1. Ian Abley, 'There is no "free market" housing solution', 12 December 2009, New Geography, posted here

2. Mike Shedlock, 'All Bubbles Pop, No Matter What Color They Are', 12 December 2009, Mish's Global Economic Trend Analysis, posted here

3. Demographia, 5th Annual Demographia International Housing Affordability Survey: 2009 Ratings for Metropolitan Markets, posted here

4. Deng Xiaoping, quoted by Andrey Gidaspov, 'The Cat Learned How to Catch Mice: Now What’s Next?', 22 April 2008, The Washington Center, posted here

5. Joint Center for Housing Studies, Harvard University JCHR Median Multiple Tables, Harvard University, Cambridge, Massachusetts, 2007, posted here

6. Hugh Pavletich, 'The curse of politically engineered research', 4 December 2009, interest.co.nz, posted here

7. 'Houston Real Estate Market Enjoys Second Consecutive Month of Positive Sales Volume and Pricing in October', Houston Association of Realtors, November 2009, posted here

8. Hugh Pavletich, 'Housing Bubbles: Why are Americans Ignoring Reality?', 25 November 2009, New Geography, posted here

9. Wendell Cox, 'California: The Housing Bubble Returns?', 19 November 2009, New Geography, posted here

10. Hugh Pavletich, 'Getting Performance Urban Planning in Place', 19 March 2008, Performance Urban Planning, posted here

11. C. Northcote Parkinson, Parkinson's Law: And Other Studies in Administration, London, Ballantine Books, 1987

12. 'Provisional list of participants', Copenhagen, United Nations Framework Convention on Climate Change, 8 December 2009, 179 pages listing more than 30,000 participants, two thirds of which is a directory of Non-Governmental Organisations, posted here

13. Steve McIntyre, Climate Audit, posted here

14. Daniel Henninger, 'Climategate: Science Is Dying', 3 December 2009, Wall Street Journal, posted here

15. Martin Cohen, 'Beyond Debate?', 10 December 2009, Times Higher Education, posted here

Housing Bubbles and Parkinson's Law

The audacity article There is no "free market" solution is confusing.

There is no "free market" housing solution, Hugh 27.11.2009

This was reposted in edited form on the New Geography website. (1)

Mike (Mish) Shedlock who runs the highly regarded Mish's Global Economic Trend Analysis website has already commented on Mr Abley’s understanding of capitalism and the behavior of housing bubbles. “Mish” responded with All Bubbles Pop, No Matter What Color They Are. (2)

Mr Abley makes the statement that I am obviously on the wrong track in suggesting “free market” solutions will work. He states:

'By hoping for a ‘free market’ solution to the problems of unaffordability, Hugh Pavletich of Demographia assumes that it is politicians, businessmen and professionals who have distorted the market for reasons of narrow and immediate self interest.' (1)

Then in considering solutions he opines:

'The only way to stop national or regional housing bubbles recurring is the establishment of the freedom for everyone to build a home on cheap agricultural land without any government or professional hindrance except in matters of technical building regulations.' (1)

The logic is difficult to follow.

I am not “of Demographia”, but the person who initiated and co-authored the Annual Demographia Housing Affordability Survey with Wendell Cox of Demographia. (3) The 5th Annual Edition was released in January 2009. My website is www.performanceurbanplanning.org.

Indeed – if there is any “tribe” I can be pigeonholed in to, it would be in to that of the late great Premier Deng of China, who said 'I don’t care if the cat is black or white, as long as it catches mice.' (4)

Now we know from the Annual Demographia Surveys of the 265 major metros of the Anglo world, and the Harvard University JCHR Median Multiple Tables of the major United States metros going back to 1980, (5) that normal affordable urban housing markets should not exceed three times households gross annual income.

Not 2.5 times, as Mr Abley suggests is my view.

Indeed – within a recent article The curse of politically engineered research I defined in the clearest and simplest terms possible, what a normal affordable housing market is:

'For metropolitan areas to rate as "affordable" and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household income. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market. The fringe is the only supply or inflation vent for an urban market. The critically important Development Ratio’s for the new fringe starter housing should be 17 to 23% serviced lot section cost – the balance, the actual housing construction. Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3 through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.' (6)

The reality is that in Houston and the other affordable urban markets of North America, new single level fringe starter stock of approximately 235 square meters (2529 square feet) on lots of approximately 700 square meters, is being provided for $US140,000 - $US30,000 for the serviced lot with the balance of $US110,000 for the actual house construction. These comprise double garage, 4 bedroom with master ensuite, separate dining and ducted air-conditioning.

Let’s consider the latest Houston Association of Realtors October Report, (7) where from October 2008 through October 2009, sales volumes have increased from 5,010 to 5,716 (14.1%), dollar volume $US0.942 billion to $US1.092 billion (15.9%), listings 49,016 to 45,424 (-7.3%), total pending sales 3,579 to 3,673 (2.6%), average single family sales price $US192,453 to $US198,639 (3.2%), median single family sales price $US141,950 to $US149,000 (5.0%) and finally months of inventory 6.3 to 6.1 months.

A quick glance of the beautifully presented HAR Monthly Report (the most professional real estate association in the world incidentally) clearly illustrates that the Houston market is picking up without inflating. The crucial link between incomes and house prices is being maintained.

Compare this with the housing casino of California as I explained within a recent New Geography article Housing Bubbles: Why are Americans Ignoring Reality? (8) Wendell Cox of Demographia within California: The Housing Bubble Returns? illustrates how another bubble appears to be getting underway in California.

Mr Cox within his article sets out how Los Angeles has inflated from its low point by 19.2%, Orange County 17.4%, San Diego 20.3%, San Francisco 34.3% and San Jose 24.3% - with the average of the greater number of examples Mr Cox illustrates, being 19.4%.

Within my article I illustrate how California, with just 37,700 new building permits expected through 2009 (population 37,000,000) and a building stock of 13,2 million, will have the lowest build rate per 1000 population of any growing economy within the Anglo world – just 1/1000. Well below replacement and worse indeed than the appalling British numbers.

So the old destructive and unnecessary bubble game is underway again in California, while in Houston and Texas and throughout middle North America, their housing markets are remaining “normal”, with their economies focused on creating real wealth.

My view has always been that we should learn from sound, affordable and normal housing markets, such as Houston and others, to see what we can adopt or adapt to suit our own local political conditions.

This is exactly what the Japanese did with respect to automobile manufacture after World War II, when they visited Detroit. They didn’t return home to build Hummers – but instead developed their skills further, to become the global leaders in the manufacture of reliable, more efficient and competitively priced automobiles.

Mr Abley appears to have a poor understanding of the real causes of our housing difficulties – which incidentally are the major drivers with respect to the climate fiasco.

I explained this at length within a March 2008 paper Getting performance urban planning in place, (10) and within a The curse of politically engineered research. (6)

Regrettably what we have experienced could best be described as Parkinson's Law on Prosac. (11) The attendees initial list at the climate conference in Copenhagen, is an excellent current example of this. (12)

Never mind that the research underpinning it is dubious as Steve McIntyre of Climate Audit, (13) and increasing numbers of other professionals are illustrating. And that science has been corrupted in the process, as Daniel Henninger of the Wall Street Journal illustrates within his recent article Climategate: Science is dying. (14) Martin Cohen does too, with his superb UK Times Higher Education Supplement article Beyond Debate? (15)

Both the urban land use and climate issues are simply cases of public bureaucracies out of control.

The realities of Parkinson’s Law are poorly understood – but they need to be understood – and fast.

All public bureaucracies will, if allowed to, due to public apathy, media negligence and poor quality governance (yes – in that order) naturally grow and do whatever it takes, to expand their influence and control.

Private sector bureaucracies do as well – but competition is their cure.

Understandably, the out of control public bureaucracies on the “growth path” will seek outside supporters and finance them where required, to bolster their influence and control.

Conversely, these public bureaucracies will go out of their way to either ignore or attack outsiders they see as a threat. They are particularly attracted to Malthusians of all strips and political hues – environment groups, community groups, protectionists business groups – whatever.

Today, the modern Malthusians are being encouraged, supported and taxpayer financed by public bureaucracies, to assist the latter in their determined pursuit of greater control.

So the focus must be on reforming these public sector bureaucracies and instilling the appropriate performance disciplines, so that they know clearly that their role is to serve the wider public interest.

Hugh Pavletich 14.12.2009

Ian replies...

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