competition between developers to secure supply, it leads to expectations on the part of incumbent land holders, for capital gains, it leads to “holdout” behavior, it raises the risk level of the development industry, it drives some operators out of the industry, it is anti-competitive, and it leads to the most obvious inflation in the price of land when “off limits” land prices are compared to what eventually is offered to home buyers.

        When no land is “off limits”, or at least most of it is not off limits, development is a honest business involving building freakin’ houses efficiently, and no-one even THINKS about the “land” part of the package needing to be any more than 15% to 20% of the total home package.

        I believe that under these conditions it is possible to have “enough” supply, still being sold at “bubble” prices. In that respect, I think David Van Der Klauw has over-simplified his argument. But I believe that an ACTUAL shortage of homes will result in the LONG term, and the TREND to housing unaffordability will worsen. (Draw a trend line through Britain’s several prices spikes over the last few decades and you will see what I mean). If Leith said the prices in the LONG run would remain unaffected by land-supply-induced cyclical volatility, I disagree with him.

        The NZ government in the early 1980’s, sold motor vehicle import quota quantities via Dutch auction. The quantities were “enough” to satisfy market demand each year. Do you think that motor vehicle importers trying to out-bid each other for the supply of quota, did not end up driving the price of cars up – and ultimately the business of importing cars became high-risk, with half of the importers going bust halfway through the third year the govt ran this scheme?

        Why does the term “cornering” supply exist in economic terminology? Are you SURE you are an economist?

      • You are a complete goose Cameron. The document that you attempt to rubbish is about Sydney housing. Therefore your statistics from Queensland have no relevance.

      • So it’s just Sydney with restrictive supply now? What a relief for the rest of us.

        I’m sure you’ll link to the appropriate data to demonstrate the falling stock of approved dwellings in and around Sydney and the massive decline in square meterage per person.

        Although if you read the article the author was quite certain about how broadly his ridiculous notions extend –

        “The housing crisis in Sydney is duplicated throughout the world where similar views and policies are found.
        Every Australian capital city is affected…”

        Yours sincerely,

        Complete Goose

      • So now you are denying that all Australian capital cities have expensive housing.
        Can you point me to the page number where the author states that Queensland suffers from a very low approval rate for dwellings? No, you can’t. Perhaps the problem in Brisbane is caused by some of the other issues mentioned by the author. eg taxes and delays.

  11. I remember that period in Texas very well. In 1983 house prices grew almost 20% while oil prices were already falling; after that house prices stagnate for some time and than crushed almost 20% in 1986-1987 after final oil and S&L (easy credit) bubble bursted. In “real” terms prices fell 30% between 1983 and 1988. In some newly developed areas of Dallas and Houston drop was more significant. We may see the same fall from your median multiples chart it fell 30%+ (from 3.2 to 2.3). So, there was a “bubble burst” in Texas in mid 1980s.
    At the same time I will agree and disagree with you about nature of this “bubble”. Texas house price fall was triggered by oil price slump but mostly caused by huge overbuilding of properties that was riding on easy credit subprime S&L bubble. In 1983 number of new units built increased by 31% but at the same time prices grew almost 20%. Construction was big thing in Texas in early 80s. Endless new developments were built in big cities (Dallas, Houston …) and some of them never used; by 2000 there were still some remains of these developments in outskirts of Dallas. So, we may see that house bubbles could happen in an environment of a responsive land supply if a new construction is driven by easy credit and expectation of “wealthy future”. Shortage of land (low supply) is not the (only) reason why bubbles inflate. We may see similar situation during the last bubble in USA: Florida, Nevada and some other states saw huge overbuilding (supply was at record levels) while these states did not tighten restrictions of new land development. Nobody can say that the reason for price jump in these states was shortage of new houses or restrictions of new land development.

    Now the key question pops up: Why bubble did not happen in northern states in mid 1980s and why it didn’t happen in Texas in 2000s while it appears that the same conditions existed?
    IMHO the reason is real as well as psychological. Mid 1980s situation is pretty much clear: in1980s Texas was a boom state. People earned a lot of money on oil and wanted to invest in something. Everybody saw the opportunity to jump on RE and enjoy the ride. People were expecting endless boom that could mean house prices can go up only. At the same time north was suffering from energy crisis from late 70s and early 80s. Inverse situation happened in late 1980s and early 1990s. Texas was still suffering from oil and RE recession while north and west were on the way up creating next bubble.

    But why Texas didn’t experience bubble in 2000s? This is a hard question. In early 2000s Texas was still recovering from IT bubble burst and more importantly from Enron scandal. Unemployment almost doubled by 2003. Then oil started going up so people invested in commodities instead of RE. Oil price was doubling every 2-3 years during that period while house prices were doubling every 10 years or so. In addition Texas life style kept “remote suburb” dream still alive while it was slowly dying off in other areas pushing the land prices close to cities up. During 2000s Dallas (city proper) recorded slowest population growth in its history – only 0.8% over 10 years, (similar situation in Houston) while suburban and rural areas was growing much faster.
    A&M provides realy good housing data source
    http://recenter.tamu.edu

    • Nice info raveswei. But I disagree with your contention that Texas had a housing bubble. Maybe my definition – a severe departure from fundamentals – is different to yours, but I find it difficult to conclude that a bubble existed when median multiples in all major cities were below 4 times throughout this entire period.

      Further, using percentage increases/decreases can be a little misleading. A 30% rise/fall sounds terrible until you realise that it is from a low (affordable) base. As an illustration, Atlanta (Georgia) has responsive supply, yet prices have fallen 27% peak-to-trough. This sounds terrible, but because prices were already highly affordable (3.0 median multiple), the $ losses in home equity have not been too severe. By comparison, the supply-restricted bubble states of Phoenix (56% fall) and Las Vegas (58% fall) have experienced far greater $ losses of housing equity because their markets were significantly more unaffordable when the bubble burst (i.e. median multiples of 4.7 and 5.9 respectively at the peak).

      As I keep saying, in order to avoid damaging housing bubbles and ensure homes are affordable, we need to address both the demand-side drivers and supply-side constraints.

      P.s. thanks for the link. Great data.

      • Texas did not experienced unaffordability problem during 80s. Texas is well know for low house prices through the history. By your definition based on affordability, there was no bubble, by some other definitions there was. Anyway, that is not so important.
        It is hard to compare bubbles in 80s with 2000s, after late 80s bubble even LA prices did not dropped more than 30% in real terms over 5 years. Texas 1980s “bubble“ was specific in one more way – it was NOT caused by fall in other areas, stock market fall or national credit squeeze as it was in Atlanta in 2008. That “bubble” burst was limited to affordable south-western oil states (TX, LA, OK, CO) and directly related to oil bubble burst and S&L crush. Most of people do not remember S&L (savings and loan associations) crisis. In many ways these associations created similar problem that Mortgage Brokers did during the last bubble. Lack of regulation, tax advantages and government mortgage insurance led to massive sub-prime landing that, among the other things, caused burst.

        It is also true that price fall of 30% from lower levels is smaller problem, but still it creates them. As you said it is important to ensure both demand and supply sides to avoid bubble. Paying attention to one side only may not be enough to avoid bubbles.

      • It is helpful to use the term “house price bubble” and “house construction boom” as two quite different things. Texas in the 1980’s had the latter. The amounts of capital destroyed in the latter are much lower than in the former, this is simple maths. 5,000 too many homes at $120,000 each versus 500,000 homes ALL inflated in price by $200,000?

        And none of the “too many” homes remain empty for long anyway, do they? Because they are affordable, and become even more affordable.

        California illustrates the opposite extreme, where new houses in the desert that should have been $120,000, are $500,000, and then when households have just walked away from their mortgages when the bust comes, the banks/developers etc just bulldoze developments to try and prop the prices up to $300,000 plus – when they SHOULD have been $120,000 all along.

  12. LandDeveloper

    In AU, the land component of a new fringe home is typically 10%-15% of the total cost (excluding Sydney). Holding costs might be a few percent on top of that. So even if one accepts that a responsive planning environment halves the cost of englobo fringe land and halves the time taken to bring land to the market, that’s only a 5%-10% drop in the total cost of the home. Some may argue that 10% saving is significant enough, but as Cam M has explained elsewhere, the Residual Land Valuation method used in property acquisition would soon take care of that saving (i.e. it would likely translate into someone paying more for the englobo land in the first place).

    • Then how do you reconcile the fact 450 square metre blocks on the urban fringe of our major cities are selling for $200k plus? This compares to $30-40k for much larger blocks in Texas. And the land component of new homes in Oz is over 50% of the total cost compared to 20% in Texas. Something is missing from your sums.

      • LandDeveloper

        Ah yes, I see that I wasn’t 100% clear. I was referring to production costs – that is, the cost to the developer rather than the buyer. When buying a house on the urban fringe, you’re quite right that land is “typically” half the buying price.

        But the cost to produce that home comprises raw land, roads, drains, fill, landsaping, charges, fees, floor, walls, roof, marketing, commissions and the like. Of all those costs, the raw land is usually around 10%-15%. So my comment was really that if you halve the cost of englobo land by improving planning restrictions, then it seems to really only translate into a marginal reduction in the overall cost to produce the finished product. That’s because all those other costs are largely unchanged.

        Hopefully I’ve cleared up what I meant to convey.

      • If land is typically half the price when the house is sold but only 10-15% of the price to the seller, then surely Leith’s point has great power. Something is inflating the land price.

      • LandDeveloper

        The 10%-15% is the raw, undeveloped value of the land. When its a finished product (i.e. after roads, drains, sewer, water, power, fibreoptics, engineers fees, landscaping, charges, etc) then yes it is worth “half” the cost of the finished product. But Leith’s arguments about free-ing up land supply only affects the “raw” cost of undeveloped land and this only accounts for a smaller proportion of the finished product. The cost to develop that land is largely constant (ie a road still costs the same)

      • Land Developer. How is it that fringe land has increased so much in cost over the past 10 years yet has shrunk in size? If the raw land is such a small percentage of the total cost, this would imply that the escalation in costs has been caused mostly by a massive blow-out in the other costs that you refer to – e.g. roads, drains, fill, landsaping, charges, fees, floor, walls, roof, marketing, commissions and the like.

        No matter how you cut it, something must have caused the land component of new homes to have escalated from around 20% of the total cost to 50-60%. Restrictive planning and development levies maybe?

        Also, how is it that the high growth markets of Texas and Georgia (amongst other places) can deliver much larger blocks for $30-40k and fully finished large homes for $150k? Are we really that inefficient in Australia?

      • LandDeveloper

        UC – I think you are getting confused about raw land costs as a percentage of production and the implied land “value” for a finished home. It is impossible for raw land to account for 50%-60% of total production costs. That would leave 40%-50% for everything else. For starters, 10% goes in GST, 5% in sales and conveyancing, another 10% in fees and charges, profit and overheads at 20%, and you haven’t even built the roads, drains, footpaths, sewer, water, power, landscaping, retaining walls, street lights, communications, parks, and of course the house itself.

      • According to National Housing Supply Council, raw land alone on fringes of Sydney costs $151k; with other costs related to purchase (stamp duty, interest, fees) it goes up to almost 200k or 1/3 of final cost. This is staggering $151k for 500sqm of agricultural non-developed land. That gives price of $1.2 million per acre or land that was used as agricultural land prior to development. As agricultural land it was worth no more than few $k.

        On the other hand infrastructure charges and land preparation costs only $79k and actual construction $150k. What is interesting is that other costs (beside land cost, preparation and house construction) takes 50% of final cost: RE agents and consultants $40k and government $70k in non-infrastructure related fees and taxes. So much of our efficiency.
        By returning agricultural land prices on fringes of our cities to normal levels 100k per acre (this is 25 times more than agri land a bit further), and by cutting exaggerated government and REA fees cost of new development could decrease by almost 50%.

        http://www.nhsc.org.au/nat_dwelling_costs/append_b.html

      • LandDeveloper

        Hi Raveswei – that same NHSC report also says that developers in Perth producing greenfield projects have a negative profit. It was a snapshot report prepared by Urbis (who I employ regularly) and isn’t necessarily a great reference source. Having said that, I don’t deny Sydney is a unique story, but because I don’t operate there, I don’t know the development landscape, so that is why I excluded Sydney from my comments. I am inclined to think that residual land value acquisition techniques were the primary driver of inflated land costs, but NSW planning is notoriously convoluted so I think UC’s insights are far more relevant there than some of the other AU capital cities. Remember, that I am not arguing land-use restrictions have no effect, rather I am arguing its not to the extent that some portray.

  13. Land Developer,

    Your suggestion raw land costs on the fringes are an insignificant component of overall costs, is not compelling.

    On my website http://www.PerformanceUrbanPlanning.org front page is a clear definition of an affordable housing market, with the critically important fringe Development Ratios incorporated. Serviced lot costs should be in the order of 20% – the balance the actual house construction.

    Development Ratios and other measures are taken extremely seriously by Texan developers and builders. We use to too, until we started creating housing bubbles in this part of the world!

    As my definition of an affordable housing market hopefully clearly illustrates, is that developing houses (and other forms of urban property – I am a commercial property developer) is extremely formulaic and indeed SIMPLE! Quite why “ueban expers” and academics have difficulty underrstanding these simple measures, is a bit of a mystery to practitioers such as myself.

    I note there has been no discussion within the article and the thread about other aspects of the Texas housing market, such as (a) the Municipal Utility District Infrastructure bond financing model and (b) the Mortgage Consumer Protection laws of the State. Compare Texas with Georgia on the latter front.

    Is sure is taking people a long time to learn about the normal affordable housing markets of Texas. There have been 7 Annual Demographia Housing Surveys to date, going back to early 2005.

    There should be planeloads of industry and policy people going to Texas. There are direct flights to Dallas and Houston from Sydney and Auckland respectively getting uderway.

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

  14. Leith, I agree with your views on restrictive planning controls, but I think you underestimate the impact of Texas’s LVR restrictions. In my view these have been just as instrumental as more liberal planning controls in keeping housing affordable in Houston.

    • Matt. The Texas example is just as readily applied to Atlanta Georgia, which had no special consumer protection laws and lots of subprime lending. Yet Atlanta’s median multiple has not been above 3.0 since 1980, despite strong population growth. The reason is due to Atlanta’s flexible supply.

      I am also not sure where you got the LVR restrictions from. You can buy a home in Texas with only a 3.5% deposit, albeit with annual mortgage insurance payments.

      http://www.therightmortgageguy.com/

      http://www.ehow.com/about_5399790_texas-mortgage-down-payment-laws.html

      It is true that Texas’ credit rules are a little stricter than elsewhere (eg. restricted home equity withdrawal and mandatory cool-off periods), but they are not all that different from elsewhere in the country. The key difference is Texas’ flexibility of supply.

    • Again, I think it’s important to re-iterate that supply-side restrictions do not ameliorate many of the effects of loose credit, nor can they prevent demand-driven bubbles based on rising incomes, which the ’80s boom in Texas was based on. (Alberta Canada is another more recent example of income-induced appreciation.)

      Look at it this way: if a bank is willing to give you a large loan based on little income and poor credit history, will you temper the amount you purchase, or simply buy a bigger property? In Atlanta this was borne by palatial constructions and people with zero income purchasing low-value properties when before they couldn’t purchase anything. The result… Atlanta by all accounts has experienced significant fallout despite relatively low house prices: the oversubscription to housing “squirted out the sides” so to speak, instead of “bubbling out the top”. Atlanta’s unemployment rate went from being below the national average to now being above, and it’s construction and finance that have taken it on the chin.

      For Atlanta, non-restrictive land use tempered the loose credit effect for many families who could simply refuse to pay elevated prices and buy a house that suits their needs. On that front it appears that Atlanta has emerged with a better chance of “normal” families not being faced with underwater assets. That is a big deal IMO. The full effects of the GFC and high prices will be felt for many years to come, so the book is not yet closed when comparing fallout between Atlanta and, say, Phoenix. Nonetheless, regardless of land restrictions, Atlanta is worse off for having experienced a credit bubble and that should be the focus, in my view, of policymakers in Australia. Even if the leviathan task of overhauling the planning commissions and other associated red tape surrounding land use is accomplished, that’s little consolation compared to the future damage of failing to make a simple policy change in the bank act with requiring higher down payments and curbing negative gearing.

      • Yeah, but what is worse – 100,000 $80,000 mortgages being defaulted on, or 100,000 $500,000 mortgages being defaulted on?

        I am picking that Georgia will be out of this mess in a year or two, but California NEVER will be. How long was the economy of Texas hampered by their oversupply boom of the 1980’s and the subsequent bust?

  15. Robert Sherlock

    Some points:
    Texas is one of the easiest places to get a loan, especially subprime. I personally have many loans that are considered sub prime as I did not even have a credit score when I moved here, no income small deposit and was able to secure a lot of credit, at a high interest rate 12% but with my rentals getting 15% net returns I was still positive.

    The bubble in the 1980’s was a demand bubble, you can only build a certain amount of houses, so prices go up, once demand decreases it take a while to get back into balance. Where as the combined supply and demand bubble has a more impressive up and down.

    I am predicting that Houston will be having a demand bubble in the next decade with the booming industries here and the strong sectors of the economy. Without a advertised boom, the population is booming already.

    • Robert, I am picking that the heartland USA cities without land supply restrictions, are going to “bury” the rest economically over the next 20 years. There are so many consequences to overpriced land. There was an interesting McKinsey Institute Paper on the British economy in the 1990’s, that said that the inflated cost of land in Britain (thanks to their Town and Country Planning Act) was THE major cause of their economic un-competitiveness.

      Inflated land prices lead to anti-competitive advantage to incumbent land owners, they lower labour productivity, they increase inequality and rob the young of opportunity, they decrease new business start-ups, they hinder agglomeration efficiencies……(the report said Britain would have no “Silicon Valley” thanks to high land prices)……

      There was a lot more than that, too. I also reckon the Chinese economy is being destroyed right now by the same problems. I doubt they will recover from THEIR property bubble bursting as well as Japan and Korea have. It is ironic how many times the world has to go through all this without “getting it”.

  16. “Actually Lefty, many planning tools that strangle available land supply, such as urban growth boundaries, were implemented over the past decade”

    And you can demonstrate to me how this was implemented all over Australia and in many places in the modern world, coincidentally all at the same time?

    Anecdotally, everywhere I look with my own eyes, I fail to see this constraint. Ten years ago I was surrounded by bush – I’m now surrounded by suburbia as far as the eye can see. Every time I go to Brisbane, the edge of suburbia starts further and further out. When I was a kid, Brisbane, Logan and the Gold Coast were three very seperate places – they are now effectively almost a single city, so much has the infill between them grown.

    The degree to which planning is hampering the pace of development is clearly being exaggerated.

    Your arguments seem to be taking on more of an ideological bent – big, bad gubbermint is the source of all problems and if they got out of the way there would be few or no problems.

    I am pointing out that there is more than one way to skin a cat. You seem to be starting to argue that there is only one truly effective way to skin a cat here.

    When it comes to planning, I think you’re seeing a mountain where little more than a mole hill exists.

    • “…..And you can demonstrate to me how this was implemented all over Australia and in many places in the modern world, coincidentally all at the same time?….”

      Well, DUH. Is global warming mania not a worldwide phenomenon? Is environmentalism not a worldwide phenomenon? Is Greenpeace not an international organisation? Was Al Gore’s move not showed in dozens of countries? Is “urban containment” planning not a worldwide phenomenon?

      As for all the growth around you – are you aware that most cities in the developing world grew many times faster in the 1950’s and 60’s than they have ever since, without planners and councils spitting their dummies over how to provide infrastructure and pay for it?

  17. Hmm – my little town of Gladstone appears to have 4300 lots already approved for development according to regional council and a new development to house around 7500 people – that’s an entire small town in itself, AND the bloody thing is to be just down the road from me Godammit! – has been submitted though not yet approved.

    I have watched the small bush town of Calliope (near Gladstone) where I grew up spread in all directions in recent years.

    Perhaps it’s only my region though. Perhaps someone has forgotten to tell developers here that they are highly restricted and just can’t do what they’ve already been doing.

    • Look on Google Earth, Lefty. How hard was it for someone to corner the entire supply of land involved in the project you are talikng about? How much land is it really, compared to how much is all around and beyond it at $4,000 per hectare – and why does this figure inflate dozens of times NOT including legitimate development costs, before someone gets to buy their house? And why does this inflation NOT occur in cities (mostly in the USA) where there is “freedom to build”?

      Look on Google earth, at any “free to build” city, and see, again, just “how much land” IS being built on in proportion to the total – it is NOT A LOT – but the fact that you CAN, keeps the prices low. The cost-benefit case for restraint is complete and utter garbage. A paper by Anas and Rhee estimates that it is SEVENTY TIMES more costly to society, to use urban growth restraints to achieve what road mileage fees would have achieved.

  18. 3d1k says: May 6, 2011 at 1:35 pm “Phil – how do you buy if the bank doesn’t lend you the money. i.e. credit is restrained. Simply impossible.
    Restricted land supply is a factor not a cause.”

    This guy gets a “fail” for reading ability. I clearly stated that in Korea, the tradition was for young people to work hard, save hard, and pay cash for their first home. No credit involved. How credit-centric can you GET? Our poor civilisation has NO IDEA any more that saving up the purchase price of something was ever a valid option?

    In cities where land supply is not constrained, (eg in Texas) it is STILL possible for an average hard working young man to do this in SEVEN YEARS.

    Cameron Murray, too, still trying hard. There was “more to it” in Korea, than just land supply restrictions? Funny, the land supply restrictions just happen to be THE essential precondition for EVERY house price bubble we could possibly discuss, but green-blinkers-wearers insist that we look at everything BUT. Never mind that there is NO CORRELATION between the house price bubbles and any other factors that people like Cameron Murray throw up as smokescreens.

    • Phil, sorry – I ignored Korea. But considered Australia, UK, Ireland, Spain, Canada, USA, NZ and so on. These are countries where the majority of purchasers required finance, experienced housing price bubbles together with an active speculative market – you’ve yet to convince me that in times of credit constriction it is possible to finance an increasing spiral of property prices. Where does the money come from????? The bubble is initially in credit and its availability. Said it before, say it again. No money – no buy.

      Price a development at xxx – if corresponding finance is not available, development will not sell, prices in development will decrease to, eventually, meet market. Simple.

      Phil, you’re blinded by conviction, not fact.

      • Read the OECD Report, “Bird’s Eye View of OECD Housing Markets”. They state that recent history is the first time that housing price bubbles, and in multiple member nations at that, have de-linked from the business cycle in the economy. That is, these bubbles inflated right through central bank “tightening” phases, while the productive part of the economy was being hammered, businesses were retrenching and laying off staff.

        The case that land supply restrictions are responsible, is overwhelming. It is this factor that turns the housing cycle into a cancer rather than just an organ of the overall economy.

  19. More questions for Leith :)

    Hi Leith,

    I agree with your argument that supply restriction increases price volatility which can initiate and/or fuel a bubble.

    However, I WONDER if relaxing supply policy is an APPROPRIATE tool to combat housing bubbles. (Before I’m berated by other commentators, I use the word wonder to make it clear that I’m asking your opinion not stating something I believe is fact and the word appropriate as I do believe relaxing supply policy would work) 

    Over the last 10-15 years, were Australia’s land supply policies flexible enough to keep up with the increased demands from a booming economy BEFORE taking into account the significant changes in credit standards/availability and high volume of immigration?

    Why do I ask?

    I PRESUME our tight supply restrictions will lead to better planned cities and communities and would also act as a safeguard in preventing poor development standards and outcomes. That is, there is a good reason why they are there in the first place. As seen in the credit market, people can do some amazingly dumb things on a large scale if no one is there to stop them. And it’s no different in the development world.

    While the earlier mentioned developments in Texas are impressive, they are the succuss stories of where less supply restriction worked well. Further, there were other attributes which contributed to their success as great developments.

    I would like to know of any similar attempts that were unsuccessful. That is, what is the history of attempted large scale developments in non supply restricted areas which could be considered failures (overbuilding, poor environmental outcome, low building standard, poor planning, building in inappropriate areas etc.)

    The eventual cost to society of a large housing bubble popping will be far greater than the sum of any failed developments in low-supply restricted areas,

    but

    if a our supply policy is flexible enough to cope with the increased demands resulting from greater economic productivity AND does in fact act as a safeguard against poor development, then I think relaxing supply policy is not the best/appropriate tool to combat housing bubbles. Perhaps bank regulation/credit policy or even immigration policy need to be addressed first.

  20. Questioner,
    You will find that competition is far better at creating high quality than government restriction is.
    Take the example of TV’s. Todays plasma or LCD TVs are vastly improved due to competition-driven improvements.
    Imagine if in 1980 the USSR had set about to write some restrictions into law to improve TV’s. They may have restricted the size of the CRT, or perhaps stipulated that certain type of valves must be fitted to the TV.
    Would this really have resulted in Soviet televisions becoming better than our modern flat screens?
    No.
    In Sydney housing there are examples of disgraceful developments resulting because once a favoured developer gets permission for extra dwellings, he faces no competition from nearby developers. The result is lower quality.
    Another example is in Sydney taxis where the number of licenses is limited by government. The result is that license holders hire the cheapest low-quality drivers. If taxi licenses were more relaxed then competition would force the owners to compete by using better drivers – cleaner, more polite, and English speaking.

  21. Questioner,

    You make some honest assessments there. Like, market driven development in Texan cities do NOT result in nightmare outcomes. Why? Because in Texas you HAVE to build what CUSTOMERS WANT. THAT is the single best “regulation” you can have. Also, the cost of land is so low, and the efficiency of supply so high, that very high quality actual homes can be provided at very high value for money.

    You say you “would like to know of any similar attempts that were unsuccessful….”. So would I. In what free market have consumers ever had to put up with “take it or leave it” choices?

    High land costs lead to nightmare outcomes all over the place, even apart from the volatile bubble and bust cycles. Buyers have to “take it or leave it”. The lower income groups are forced to live in older, unrebuilt, unreconditioned, unhealthy homes because that is the “least unaffordable” option.

    Take a look at “Crack Shack or Mansion”

    http://www.crackshackormansion.com/

    What you get for $1,000,000 in Vancouver (Aussie cities are almost as bad), and what you get for that price in SANE markets.

    There is virtually NO justification for urban growth boundaries that are actually TRUE in real life. The kind of urban form that results is LESS efficient, not more efficient; because people and businesses are forced to take “least unaffordable” options that are BADLY located. NO city with urban growth boundaries has achieved an INCREASE in inner city and inner suburb density, because the land prices are a MULTIPLE of fringe land prices. If the number of people who can afford “anywhere” is reduced, the number who can afford the “best/most expensive” locations is next to nil. What ACTUALLY happens is “dense sprawl”, or increased densities near the fringe.

    In contrast, a free market will “sprawl” slightly more, but gain far MORE efficiencies in central and nodal agglomerations.

    • More questions for Leith :)

      Claw and Phil,

      I agree with your responses for the large part. Both focus on the point that a free market will operate with the best efficiency.

      Yet my observations of the real world suggest that majority of people are not overly bright (to put politely) and many don’t know what they want for breakfast, let alone what they want/need in a home or investment. (If you think people are smart, explain why someone who earns $50k a year would take out a $280k+ loan when the math taught in 7th grade would suggest this is not a good idea. And lets not get started on those who lend them the money 🙂 )

      From a quality development outcome standpoint, I believe that the successful Texas outcomes are largely a result of good, honest business (see post from “learner” below) as opposed to the developer listening to the customer. Furthermore, you will still have issues such as:
      -large developers buying HUGE volumes of land to gain a monopoly in more desired areas.
      -dumb developers doing poor business in bad areas yet still convincing people to buy there.
      -councils unsure how to manage (operationally and financially) new infrastucture and population they were not prepared for.
      -overbuilding and half finished developments in areas where a bad developer set up shop, failed and left when most people purchased elsewhere(leaving a confused, angry and less than qualified council with bank garauntees to finish the job).

      While fixing one problem, you open the door for many others.

      While I agree with the points that both yourselves and Leith are making, I think that suggesting removing urban growth boundarys is TOO SIMPLE to fix the issue of our restrictive land supply policy. A complete overhaul of zoning, planning regulation, infrastructure, council authority etc. is needed to get the result Leith is suggesting. And again, I think this should be done. My thoughts are that this would best be tackled progressively while the bigger elephants in the room can be addressed far quicker (bank/credit policy, immigration policy)

  22. This is not academic, but based upon 20 years of observation in the Twin Cities market in Minnesota.

    1) The Greater St. Paul/Minneapolis area is a very large geogrphical area relative to its population.

    2) Nonetheless the presense of lakes, rivers and wetlands do create natural barriers to growth.

    3) In my opinion, housing supply was relatively restricted by geography and policy, but the nature of the policy restrictions changed greatly between 1990 and 2000. Most notable was the change from low density (large lot) zoning to cluster (common interest community) zoning that allowed far more units to be built while preserving open space.

    4) The outward growth of the metro boundary was driven by the growth of two industries in particular, construction (for men) and health care (for women), whose employees frequently had irregular commuting patterns, that is, they went to jobsites as opposed to a fixed workplace.

    5) Everybody was loving it until gas prices tripled and then quadrupled as measured against the extreme lows of the late 1990s. While real estate (housing prices, but also raw land) prices here were ready to crater, they didn’t really cliff dive until Hurricane Katrina caused a gas price shock.

    • Thanks MinnItMan. I have travelled widely around the US, but have yet to make it to the twin cities. I look forward to visiting there some day (in summer, of course). It looks like a beautiful place.

  23. I accidentally hit send, but the first real cliff dive was not real estate, but the market for the used pick-up trucks and SUVs that were ubiquitous outside of the Interstate 494/694 beltway surrounding the cities and first tier suburbs. Given the amount of driving people signed up for to have their house and their job, it wasn’t uncommon for a working couple to have their cost of gas go up by $400 a month between 2000 and 2006, and it wreaked havoc on the most maxed-out credit users first.

    Note to non-American readers: despite the bankruptcy of 2 of 3 of our auto manufacturers, the one product category that they made a ton of profit on was 4 wheel drive light trucks with atrocious fuel economy. To be fair here, these vehicles may not make any sense in California, but they do here with 90 inches of snow over a six month winter, and where not being able to get out of a ditch can cost you your life in 30 below weather (and help you avoid that in the first place). But, they’re still too expensive for an increasing segment of the population.

    I’d convert to metric, but I’m a lazy American. Suffice it to say, 30 below F means motor oil starts to solidify.

    • You touch on a fundamentally important point there. When property prices bubble, “drive to qualify” (for a mortgage) INCREASES because the “cost of land” factor becomes far greater than the “cost of travel” factor. But the TOTAL “cost of mortgage PLUS cost of travel” is FAR higher than the pre-bubble situation. These hholds are mega stressed, hence foreclosures etc in the “drive to qualify” communities.

      Planners have failed to make the connection between their policies driving up the price of land, and the increased popularity of “drive to qualify” subdivisions. They invariably point to the foreclosures as evidence that yet MORE restrictions (and higher land prices than ever) are necessary.

      Fortunately, V8 SUV’s are a discretionary choice. The potentially lowest REAL cost of “automobility”, has only steadily got lower in spite of rising oil prices – fact. There has never been CHEAPER “real” “automobility” than the 2001 Honda Civic, bought today for prices at which MOST of its devaluation from new has already happened, yet will still run trouble-free for years, using a minimal amount of petrol.

  24. curmudgeonman

    I lived in Houston in the early ’80s. I worked for the Aramco. I figured an oil company owned by Arabs would never go broke. About 2 years after I moved to Houston, oil patch went bust, including the Arab oil patch. Maybe the housing bubble you are referencing was induced by demand dropping out of the market. I do not know for a fact if oil was a big enough component of the Texas economy to have a big effect, but I suspect it was.

  25. There is quite a difference between “the presence of lakes, rivers and wetlands do create natural barriers to growth”, and a city on an island. The same difference applies to a city with large heritage preservation areas, compared to one with an urban growth boundary.

    The island, and the boundary, allows land price bubbles to get under way. But “enclaves” not able to be developed, do not, provided there IS freedom to build around and beyond those enclaves.

  26. The real reason that house prices in Texas did not spike was that the Texas Legislature made it illegal to borrow against the last 20% of equity in your house. This stopped average people from sucking away all their equity to leverage buying more houses. It was a smart move by the legislature and is seldom talked about.

  27. I would like to add a couple of points. As soon as I read this I emailed my brother who has lived in texas for 30 years, is a CEO and his wife sells real estate. Below is his response.

    “I have read the article attached. I think all his points are fairly valid, but from a more practical standpoint, prices of homes in Texas (except Austin) have historically been lower than other areas. It is probably not surprising that the highest prices have been on the coasts, and the further you work your way in, the lower the prices. Unlike California, and NY etc (highly unionized etc) Texas is a very business friendly and encourages business development. It also has a lower per capita income due to the amount of minorities, and high birth rate. In addition, Texas is a bigggg place with generally lots of land to expand into. The two oil busts have also left increased inventory in the median price range.

    There has been a slight bust here, but much less than other areas. Houses here are built like any other place depending on their price range, but don’t forget, there is an abundance of cheap labor here that can help build houses cheaply.

    Bottom line, California is highly regulated with lots of union labor and high taxes, and Texas is gods country with lots of extra land and cheap labor and is attracting new and relocating business because of the previous statement.”

    So coastal land or interior, cheap labour and low incomes combined with a pro business state government are aditional factors contributing to the price stability in Texas. Non of these factors are present in Australia. So I call your comparision, Leith, void in this instance. Housing afordability needs much more than cheap, low regulated land releases.

    • Void in what sense learner? I fail to see how your comment proves anything except that Texas is a great place to do business and buy a home due to its low level of regulation (exactly what I have been advocating).

      The last time I checked, Australia is not exactly short on land. We have amongst the lowest population density in the western world, even in our major cities. And guess what comprises over 50% of the cost of new homes in Australia…. you guessed it, the land. This compares to Texas where the land component is only 20% of the total cost.

      I never suggested that Australia could supply new homes for $150k as they do in Texas and Georgia. But we should be able to provide them for $250k, even with our higher labour and input costs. But alas, we provide them for $350k+ due predominantly to our high cost of land brought about by our ridiculously restrictive land-use policies.

  28. And guess what? Austin, Texas, a smaller, low-growth, land-locked city, has had relatively large price rises BECAUSE it is the LEAST LIBERAL city in Texas re land supplies. Check the Demographia surveys and the Wharton regulatory indexes.

  29. So will you now prove there is no bubble in China, and was no bubble in Las Vegas — or are you going to prove that China and Vegas are doing everything the can to throw a wrench in new housing starts? That would be a good trick.