Housing affordability has been virtually destroyed in many markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. Median Multiples — the median house price divided by the median household income — has been driven up from the historic norm of 3.0 to above 7.0 in many markets. The “3rd Annual Demographia International Housing Affordability Survey” found Vancouver, and some markets in Australia, the United Kingdom and the United States at above a Median Multiple of 7.0 in the third quarter of 2006. Three California markets exceeded a Median Multiple of 10. More recently, it has become clear that Auckland, New Zealand has seen its Median Multiple rise to above 7.0.
In some markets, the cost escalation has been so steep that it now takes at least 10 years more income for the median income household to purchase the median priced house (including mortgage interest) as it did 10 years ago (this is not a misprint). Perth, Australia, San Diego, San Jose, Los Angeles, San Francisco and Miami all belong to this disgraceful club.
There have been a number of attempts to blame the housing cost escalation on increased demand from lower interest rates and more permissive mortgage loan approval practices. There are two principal problems with this thesis.
1. Many markets have not experienced the hyper-inflation that has occurred in what have become the most costly markets.
2. Demand does not increase prices in and of itself. Demand is associated with inordinate cost increases only when supply does not respond.
And, supply has not responded in some markets, because it has been prevented by public policies in land use. The policies in question go by the names “urban consolidation,” “smart growth,” “compact cities,” “growth management” and so on. What they all have in common is rationing land for development, whether through urban growth boundaries, slow approval processes, moratoria or other market interferences. At the same time, excessive infrastructure fees (impact fees) also have played an important role in increasing housing prices in some areas (principally Australia and California).
This is not to suggest that demand did not have a role. Any time that demand strengthens and supply is not allowed to respond, prices will rise. Thus, as demand surged from the lower interest rates and the more permissive lending practices, prices escalated in the restricted markets where supply is strongly controlled by planners. Where liberal land use policies were in place, there was little or no housing price cost escalation relative to incomes.
The situation is well illustrated by a comparison of England and the three fastest growing large markets in the high-income world, Atlanta, Dallas-Fort Worth and Houston.
England, with a population of nearly 51 million, has some of the world’s most restrictive land use regulations. In 2006, approximately 167,000 houses were constructed by the private sector in all of England.
More houses were built in Atlanta, Dallas-Fort Worth and Houston alone. Each of these urban areas has liberal land use regulations. Their combined population is approaching 17 million. In 2006, approximately 195,000 new houses were built by the private sector in Atlanta, Dallas-Fort Worth and Houston, more than were built in all of England. This is despite having a population only one-third that of England.
As James Heartfield argues in his book, “Let’s Build,” England should be building 500,000 houses per year. That’s just about how many England would build if its government policies permitted its population to be treated as well as well as in Atlanta, Dallas-Fort Worth and Houston (and many other markets).