Demographia 2009: It IS a supply shortage after all.....

HAMISH_MCTAVISH

The latest Demographia report is out, categorising housing across the major global markets as affordable, unaffordable, seriously unaffordable, and severely unaffordable.

http://www.demographia.com/dhi.pdf

Unsurprisingly, the UK has no affordable areas as they merely use the old 3 times income standard as a benchmark, without looking at true affordability. I've posted before that they do have a vested interest in promoting the concept of unaffordability, which is why they use such a categorisation scheme.

However as to the reasons why housing is the price it is, they have compiled an impressive list of research and documentation.

And the result?

No, it wasn't the credit bubble, it was the lack of supply!!!!!!!!!

WHY THE HOUSING BUBBLE OCCURED

Various theories have been used to describe why the housing bubble occurred.

More often than not, the theories describe influences that occurred in all markets.

In the metropolitan markets of the United States and Canada, general theories are simply inappropriate. This is because the house price escalation varied far more than can be explained by any factor operating at the national level. This is a serious error in light of the radically different house price increase experience between metropolitan markets in the United States and Canada.

In some markets, the Median Multiple doubled or even tripled. In other markets, the Median Multiple remained below the historic maximum norm. Any plausible theory must describe why house prices virtually “exploded” in some markets, while remaining at or near historic norms in other markets.

Interesting. So house price differentials remain in all major markets, not just the UK.

Hmmmm, I wonder what this means.....

The most frequently cited implausible theories include the following.

Demand: It has been suggested that the looser credit policies increased demand, which led to higher prices.

Moreover, demand, however, cannot explain why some markets had such large price increases and others had such small increases.

Overall, US responsive market prices relative to incomes increased only 0.6 times household incomes during the bubble. By contrast, prices increased more than four times as much (2.6 times incomes) in the United
States in the prescriptive markets.

Demand rose all over, because mortgage credit was equally easier to obtain in all markets.

Yet, demand was at its greatest in some of the markets with the least price inflation (such as Atlanta, Dallas-Fort Worth and Houston).

Ahhhh, so it wasn't the increase in demand caused by credit, as credit and demand increased everywhere but prices did not.

So if it was just credit, prices would have risen everywhere by a more or less equal amount, when of course they did not.

So what was it then?

The Difference: There are substantial differences between metropolitan markets in one factor of market influence: land use regulation.

Generally, land use regulation falls into the following two categories: Responsive land use regulation: Liberal or traditional regulation is referred to as responsive land use regulation because it responds principally to the market as revealed by people’s preferences. Under responsive land use regulation, there is a substantial interplay between buyers and sellers of land, resulting in generally lower land (and house) costs.

Prescriptive land use regulation: The newer regulatory systems are referred to as prescriptive land use regulation because they are based on “visions” or plans, which prescribe where development is to occur. Under prescriptive land use regulation, the interplay between buyers and sellers of land is substantially interfered with, resulting in generally higher land
(and house) costs.

Restricted supply.

Who would have thought it....:rolleyes:

And why was this the case?

Economics, Land Use Regulation and Housing Affordability

Economics teaches that scarcity raises prices.

In a number of metropolitan markets, land for development has become scarce due to prescriptive land use policies, such as urban growth
boundaries, huge areas recently declared off-limits to development, building moratoria, confiscatory and unprecedented impact fees, minimum lot sizes and expensive amenities.

The advent of looser mortgage qualification standards over the past decade led to an increase in the demand for owned housing. Markets with prescriptive land use policies lacked the resilient and competitive land markets that would have allowed the greater demand to be accommodated without inordinate increases in house prices (see “Strangling Urban Land Markets,” below).

Economists have long raised concerns about the price escalating impact of prescriptive land use regulation.

For example:
• Nobel Laureate Paul Krugman of The New York Times noted that the house price bubble has been limited to markets with strong land use regulation.

• A United Kingdom government report by Kate Barker, a member of the Monetary Policy Committee of the Bank of England, blamed that nation’s loss of housing affordability on its prescriptive land use policies under the Town and Country Planning Act of 1947.

• In last year’s Demographia International Housing Affordability Survey, former Reserve Bank of New Zealand Governor Donald Brash wrote that the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.

• Theo Eicher of the University of Washington produced a working paper placing much of the blame for house price escalation on land use regulation United States municipalities.

• A New Zealand government report by Arthur Grimes, Chairman of the Board of the Reserve Bank of New Zealand blamed the loss of housing affordability in the nation’s largest metropolitan area, Auckland, on prescriptive land use policies.

• Reserve Bank of Australia Governor Glenn Stevens told a parliamentary committee that “An increase in state government zoning regulations is a significant factor driving up the cost of housing.” He also noted the increase in local and state government levies on new developments as a driver of higher housing prices.

• An Organization for Economic Cooperation and Development (OECD) report noted an association between strongly regulated land markets and higher housing prices.

• Research by Harvard University’s Edward Glaeser the University of Pennsylvania’s Joseph Gyourko others shows a strong relationship between prescriptive land use policies and higher housing prices.

• William Fischel of Dartmouth University Fischel shows that the diversion of house prices between California and the rest of the nation from 1970 to 1990 was associated with stronger land use regulation

• Glaeser et al at Harvard University further show that Boston’s house prices had been inflated 60 percent by scarcity created by prescriptive planning that relies heavily on large lot zoning (rural zoning).

Oh dear.....

That argument appears to be decisively settled.

It wasn't the credit bubble that drove up prices. It was the supply shortage.

What are we going to argue about now?

phil_b_2

You didnt seriously read through that whole pdf??

Cheers for summing things up though

HAMISH_MCTAVISH

phil_b wrote: »

You didnt seriously read through that whole pdf??

Most of it.

Had the day off today, and a case of Crabbies Ginger Beer to get through.:beer:

Cheers for summing things up though

the_ash_and_the_oak

interesting article.

cause of bubble was cheaper and more readily available credit imo.

Mr.Brown_4

My on topic answer is typified by Mr and Mrs Wilson buying 800 BTL houses. Might cause some shortage d'ya think?

My off topic observation is this. Why do you do this Hamish? Why is every bit of news so important? Why does it matter to you so much? Are you worried they might drop? Are you gloating that they might go up? What is the point?

the_ash_and_the_oak

no harm in a fellow posting a link now and then imo

Mr.Brown_4

the_ash_and_the_oak wrote: »

no harm in a fellow posting a link now and then imo

Yes you are right. Of course Hamish should be allowed. It was just an observation on my part about the sadness of thousands of posts that report every bullish titbit. And I have been guilty of reading and commenting on this stuff. It's just I am tired and bored of it. Maybe some people never move on.

I should have just said "Jesus, I am bored with reading this stuff".

the_ash_and_the_oak

I never read any of the linked articles personally

Thrugelmir

So you ignore a key point made at the beginning of the report. Which would have been caused by a credit bubble.

HAMISH_MCTAVISH - Unsurprisingly, the UK has no affordable areas as they merely use the old 3 times income standard as a benchmark, without looking at true affordability. I've posted before that they do have a vested interest in promoting the concept of unaffordability, which is why they use such a categorisation scheme.

However as to the reasons why housing is the price it is, they have compiled an impressive list of research and documentation.

And the result?

No, it wasn't the credit bubble, it was the lack of supply!!!!!!!!!

Whereas the report says.

In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices generally being 3.0 or less times median household incomes where demand and supply are balanced. This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the
United States.
Indeed, this historical relationship should have provided a warning to the economics and policy community, much of which seems to have assumed prices would continue to escalate to previously unknown heights

The largest house price decreases over the past year occurred in
Ireland, New Zealand and the United Kingdom, where housing affordability in nearly all markets had reached “severely unaffordable”

United Kingdom: Government reporting of house prices has slowed by more than six months over the past year in England and Wales, which has made it impossible to present sufficiently accurate estimates below the regional level. As a result, a number of metropolitan markets have been
excluded from this report. Their corresponding regions, reported upon this year, are indicated in Table 7 in the Methods and Sources section.
The Median Multiple in the United Kingdom was 5.2, which is well above the historic maximum norm of 3.0. London (inside the Green Belt) and Belfast are the most unaffordable, with a Median Multiple of 6.9. The Southwest region of England had a Median Multiple of 6.8 and the London
Exurbs ranked fourth most unaffordable, at 6.7. The London Exurbs had a Median Multiple of 6.8.
Most markets were “severely unaffordable” (Median Multiple 5.1 or greater), though Yorkshire, the Northeast region of England, the Northwest region of England and Dundee in Scotland were

“seriously unaffordable” (Median Multiple between 4.1 and 5.0)

All of which bubbled up under a relaxed lending approach and easily available credit.

Graham_Devon

I'm impressed as to how hamish rubbish's the bit he doesnt like and uses the bit he does like as gospel

As I say time and time again and get ignored. The demand was helped by the availability of credit.

HAMISH_MCTAVISH

Thrugelmir wrote: »

So you ignore a key point made at the beginning of the report.

Which would have been caused by a credit bubble.

No, the report calls the credit bubble an "implausible" cause.

Whereas the report says.

No, it states.... "In a situation where supply and demand are balanced".....

They are not balanced in the UK, as prescriptive planning prevents that, by creating supply shortages.

Which the report clearly states, if you bother to read it.

All of which bubbled up under a relaxed lending approach and easily available credit.

I expected better from you Thrugelmir, as I know you understand the difference between correlation and causality.

If credit was causal, we would not see the differences in price between areas. Credit growth is equally available throughout a market. Supply shortages differ by locality. As do prices. :rolleyes: