Artificial land supply restrictions boost house prices in US and Ireland
Last week, I posted an article on Finfacts, which stated that for the cost of a typical management level house in Dublin, Ireland, one could buy 9 similar houses in Houston, Texas, 3 in Amsterdam, 2 in Sydney and almost two in Tokyo.
I said that in Houston, there's a positive approach to supply where restrictions are at a minimum and competition forces builders' margins down to single digit figures while in contrast, planning intervention and cronyism has prompted the European Environment Agency (EEA) to use Dublin as a "worst-case scenario" of urban planning so that the new EU member states in Eastern Europe avoid making the same mistakes.
The current issue of BusinessWeek magazine (Nov 6, 2006), says that, even though Houston has had a long stretch of healthy economic growth, it's so easy to build homes there, that inflation-adjusted prices are still 19% below their 1983 peak.
Peter Coy asks in BusinessWeek, how common is a boom-bust-boom pattern? He says that over the past three decades about 40% of housing busts in big US metro areas have eventually been followed by strong recoveries. That's according to a BusinessWeek analysis of inflation-adjusted housing prices. In an additional 15% of markets, prices adjusted for inflation barely got back to their previous peaks after 15 years. In the remaining 45% or so of markets, prices adjusted for inflation were still down a decade and a half after their pre-bust peaks.The disparity between winners and losers was striking: Among the winning markets, the average inflation-adjusted gain after 15 years was 43%, while among the losers the average inflation-adjusted loss was 19%.
Coy asks how do you know if your own local market is the kind that will snap back or the kind that will languish indefinitely? One key factor is the ease or difficulty of building new homes. Places where new home construction is a long and expensive process, such as Boston and San Francisco, tend to experience big price movements, both up and down. "Restricted supply leads to more volatility in prices," says Edward L. Glaeser, a Harvard University economist who has studied big-city housing markets.
BusinessWeek says that supply considerations can cause markets to diverge from what seem to be the fundamentals for a long time, perhaps permanently. One explanation for this is the "superstar cities" concept developed by economists Joseph E. Gyourko and Todd M. Sinai of the University of Pennsylvania's Wharton School and Christopher J. Mayer of Columbia Business School. They argue that certain cities -- Boston and San Francisco, say -- benefit from a winner-take-all phenomenon that separates them from also-rans. People all over the world want to own homes in Boston and San Francisco, and the supply is limited. As worldwide wealth rises, there is a bidding war for homes there. No such luck for, say, St. Louis. In fact, according to the authors, the gap between prices in San Francisco and the national average doubled between 1970 and 2000.
What makes the housing supply inflexible in markets like Boston isn't necessarily a lack of land. Far more often, the cause is regulatory constraints like minimum lot sizes.
"There's a pretty strong correlation between volatility [of housing prices] and regulatory constraint," says Stephen Malpezzi, a housing economist at the University of Wisconsin School of Business.
Glaeser says that because of zoning regulations, the density of housing in many metro Boston communities is actually lower than in growing areas of the supposedly wide-open Southwest.
"In Wellesley [Mass.], they should be building apartment buildings around the train stations, but it's all single-family housing," says Richard K. Green, a finance professor at George Washington University.
Peter Coy writes that at this stage in the slump, restricting the supply of housing may sound like a good thing. It's not. Sure, it can make current owners richer by increasing the scarcity value of their homes. But it's murder on first-time buyers. And in the long run, it's bad for the local economy. As Glaeser notes, companies tend to migrate away from areas with costly housing to avoid paying the higher salaries needed to compensate employees for their home costs. He notes that between 2003 and 2005, high-cost Massachusetts lost 0.3% of its population, more than any other state. "The economy cannot grow unless the population grows, and the population cannot grow without new housing," he wrote in a May paper.
Ireland, a country that is 4% urbanised, is short of land!!
The Irish land rezoning system that has been the subject of a public tribunal investigation of planning corruption for 9 years - with no prospect of any change to the system that spawned it -turns Irish farmers on public welfare from the European Union, who are lucky to be located near Irish towns into multimillionaires, selling at up to €500,000 ($640,000) an acre or more.
Two years ago, the Irish Government paid €29.9 million for a 150-acre site at Thornton Hall in North Dublin, for a prison relocation. Stupidly, Government officials left the cat out of the bag on the identity of the prospective buyer.
The farmer who sold his land to the Department of Justice, moved North-west of County Dublin to the adjacent County Meath and bought a replacement 133 acre farm for €5.3 million. According to journalist Frank Connolly, in March 2005, the 238-acre Grange Farm at Kilbride, just ten miles from the city centre and four kilometres to the west of the Thornton site at Kilsallaghan, was sold at public auction for €6.2m or just over €26,000 an acre as compared with the €200,000 per acre paid for the Thornton Hall lands – almost eight times more.
Once it's known that Irish land is for development, it's like winning the lottery, without even having to buy a ticket.