Last week, Rortybomb published an interesting article entitled Investigating the Link between Debt, Deleveraging and the “Texas Miracle”. In the article appeared the below chart showing per capita debt balances in key US states using data extracted from The Federal Reserve Bank of New York quarterly data release (excel file available here):
The chart shows large variances in per capita debt levels between states. Further, while some states experienced a huge build-up in debt levels in the lead-up to 2008 followed by large declines in debt levels (deleveraging) afterwards, others experienced only minor changes over the same period.
The article then contains the following chart showing a strong correlation between the percentage of deleveraging versus the unemployment rate; that is, the percentage of decline in debt from Q2 2008 to Q2 2011 versus the June 2011 unemployment rate for the states in question above:
Second, the cities/states with more responsive land-use regulations:
As you can see, the cities/states with less prescriptive land-use regulations (planning systems) have achieved both more affordable housing and lower levels of house price volatility than those with more onerous requirements.
Some of the key reasons behind this outcome were explained in last week’s article:
…restricted land/housing supply is a double-edged sword. With supply unable to respond quickly to changes in demand, the housing market becomes overly sensitive to demand shocks, resulting in greater price volatility and boom/bust cycles as demand rises/falls.
During an upswing, the extra demand will automatically feed into higher home prices rather than new construction. In turn, the price rises and perceived scarcity will encourage speculative demand and ‘panic buying’ from first-time buyers, which helps to drive prices up even further. The opposite holds during a downturn, where unresponsive supply will help to accentuate price falls as new housing planned years ago continues to hit the market.
And the implications of this result is shown in the first chart of this article: Texas, Pennsylvania and Ohio – all states with more responsive land-use regulations – experienced a smaller build-up and subsequent decline of debt than the states where land-use regulations were strict – namely, Nevada, California and Arizona.
Moreover, according to the same Federal Reserve Bank of New York data, the supply responsive states – Texas, Pennsylvania and Ohio – all have far lower levels of per capita mortgage debt and home equity lines of credit (HELOC) debt than the supply restricted states (see below chart).
This analysis is supported by a recent article by Demographia’s Wendell Cox, which showed overwhelmingly that US house price escalation was far greater in the more restrictively regulated housing markets at the peak of the US housing bubble:
As was the subsequent losses in the years following the global financial crisis:
The key point to take away from this analysis is that the supply-side of the housing market is critical.
While there are strong arguments for cracking down on the destructive speculation and easy credit that has fuelled the world’s housing bubbles, it is paramount that authorities 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 can stable and affordable housing markets be achieved, and the painful deleveraging that follows the bursting of all housing bubbles be avoided.
Later in the week I will examine the alternative claim that Texas’ stable and affordable housing has been achieved because of its relatively high rate of property taxation. Then, in a seperate post, I will provide an overview of Houston’s urban planning regime and infrastructure financing system to determine what lessons can be learned by Australia.