1. Hugh Pavletich, Housing Bubbles: Why are Americans Ignoring Reality?, 25 November 2009, New Geography

2. Charles Roxburgh, Susan Lund, Charles Atkins, Stanislas Belot, Wayne Hu, and Moira Pierce, Global capital markets: Entering a new era, Seoul, London, San Francisco, and Washington, McKinsey Global Institute, 2009, posted on www.mckinsey.com

3. Press Release, John Healey: Building momentum for homes of the future, 24 November 2009, Communities and Local Government

4. Ian Abley, Predicting the future of British house building, 10 November 2009, posted here

There is no "free market" housing solution, Hugh

Dear Hugh,

Through Demographia you have sought to measure affordability in housing markets using the following rule:

'Households should not spend any more than three times their gross annual household income to house themselves, and importantly, not load themselves up with any more than two and a half times their gross annual household income in mortgage debt.' (1)

Hugh Pavletich

It would be good if housing were more affordable than this measure, but in many regional and national markets you have studied around the world's industrial democracies, housing is far more unaffordable. Britain has been the leader in house price inflation and housing financial bubbles since the 1970s. In their recent report Global capital markets, (2) the McKinsey Global Institute has confirmed what you have shown at Demographia:

Writing for New Geography you ask; Why are Americans Ignoring Reality? You seem to expect Americans to see house price inflation as a problem of self-interest distorting the market:

'These issues are not “ideological” or “environmental”, but have much more to do with deliberately misleading information being generated by professionals in collusion often with political and commercial elites, who are keen to promote housing bubbles for their own ends.' (1)

Come off it Hugh. An elite agenda is necessarily ideological. Surely the ideology at work is environmentalism, making a moral virtue of the retreat of political and commercial elites from the industrial production of housing. The preference is for interest payments on a fund of mortgage debt rather than the effort of turning a profit from development, let alone construction. Professionals like estate agents, planners, architects, and bankers are certainly in collusion with that elite ideology.

That is not to say there is a conspiracy to plan a housing bubble. That is too crude. There is clearly regulation and legislation. On 24 November 2009 the Housing Minister John Healey confirmed that Britain will be the first country in the world to require zero carbon homes as a matter of law from 2016. Britain is the world leader in green ideology.

John Healey

All of the newly built British housing will have much better insulated walls, windows, roofs and floors. The clear aim of the government is to keep reducing the energy consumption of all new homes to be measured in kilowatt-hours per square metre of floor area per year. New Labour hope to make it law that total energy consumption is no more than 46 kWh/m2/year for semi-detached and detached homes, and then no more than 39 kWh/m2/year for all other homes. The energy efficiency standards will be applied from 2016, subject to yet another consultation on the Code for Sustainable Homes, announced at the end of 2006, and technically published for use on a voluntary basis in 2007. The building regulations get revised in 2010, 2013, and 2016 leading to this legal requirement for maximum energy consumption in all new homes.

Healey says that "zero carbon" is a concept that will apply to a new home at the "point of build". 'We are not going to regulate through this policy how occupants live in them,' he says. (3) However the Code for Sustainable Homes assumes patterns of behaviour. Environmentalists within and without government will argue that behaviour needs to change. They will be suggesting all sorts of intrusions into daily life.

British environmentalism couldn't be more ideological. A reduced volume of housing built yearly will have the performance of the Halley VI Antarctic Research Station. At audacity we have predicted that the zero carbon requirement will probably only apply to around the 100,000 new homes that will be built annually, while the existing stock is around 26 million homes. Healey is also going to regulate existing housing, and is not just looking at the residential sector. He is gathering experts:

'I have launched proposals for all new public sector buildings to be zero carbon from 2018 and all new commercial buildings from 2019. I want to gather all of the expertise out there so we have the best, practical solutions to do this.' (3)

I am sure politicians like Healey don't want their pursuit of "zero carbon" buildings to mean that fewer buildings are built. I am sure there are some environmentalists who will be pleased that building activity is in decline. But many will be worried that housing production will be reduced to historically low levels. Yet it is the logic of green thinking that the most energy efficient thing to do is not to build more buildings.

It is green not to build new homes to meet demographic demand. Let people modify their behaviour, say the environmentalists, and live together in as much of the existing stock as can be refurbished. It also happens that the existing stock is highly mortgaged, and the vast majority don't want their homes to fall in value. An indefinite policy of green refurbishment of the homes that already exist and a future of house price inflation are highly compatible. That suits the mortgage lenders, and the government, though no-one except a hardened green would argue that new build could reduce to zero. Instead the commitment to "zero carbon" allows government to appear virtuous in its legislation for the new build sector. Politicians fight over energy consumption and carbon reduction per home, even while the number of new homes built falls behind the number of new households wanting a home every year. The politics is about kWh/m2/year, not some supposed equilibrium between housing supply and demographic demand for household formation, the £/m2, or even m2/person.

In Britain the financial market demand is for house price inflation, not a demand for house building which might suit the construction industry, and provide the utility of homes. All environmentalism does is offer more and more reasons not to build. Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next.

By refusing to entertain the idea that capitalism is ideological and greening itself, you can't explain why so many professionals collude so spontaneously, without overt conspiracies, to build fewer homes than demographic growth demands.

You have proven through Demographia that around the world average house prices have variously become disconnected from household income multiples. But you jump from there to the idea that this is all a plot to undermine a "free market".

You seem to think that a "free market" would perfectly supply homes to meet demographic demand. It would not. Some people don't earn enough to buy a home even at the "affordable" price of two and a half times their gross annual household income.

The market in finance is more important to people than the construction of homes to live in. People want homes to be an appreciating asset, not a depreciating utility, like a pair of trousers, or a car. They want their home to appreciate in value, and they want to be green. Most people want to be greener and better off. I think that is a fair observation.

Being green makes mundane opposition to new house building, or the attempt to constrain "sprawl", seem virtuous. That anti-development stance also happens to sustain the basis for house price inflation through low rates of building. People don't wake up thinking that they will inflate the value of their home by resisting sprawl in principle. They may have specific local objections to particular development schemes that add up regionally and nationally to a frustration of housing production. They are opposed to what they believe is Climate Change caused by sprawling development. It is common for people to think that sprawl is bad for the planet, even while they live in the sprawl. This is oddly far more about self-criticism than self-interest.

By hoping for a "free market" solution to the problem of unaffordability you have assumed that it is politicians, businesssmen, and professionals who have distorted the market for reasons of narrow and immediate self-interest. However all these people argue against house building because they think that environmentalism is morally above self-interest. They are saving the planet in their minds by not building, and by their opposition to sprawl. Refusing to house ourselves well seems virtuous.

The fact that this has had the effect of making the lending of mortgages on inflated land values a much larger business than the construction of homes is a consequence of the "build less" or "build compact" environmental morality. No-one planned to cause a sequence of bubbles. Once started no-one knows how to stop the process of inflationary planning policies painlessly. Britain's desperate social dependence on sustained house price inflation can't be brought to an end easily.

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 hinderance except in matters of technical building regulations. Fire should not spread, and buildings should not fall down. But even building regulations can become ideological rather than technical. The British building regulations, as Healey has made clear, will also push energy efficiency standards to illogical extremes of peak performance on an inadequate supply of new housing. The role of building regulations is an ideological argument too. Environmentalism is not public health and safety.

The political freedom to build wouldn't be a "free market" because not everyone is able to raise the finance to buy cheap land and pay for construction. The idea of a "free market" is a long running ideological myth. But the universal freedom to build would mean people were free politically to attempt to raise the finance to buy land and build.

More importantly the freedom to build would mean that the price of an existing home would not have been inflated over the cost of building a new one. The fact that since the early 1970s an existing home has been valued at more than the cost of construction is the basis for the financialisation of the housing market as constrained by the planning system. That financialisation was popularised through the idea of Britain as a home owning democracy in the 1980s and 1990s. In the first decade of the twenty-first century the expansion of mortgage finance and housing equity withdrawal kept the economy going.

So come on. See the green ideology, largely based in a shifting and messy political and economic reality, and not just the demographics.

Britains mostly want to be greener but with renewed house price inflation, while no-one wants to make an argument explicitly for unaffordability. It may be confused and deluded, against industry and flawed, but it is ideologically based.

However ideas can be challenged and changed. I would rather struggle ideologically with the democratic predicament we are in than waste time by promoting an idealised and elusive "free market".

There is no "free market" housing solution to be promoted. There is a need to politically end the environmentalist denial of the freedom to build in an industrial democracy. With a population free to build the finance system would be more interested in cheapening new construction on lower cost land, and not preoccupied with securing the financialisation of periodic but persistent house price inflation.

Planning as a political denial is considered an ecological good by the public, but for elites it serves as the security behind a vast fund of largely unproductive, avoidable, and socially burdensome mortgage lending.

You ask; Why are Americans Ignoring Reality?

Not all are.

I think the question for you is; Why are you ignoring green ideology?

The market is not capable of being corrected as the location of freedom from the control of political and commercial elites, or their professional employees. What is precisely missing in the face of the morally self-less capitalist ideology of environmentalism is an ideology in favour of raising the productive capacity of the construction industry based on a radically universal sense of immediate and material self-interest. (4)

So can you recognise the ideology of environmentalism at work?

Regards

Ian Abley 27.11.2009

Hugh replies...

Housing Bubbles and Parkinson's Law 14.12.2009

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