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hugh-pavletich

HUGH PAVLETICH

Fellow Urban Development Institute of Australia (FDIA)

Former President –
Southern Division – Property Council of New Zealand

Co author – Annual
Demographia International Housing Affordability Survey

Demographia.com


CONTACT
+64 3 343 9944
Christchurch, New Zealand



 

 

 

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INTRODUCTION

As a long term commercial development practitioner and former industry leader in New Zealand, I was approached by colleagues back in late 2004, expressing concern that the public was not being provided with sound structural information about the state of the urban housing markets within Australia and New Zealand.

We were all aware that most of the housing market information generated and relayed by the media, was too often self-serving.

Its only purpose was to sell more overpriced housing with grossly excessive mortgages and hopefully lift the advertising spend at the same time. 

The wider public interest was never considered. 

Some way had to be found to generate sound structural information about urban housing markets.

THE ANNUAL DEMOGRAPHIA HOUSING SURVEY IS CREATED

This is why I initiated the Annual Demographia International Housing Affordability Survey's with the support of my colleague and survey co - author Wendell Cox of Demographia. This public policy consultancy is an international demographer and urban transport specialist, based in St Louis, Illinois, U S A.

The first Annual Demographia International Housing Affordability Survey was released in early 2005 – the 9th annual edition will be released late January 2013. 

These Annual Survey’s cover the major urban housing markets of what is loosely referred to as “the Anglo world”, being the United States, Canada, United Kingdom, Republic of Ireland, Australia and my home country, New Zealand, and Hong Kong too.

The surveys are based on what is termed the Median Multiple, which is simply the median house price divided by the gross annual median household income of particular markets.

The “median” is the mid-point of a range of numbers, and is preferred, as “averages” tend to move more dramatically over time, depending on the intensity of activity within market price segments. It is a measure employed by the United Nations and World Bank Urban Indicators Program’s.

It is a simple, robust and widely accepted measure.

HOUSING SHOULD NOT EXCEED 3.0 TIMES INCOME

It is clear from the Annual Demographia International Housing Affordability Surveys and the vast amount of other credible international research , that housing prices should not exceed 3.0 gross annual household incomes.

Further to this, households should not have to burden themselves, with in excess of the equivalent of 2 ½ times their gross annual household income with mortgage debt.

I explained this - and that total housing stock value should not exceed 1.5 times GDP (or GSP OR GMP) early 2011, within a Sydney Morning Herald article - Report: housing affordability out of sync with incomes

This is something people within Australia and New Zealand (and other countries too for that matter) were not aware of, until the Annual Demographia International Housing Affordability Surveys  were generated.

DEFINING AN AFFORDABLE HOUSING MARKET

To be clear – as I explained within a November 2009 article The curse of politically engineered research, an affordable urban housing market is defined as follows – 

“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 incomes.

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 of that urban market.

The fringe is the only sufficiently responsive supply or inflation vent for an urban market.

The critically important Development Ratios for this new fringe starter housing should be 17 – 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.”

NEW ZEALAND PLANNERS SUPPORT DEMOGRAPHIA SURVEY

Following the release of the 2007 3rd Edition Annual Survey, the New Zealand Planning Institute publicly stated – 

“The New Zealand Planning Institute strongly supports Demographia’s call for planners, local councils and developers to collaborate more proactively and effectively in the provision of an adequate supply of affordable new residential housing” adding “Importantly, this and other such partnerships around New Zealand will help ensure that affordable housing takes its rightful place at the heart of community planning decision making, alongside other key elements such as environmental sustainability.”

SUPPLYING AFFORDABLE HOUSING SIMPLE AND FORMULAIC

Supplying affordable new housing is indeed a very simple and formulaic business – and has been since Bill and Alfred Levitt created the modern residential production construction industry we know today following World War 11.

A truly remarkable achievement of entrepreneurial genius. The Henry Fords of the housing industry.

The Performance Urban Planning website is dedicated to the memory of these geniuses.

They supplied new affordable starter housing to young American families for about $US100 per square metre ALL UP. Today on the fringes of the affordable United States markets it is being supplied at in the order of $US600 to $US700 per square metre ALL UP. In bubble housing markets such as New Zealand, it has “skyrocketed” out to $NZ2,500 per square metre ALL UP...and often well beyond that.

It is simply a matter of “following the numbers” (employing the Definition above) to ascertain the problems and what the solutions should be.

HOUSING RESEARCH INSTITUTES MUST PROVIDE HONEST RESEARCH

Remarkably – since the time of the release of the first Annual Demographia International Housing Affordability Survey in early 2005, there has not been credible structural analysis carried out by any Government Housing Research Institute.

The reason for this is because they are not interested in clarifying and solving the issues, because it would “upset” their political paymasters and vested commercial interests. Talking around the problem is “the name of the game”.

HOUSING PROBLEM IS A LOCAL GOVERNMENT COSTS OUT OF CONTROL PROBLEM

Within informed circles however, it is well known that the housing affordability problem – which in historical terms is of very recent origin – is at its core a Local Government costs out of control problem. I outlined how this game is played back November 2011 within How Housing Bubbles Are Triggered.

With respect to Christchurch, New Zealand (the writers home town and where the earthquakes occurred) I have set out the solutions within Christchurch: The Way Forward .

NEW ZEALAND GOVERNMENT GETTING SOLUTIONS IN PLACE

Following over 8 years of public conversation of these issues, thankfully the New Zealand Government, under the leadership of Deputy Prime Minister and Finance Minister Hon Bill English, recognises the problem and is starting on the path of getting workable and pragmatic solutions in place.

The October 2012 announcements by Mr English are covered extensively on this website – and need to be read closely.

FOCUS IN LAND SUPPLY AND INFRASTRUCTURE FINANCING

The key messages here are:

  1. Local Governments must not be allowed to manipulate and “straightjacket” land supply and
  2. finance infrastructure inappropriately. If allowed to do so, they will only “mask” their failures and “trigger” housing bubbles.

It is clear Texas; USA has the most sophisticated land use law and infrastructure financing arrangements in the developed world. Properly – the “Texas model” should be adopted and adapted to housing markets experiencing housing supply problems.

As the Annual Demographia International Housing Affordability Surveys (coupled with the Definition above) clearly illustrate, housing markets that exceed 3.0 times incomes (Median Multiples) have political impediments to new supply that need to be dealt with.

RESPECT PEOPLES RIGHT TO AFFORDABLE HOUSING

Indeed – the United Nations within its 2007 World Population Report was very forthright when it stated – 

“Once policymakers and civil society understand and accept the demographic and social composition of urban growth, some basic approaches and initiatives suggest themselves.

These could have a huge impact on the fate of poor people and the viability of the cities themselves.

Throughout the report, the message is clear. Urban and national governments, together with civil society and supported by international organizations, can take steps that make a huge difference for the social, economic and environmental living conditions of a majority of the world’s population.” 

“ Three policy initiatives stand out in this connection.

First, preparing for an urban future requires at a minimum, respecting the rights of the poor to the city. As Chapter 3 shows, many policymakers continue to try to prevent urban growth by discouraging rural – urban migration…….

These attempts to prevent migration are futile, counterproductive and wrong – a violation of people’s rights. 

Denying people affordable shelter or inflicting on them excessive rents and mortgages, is a very serious issue, and indeed, unnecessary.

ECONOMISTS MUST LEARN STRUCTURAL URBAN ECONOMICS

Over these past few years, I have at times been highly critical of the economics profession, as illustrated within the article Housing Bubbles & Market Sense from January 2009 – where in my view the profession is “seriously impaired” due to the influence of the late Professor Paul Samuelson in particular, with his emphasis on superficial modelling. 

The sad reality is that if the current and previous generation of economists had been properly trained in structural urban economics, the consequences of strangling fringe land supply and artificially inflating raw urban land prices, coupled with inappropriate infrastructure financing, should have been “blindingly obvious” to them. 

...AND TOO, THE URBAN PLANNERS...

The urban planning profession has also experienced inadequate training, as I explained within an article The Housing Bubble: The Planner's Role and Lessons Learned on the United States Planetizen website August 2008. Too often unfortunately, due to inadequate professional disciplines, it has lurched from one fad to the next, as the costs of the previous one, in social, environmental and economic terms, become so obvious.

The “costs” are always, of course, borne by the poor and the disadvantaged.

This website is an “archive” of my writings over these past years, with articles of note and down the left column, links I trust you find of interest.

Hugh Pavletich FDIA
Performance Urban Planning
Christchurch
New Zealand
November 27 2012

DEFINITION OF AN AFFORDABLE HOUSING MARKET

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 earnings. 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 (refer Demographia Survey Schedules for guidance).

The critically important Development Ratios for this new fringe starter housing, should be 17 - 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.