It’s too Late to Build Our Way Out of A Bubble – So Why Panic and Allow Sprawl Everywhere?

The narrative of the IMF, EU, and now every political party apart from UKIP now seems to be build, build, build, relax planning, quick, quick or we will have another house price boom and bust and associated financial crisis.

One of the great economic nostrums is ‘never reason from a price’ because prices are due to both movements in supply and demand.  So to suggest that a high price requires greater supply is only half the story, it misses out whether the greater distortion is due to excess demand fueled by foreign capital and unsustainable credit growth based on property speculation.  Certainly in the long term greater supply helps, however if you are close to the top of an asset speculation cycle greater supply can simply fuel greater capital inflows and credit growth fueling the bubble to ever greater heights, and increasing the height from which the market must fall, the hurt caused when it does fall, and potentially hastening the point at which a hard landing occurs rather than from which a soft landing is possible.

I will give an example from a market much more ‘flexible’ in its release of land etc.  Dubai, where in Q1 2014 houses prices rose a record 21% and the stock of homes advertised for sale also reached record levels.  So what was the lesson from the price alone, more land releases, more consents, more completions needed because ‘market signals’ were telling you to build more.  In fact by trying to reason only from a price, from not considering inventories and unsold stock, not considering credit flow and capital inflows, and not considering whether house prices reflected real yields they were reasoning from only 1 5th of the full market signals necessary to guide public policy.

So for those who chant such simplistic nostrums learned only from the bad economics taught at Oxbridge PPE courses don’t listen to them they are charlatans.  They are the same voices that politicians listened to in Ireland and Spain calling for ever more bad release of land in poor and unsustainable locations, and look what happened as the village housing now lies half built and stripped bare by vandals, the same voices who said the markets in China, Australia, Canada and France will keep rising forever because they missed the last property crash, only now to face some of the largest property crashes in history, despite much easier supply than in the UK, as the housing market is much more flexible to changes in credit than it is to changes in supply, the latter only adding to stock by 2-3% a year when the amount of credit increasing in a year for housing can be 10 times that.

Increasing supply is needed but as a measure it has a lag of in some cases decades (for the largest sites), so there is time to get it right, develop plans and increase housing in the best locations, and more importantly turn on the levers of supply (and finance especially counter cyclical government finance) when it  will do good and least harm, let alone fuel the peak of a bubble.  The UK Government is panicking because of low housebuilding levels and because of a dogma against public spending reaches for the neo-liberal measure of allowing sprawl, a measure which has led to a housing and economic disaster in every country and at every time where it has been tried.

Don’t believe me, read this 793 page book chronicling 2 centuries of housing bubbles in Australia in painful detail by Egan and Soos

One of the most popular and influential ideas to emerge in recent years is that poor government regulation has restricted the supply of land in the form of planning, zoning and development regulations, thus hindering the timely construction of dwellings. By appealing to basic economic principles, this ‘supply constraint’ is reasoned to have increased housing prices…The purported central role of restrictive land use regulations in causing housing price inflation requires critical examination. Two distinct versions of the urban containment theory need to be considered: in the basic version, these policies restrict supply, causing a structural, upwards shift in housing prices (the ‘static-supply’ theory).This argument says nothing about the volatility of the asset price cycle. In the second, more subtle version, urban containment policies are hypothesised to delay new housing supply, exacerbating housing price volatility (the ‘cycle-supply’ theory). According to the latter variant, the rise and fall in land and housing prices during a real estate cycle are amplified. Adherents claim it is possible to out-build a bubble by increasing the supply of new housing on the urban fringe, as liberal land markets ensures a rapid supply response to escalating demand during a credit boom. Proponents claim a responsive supply of housing minimises or prevents the formation of bubbles in the land market, as the opportunity for reaping extraordinary capital gains is muted. Fortunately, the claim that supply-side factors are a fundamental driver of land market bubbles can be tested. Two conditions must be fulfilled to confirm this hypothesis: firstly, the history of the land market should not show the formation of bubbles without urban containment policies. A rich documentary record exists to test this condition. Secondly, the supply of available properties in the rental market must also be obstructed, driving up residential rents in the process….In recent decades, large bubbles have also formed in a number of housing markets considered to have liberal land use policies.

The historical record for countries with long-term real estate data – Australia, England, the Netherlands and the US – demonstrates repeated land market cycles for centuries prior to the onset of planning, zoning and development regulations implemented in the early 20th century and more extensively in the post-WW2 period. Australia’s own economic history appears to falsify the urban containment hypothesis given the formation of land market bubbles in the 1830s, 1880s and the 1920s; long before government bureaucrats made red tape into an art form during the modern era…. If the urban containment hypothesis were valid, then land bubbles in the mid-1970s and late 1980s should have been larger than those previously experienced due to additional urban containment policies and a lower rate of dwelling construction, but this is not supported by the available data.

[they quote Fred Harrisson]

But for a clinching argument, we can return to the UK. In the 150 years before 1947, the housing and land markets featured prominently in the booms and busts of the business cycle. To what do we attribute those previous episodes? We certainly cannot blame planners! In terms of price volatility and supply falling short of demand, the patterns were consistent throughout two centuries. Land planning did
not mitigate – but nor did it exacerbate – the dynamics of booms and busts…

A study by economist Dirk Bezemer tabulated the number of economists who correctly identified the US housing bubble and predicted the subsequent GFC. Among this select group, a consensus emerged that debt-financed speculation was the major cause of the bubble, with some mention of insufficient land taxation. Not a single economist considered urban containment policies to be a factor. The three experts in the historical analysis of real estate cycles – Phillip Anderson, Fred Harrison and Fred Foldvary – do not mention urban containment policies as a cause of land bubbles, past or present….

Private debt and property taxes are a glaring omission from land use policy studies, demonstrating more research is required before urban containment policies can be claimed to cause or amplify land market bubbles. General equilibrium models are incapable of controlling for the effects of mortgage debt acceleration on land prices and many studies have not controlled for the effects of property and land taxes. Adherents of the urban containment hypothesis have conveniently ignored the fact that rents tracked just above the rate of inflation across major US cities during the formation of the land bubble. The reason is obvious: if urban containment policies amplified bubbles, then rents should have increased significantly in those housing markets that were allegedly supply-constrained….

It is difficult, if not impossible, to prove causation between urban containment policies and rising land prices without a commensurate increase in rents. Recent empirical studies confuse correlation with causation, as equilibrium models cannot control for the effects of mortgage debt acceleration or the behavioral psychology of irrational agents. Once a land bubble has formed, it becomes challenging to disentangle the influence that urban containment policies have on land prices from these confounding factors. It is already difficult to accurately measure the multiple costs and benefits resulting from government regulation of planning, zoning and development. No study has yet isolated the impact of urban containment policies from other factors, such as private debt, taxation and psychology.

 

3 thoughts on “It’s too Late to Build Our Way Out of A Bubble – So Why Panic and Allow Sprawl Everywhere?

  1. Pingback: Do we believe anything we hear? | Interesting Growth Ecomony

  2. Pingback: Can Sprawl Prevent Housing Bubbles? | Decisions, Decisions, Decisions

  3. Pingback: Why Non Land Supply Constraints Mean a Rush to Release Land will Pop the Housing Bubble | Decisions, Decisions, Decisions

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