For the past six years, Hugh Pavletich of Performance Urban Planning (Christchurch, New Zealand) and I have authored the Demographia International Housing Affordability Survey. The Survey assesses structural housing affordability by the use of the Median Multiple (median house price divided by the median household income). This measure is in wide use and has been recommended by the United Nations and the World Bank.
Six nations are routinely covered, including the United States, the United Kingdom, Canada, Australia, Ireland and New Zealand. In each of these nations, the Median Multiple has been astonishingly similar, at least until recent years, with all six nations having had a Median Multiple of 3.0 or less until the last decade, or at the worst, the late 1980s. Of course, as Demographia and a world-class collection of economists have shown, house prices have risen substantially relative to incomes as a result of growth management (also called smart growth, urban consolidation) that ration land for development.
For the first four years of the Survey, California markets were the most unaffordable, with Los Angeles exceeding 11 at one point, while San Francisco, Honolulu and San Diego exceeded 10. That all changed with the US housing bust, which was the most severe in California. As a result, Vancouver has become the most unaffordable major metropolitan area in the six nations, with a Median Multiple of 9.3 in the 2010 Survey. Sydney was a close second at 9.3.
The South China Morning Post, Hong Kong's leading English language newspaper, approached Demographia to estimate a Median Multiple for Hong Kong. This we were pleased to comply, given our interest in expanding the scope of the Survey to more than the six nations.
It took a considerable amount of "digging" to develop the data, and a number of emails back and forth with The South China Morning Post. The result was an estimated Median Multiple for Hong Kong (the entire Special Economic Region) of 10.4. This makes Hong Kong the least affordable metropolitan area of the 273 Demographia has reported upon. The South China Morning Post illustrated this in an attractive graphic.
At least temporarily, however, home purchasers in Hong Kong have been able to arrange financing packages that mute these high costs. Currently, mortgage interest rates are from 0.8% to 2.1%, which is far below the lowest levels reached in the six nations. As a result, such homeowners find their housing more affordable that some metropolitan areas with higher Median Multiples (such as Vancouver and Sydney).
However, things could soon change. Professor Chau Kwong-wing of the University of Hong Kong calls the present situation: "... just a short-term illusion," adding that "People think they can afford an expensive flat with a reasonably cheap mortgage. Their dreams will burst and the flat will become unaffordable when the interest rate rises." The professor has a point. Variations in interest rates can mask or magnify structural affordability, which is measured by the Median Multiple. This is because interest rates are subject to fluctuation, while buyers and sellers do not renegotiate sales prices after the deal is concluded.
Professor Chau echoed the land regulation views of the economists, indicating that the need for "increasing land supply for sales."
We look forward to routinely reporting on Hong Kong in future editions of the Demographia International Housing Affordability Survey.
Hong Kong has grown fast in recent decades, not only in population but also in income. International Monetary Fund placed Hong Kong's 2009 gross domestic product per capita (adjusted for purchasing power) only 10% below that of the United States, and 15% above its former colonial administrator, the United Kingdom. Hong Kong was even further ahead of other major European Union nations and Japan.
Forbes Magazine just released its "Best Places for Business and Careers" list and it's no surprise to me that Des Moines, Iowa just landed in the top spot. Nearly 5 years ago, I'd have said the same thing you may have just muttered. "Des Moines...that's fly over country...who'd want to live and work THERE?" I fully appreciate your logic with our cold winters, humid summers, and ag-centric heritage. But weather and corn fields aside, the Des Moines metro, a circle consisting of about half a million people, has captured my heart and I've become its most passionate evangelist.
After a lifetime of Southern California bustle, my wife wasn't exactly thrilled about my desire to abandon our friends and family infrastructure. But ultimately she wanted me to have more than a view from the windshield of a Honda Civic and to be a stay-at-home mom for our kids. We began to see clearly that reaching goals for entrepreneurship, more family time, and more civic engagement were unattainable in our current location. We were ready to reclaim our time, live with less hassle, and stretch a bit.
So in 2005, we executed geographic arbitrage landing in Clive, Iowa, a beautiful community on the West side of the Des Moines metro. Soon the memory of my 2.5 hour daily plunge into freeway hell was fading. Views of the beaches and mountains from the window of the 6:20AM flight to DFW became real life experiences on urban bike trails and fishing at the lake blocks from my house. A 20-minute drive from end-to-end, the Des Moines metro area defines easy living and 70 miles equals 60 minutes. (I'm still chronically early to my appointments.)
During those first months here a local business blogger who'd been reading my copious posts on "Why Des Moines?" reached out to me. After coffee and a few introductions, my personal and business network began to flourish. It was hard to comprehend how quickly anyone who's willing could reach top level contacts in business, associations, and in government. Before long I was shopping a business plan to investors and prominent business owners in town. I was even introduced to State House representatives who cared about my thoughts on what's happening in their districts. (I went 33 years never meeting a Congressman in CA.) I realized that within a few phone calls I could reach top decision makers, corporate leaders, and legislators and they were willing to listen to me. My business createWOWmedia is growing rapidly now and I'm reaping the benefits of 2.5 years of head down execution and statewide relationship building. I had the time, the energy, and the start up capital through my CA home sale to stop dreaming and start doing. The Des Moines metro gave me that opportunity and I'm thankful for it.
I've figured out that if you're willing to endure a couple months spent largely indoors or bundled up that the trade-offs are magical and worth their weight in gold. I wouldn't trade what I've found here for anything. The Des Moines metro and the state of Iowa as a whole offer so much…and ask so little in return. Des Moines is easy living defined.
Am I worried about a massive influx of new Iowans pouring in from Western states based on this piece and Forbes's recommendations? No chance. But if you do decide to take the plunge and reclaim your life from the concrete jungle, shoot me an email and I'd be happy to guide you. That's what good neighbors and Iowans do.
Doug Mitchell is a Southern California refugee who moved his family to Des Moines, Iowa to build a better life. Doug can be reached at doug@createWOWmedia.com or on twitter @doug_mitchell
The big news in finance this week is that Goldman Sachs got busted – finally – for fraud related to those mortgage-backed bonds. At the heart of the Securities and Exchange Commission charges is the accusation that Goldman Sachs failed to disclose conflicts of interest it had on some mortgage investments. One of the charges that Michael Milken plead guilty to in the 1980s was the failure to disclose. “This type of non-disclosure has [not since] been the subject of a criminal prosecution,” according to his website. The charges against Goldman are for civil fraud. The difference between civil and criminal cases is that civil cases are usually disagreements between private parties; criminal cases are considered to be harmful to society as a whole. The judge in the Milken case found that his failure to disclose resulted in $318,082 of financial damage. The SEC is charging that Goldman’s failure to disclose resulted in a $1 billion loss to investors. The former resulted in criminal charges, the later in civil. One has to wonder, given Milken’s 10-year sentence for a relatively small dollar-valued infraction, what would be appropriate in this case.
The only criminal case related to the financial crisis that has been brought against any Wall Street executive so far was against two Bear Stearns hedge fund managers. They were found not guilty in November of “falsely inflating the value of their portfolios.” Theirs was a crime of commission not omission – they were charged with actively lying to investors and not with failing to disclose information. The closest situation that might result in criminal fraud charges for failure to disclose will be if the Justice Department pursues charges against Joseph Cassano, the AIG accountant who failed to disclose information about the magnitude of the losses AIG had insured. Federal prosecutors have been investigating this since at least April 2009 – information about investigations is not made public, including if the investigation has been dropped, so we don’t know for sure that there aren’t charges in the pipeline.
All this Wall Street activity that resulted in the US taxpayers forking over $3.8 trillion in bailout money – it’s really hard to imagine that some good-guy-with-a- badge somewhere can’t figure out who harmed our society as a whole.
There are few downtown areas in the nation that are more attractive than Seattle. Downtown Seattle is a dream of spontaneous order and a fascinating place well worth exploring. It is one of the nation's great walkable downtown areas, with a mixture of older and newer buildings, hills, Ivars Acres of Clams and the Chief Seattle fire boat on Elliot Bay, Pioneer Square, the Pike Place Market (itself the home of the first Starbuck's coffee) and a hyper-dense 100,000 jobs per square mile.
Downtown boasts the L. C. Smith Tower, which from 1914 to 1966 was the tallest office tower in the west, at 42 floors and nearly 500 feet. Now Smith Tower ranks no better than 35th tallest downtown. Seattle has built so aggressively that a visitor to the observation deck would see more looking up than down. Smith Tower is dwarfed by a skyline containing some of the nation's most impressive office architecture, such as Columbia Center and the Washington Mutual Building, which was named for the subprime mortgage lending champion.
Downtown has many more historic landmarks, such as the Olympic Hotel and the Washington Athletic Club. The art-deco Northern Life Tower was the second tallest until the building boom of the 1960s and would have been the pride of more downtown areas than not. The 1970s Henry M. (Scoop) Jackson federal building is a rare gem of its age, while the Rainier Bank Building is perched on a tapered base that begs the question as to whether it will collapse before the Alaskan Way Viaduct in the great Cascadian subduction zone earthquake (which is due to strike sometime between now and the end of time).
The Condominium Bust: Downtown Seattle has experienced one of the nation's strongest central city condominium booms, though its success (and that of others) has long been drowned out by the high pitched chorus of the Portland missionary society. As in Portland, Atlanta, San Diego, Los Angeles and other newly resurgent downtown areas, Seattle's condominium boom is now a bust as resembling that of a subprime-baby remote desert exurb halfway between San Bernardino and Las Vegas. Even so, the condominium neighborhoods of downtown Seattle are more attractive than what they replaced. Eventually, the large inventory of empty units will be sold or converted into rental units.
The Office Bust: Downtown's condominium bust has spread to its office market as well. The vacancy rate is now over 20%.
The Employment Bust: Data from the Puget Sound Regional Council of Governments (PSRG) indicates the depth of the problem. From 2000 to 2009, employment in the downtown core declined more than 12%, with a loss of 20,000 jobs. But it would be a mistake to conclude that downtown Seattle's employment decline stems from the Great Recession. The losses occurred before. In 2007, the last year before the recession, employment had fallen nearly 18,000 from 2000.
Downtown Seattle's employment decline mirrors trends around the nation and around the world. Now, downtown Seattle accounts for only 8.4% of employment in the four county area, something that would surprise an airline passenger looking at its verticalness from above.
The balance of the city of Seattle has done somewhat better, having lost 3% of its employment since 2000.
Suburban Job Ascendancy: All of the employment growth in the Seattle area has been in the suburbs. While the city, including downtown, was losing nearly 30,000 jobs, the suburbs of King, Pierce, Snohomish and Kitsap counties added 90,000 jobs (Table). Suburban Redmond, home of Microsoft, added 19,000 jobs all by itself. Even Tacoma, the old second central city and long since defeated challenger to Seattle added a modest number of jobs between 2000 and 2009.
|EMPLOYMENT IN THE SEATTLE AREA: 2000-2009
|Balance: King County
|Compiled from Puget Sound Regional Council of Governments data.
If You Built it, They Must be Going: With these trends, it might be expected that local transportation agencies would be rushing to provide sufficient infrastructure to the growing suburbs. Not so. Planners are scurrying about to build one of the nation's most expensive light rail systems with lines converging on downtown, to feed 20,000 fewer jobs today and perhaps 30,000 or 40,000 fewer in the future. Perhaps this is the train "got a whole city moving again" as the television commercials put it?
What about growing Redmond? It's on the map. The line is scheduled to reach Redmond sometime between now and the end of time.
There was a popular book in 1973 – A Random Walk Down Wall Street. (by Burton Malkiel, now in its 9th edition, 2007) – that pooh-pooh’ed the idea that one investor’s stock picks could always be better than another investor’s stock picks. The punch line is that you could randomly throw darts at the Wall Street Journal financial pages and do just as well as anyone else investing in the stock market. I first read it in 1980, while taking Investment 101 in business school at night and editing economic research documents for the Federal Reserve Bank of San Francisco during the day. I had a very memorable argument with John P. Judd, then senior research economist and more recently special advisor to the Bank president and CEO Janet Yellen.
John thought the Wall Street brokers were crazy for thinking they could make more than average returns on investment. I thought the Federal Reserve was crazy for thinking they could control the money supply. John was already a PhD economist; I was still working on my Bachelor degree in business administration.
Twenty years later I also have a PhD in economics, but there are still two camps pulling in different directions in their dangerous tug-of-war on the economy. There are the double-dip pessimists led by Yale Economist Bob Shiller and most recently discouraged by Paul Ferrell of MarketWatch. And there are the “Mad Money” optimists who believe that Jim Cramer will tell them everything they need to know to get and stay rich, while Ben Bernanke consoles them with sound bites like “increased optimism among consumers … should aid the recovery.”
At the heart of the problem is the same, original argument I had with John Judd – “is there a way to beat the averages” – except that this time around Wall Street is in bed with the Federal Reserve. You can no longer tell the crazies apart.
Which brings me back to the Random Walk. If Wall Street has their way, they will inflate the market just enough to induce you to put your money back in. Don’t forget the Weenie Roast of 2008. If the government – either Congress or Treasury or the Federal Reserve – has their way, they will let it crash again, too. Don’t forget that it was only Wall Street that got bailed out the last time. I think the chances are 50-50 either way.
Queensland might be thought of as the Florida of Australia. Like Florida, Queensland is the "Sunshine state." For years, Queensland has been the fastest growing state in the nation, just as Florida has been the fastest growing large state in the United States. The Gold Coast in Southeast Queensland might be characterized as Miami Beach on steroids.
Both states have also faced housing difficulties. With its smart growth land rationing policies, house prices escalated wildly in Florida and then collapsed as America's "drunken sailor" lending policies came home to roost. Queensland has had similar "urban consolidation" land rationing policies and the same house price escalation has occurred. However, the price bust did not follow, because lending standards were more strict. This is because adults were in charge of finance in Australia instead of the cartoon characters that drove policy in the United States. Australian lenders at least asked borrowers if they had a job and checked their pulse.
But there are still housing problems in Queensland. The Urban Development Institute of Australia Queensland has just released its two Richardson reports that, among other things, suggest that restrictions on housing are increasing household sizes. In recent years, only one new house has been produced for each new resident, which compares to an average household size of 2.5. Presumably younger people are living longer with their parents and perhaps, with the strong foreign immigration to Australia, there is substantial "doubling up," as houses are shared by people who would not otherwise live together, such as multiple families (internationally, census authorities define a household as all of the people living in a single house).
Median lot prices and median house prices have risen strongly in Queensland, which has led to a decline in housing construction and a loss of construction jobs. The report recommends allowing more housing development on greenfield sites and developing additional infrastructure on the urban fringe where more housing would be developed. Finally, the report urges that the state establish benchmarks for the time it takes to approve and build greenfield developments.
The Richardson reports are just another indication that the severity of the housing crisis and its causes is more broadly understood in Australia. Queensland would do well to follow its recommendations.
Photo: Gold Coast
Barack Obama’s home state is in the news but not for positive reasons. Fitch downgraded Illinois debt. At the end of March, according to the Bond Buyer:
Fitch Ratings late Monday downgraded Illinois’ general obligation rating one notch to A-minus and warned of possible further action by leaving the state’s credit on negative watch ahead of $1.3 billion of short- and long-term GO issuance in three deals over the coming weeks.
Gov. Pat Quinn had hoped that the General Assembly’s passage last week of pension reforms would stave off any negative rating actions and buy the state some additional time to address a nearly $13 billion budget deficit and liquidity crisis in the current legislative session.
Fitch isn’t Illinois’ only problem. The Chicago Tribune wrote a devastating editorial concerning Illinois’ economic performance:
once-thriving Illinois in February had 475,000 fewer jobs than it did in November 2000. Even replacing every one of those jobs wouldn't fix the sorry state of this state: Factoring in population growth over the last decade, Illinois needs 600,000 new jobs just to get the employment level back to where it was. The cumulative cost to Springfield of those lost jobs: $6 billion in tax revenues through fiscal '09 and, barring some miracle, $10 billion through fiscal '11.
Illinois politicians keep trying to blame job losses on the Great Recession. But this is only the latest bad patch in two decades during which Illinois has lagged the nation at growing jobs. Geoffrey Hewings, head of the U. of I.'s Regional Economics Applications Laboratory, says something else has to explain why Illinois unemployment keeps running well above the national rate: "Our economy looks like the U.S. economy" in terms of its blend of manufacturing, service and other sectors. "Yet since 1990, we've underperformed the U.S. in job creation."
In fact, for the decade before this recession began, other researchers have pegged Illinois' job creation rate at 48th in the U.S., ahead of moribund Ohio and Michigan. Can't blame recession for that.
Illinois lawmakers spent much of the last 20 years treating private-sector employers as if they were stupid — unable to understand that they and their workers eventually would have to pay for too much state spending, borrowing and promises of future obligations — none more egregious than the now severely underfunded retirement benefits for public employees.
This kind of editorial might scare away future business expansion in Illinois. It wasn’t easy for the Tribune to write this one because it’s so negative that it even might scare advertisers away. But, the truth can’t be ignored much longer. Special interest groups are thriving, but taxpayers are not. The long time Illinois Speaker of House is more responsible than any individual for Illinois’ persistent financial problems. Illinois declines, but Madigan’s property tax appeals law firm thrives.
There has been a lot written lately about the return to the city. I’ve noted myself how places like central Indianapolis have reversed decades of population declines. That’s exciting. And the New York Times, for example, just trumpeted how “smart growth is taking hold” in America.
But let’s not kid ourselves here. In my view this represents a possible inflection point, but it is way too early for the type of triumphalist rhetoric being bandied about by advocates.
Let’s take a look at the change in the regional population share in core counties in 2009 vs. 2008 for the Midwest cities I typically focus on.
|| Core County Share Change
|| 2009 Core County Share
|| 2008 Core County Share
For St. Louis, I use St. Louis city + St. Louis County as the core. For Minneapolis-St. Paul, I used Hennepin+Ramsey as the core.
As you can see, only two regions managed to increase core county share of population, and these by a minuscule amount. Everyone else lost core county share. Keep in mind that even these “core” counties have many places with suburban characteristics. Now you might prefer a purely core city measure, and if so, be my guest. But don’t be surprised if the data gets even worse in many cases. Even in Chicago, which might have experienced the biggest urban core construction boom in America, the city lost population while Cook County gained it. Looking at the core city would make Chicago’s share loss worse.
I think this shows there is still some work to do, to put it mildly.
So why the difference versus the EPA study the NYT trumpets? Well, for one thing, the EPA study is worthless as a measure of urban health. They measure only new building permits, not people. This I think taps into a subtle suburban mindset in our outlook, that new housing units must represent net new inventory and net new people moving in, but in urban areas that’s not necessarily the case.
The sad fact is, many of our urban cores have experienced significant housing abandonment and demolition. So in addition to construction of net new units, there’s a countervailing force of reduction. For example, the greater downtown area of Indianapolis has been seeing lots of construction. But the regional center comprehensive plan noted that between 1990 and 2000, the net number of dwelling units actually decreased. “The actual number of housing units declined over the 10-year period as some housing became dilapidated or was demolished and as some projects were emptied to await renovation (the Census only counts habitable units).”
What’s more, as yuppies move in, and others move out, there is bound to be an effect on household sizes. Is it is really a good idea to price out larger immigrant families to the inner ring suburbs so that DINK’s can move in? How’s that for the environmental footprint of the region?
I’m glad we’ve got big increases in urban construction and even population increases in some neighborhoods, but let’s not get ahead of ourselves by trumpeting a “fundamental shift”, as the EPA does, when the demographics don’t back it up.
The New York Times article is also a disappointment. It fails to do any independent analysis of the data and only talks to people who are cheerleaders for the study, making it a sad piece of journalism.
Someone recently described me as an “apologist for sprawl”. I in no uncertain terms reject that label. I am a passionate urban advocate who wants to see our core cities thrive and prosper. I want more growth there. I live in a city in a walkable neighborhood and rarely drive.
But advocacy research of the type urbanists are quick to decry in others does a disservice to the cause. To change the trajectory of our cities and our built environment in America, we need to start with something called “reality”. I am optimistic that there’s a change in the air. But let’s not make claims about “fundamental shifts” that are simply not supported by any realistic look at the totality of the data.
This post first appeared at The Urbanophile.
One of the most enduring myths in public policy is that local government consolidations save money. The idea seems to make sense, and most of the academic studies support the proposition. However, rarely, if ever, does the promised reduction in public expenditures or taxes actually take place.
Residents will vote March 16 on a proposal that would merge the village government of Seneca Falls, New York into the more rural and adjacent town of Seneca Falls. Under state law, this can occur without the consent of the town into which the village would be merged.
Paltry Savings and the Risks: A consultant report suggests savings that can only be characterized as pitiful. Out of a combined budget of $13 million, less than $400,000 would be saved, and even that figure is by no means sure, according to the consultant.
Voters may want to consider the following specific risks that could make achievement of the expected savings and tax reductions impossible:
Proponents expect to receive $500,000 annually in funding from a state program that seeks to encourage municipal consolidations. The state program is slated for cuts. Further, with New York’s serious budget difficulties, such a superfluous program could be a prime candidate for discontinuance. Thus, one of the principal factors expected to lower taxes might not survive in the longer run.
Presently, the village has a police department, while the town does not. The new town government is not likely to be able to get away with providing a higher level of police protection in the former village than in the merged town. One of two outcomes seems likely: (1) The first is that the present police protection (and budget) would be spread throughout the merged town. This would dilute police protection in the former village area. (2) The second is that the higher level of police protection in the village would be spread throughout the merged town. This would mean larger expenditures that could easily erase the already minimal projected savings.
The consultant proposes that a new town hall be built. The costs of this building could substantially erode the projected operating cost savings.
A principal reason that municipal consolidations rarely save money is that the necessary “harmonization” of service levels and employee compensation costs inevitably migrate to the level of the more costly former jurisdiction. The police issue in Seneca Falls is a prime example of the service harmonization cost risk.
Learning from Toronto: Seneca Falls does not have to look far to see how local government consolidation can lead to more spending and higher taxes. Less than 150 miles away as the crow flies, Toronto residents were glowingly told of the lower taxes and expenditures that would result from consolidating six jurisdictions into a “megacity” in the late 1990s. As we and others predicted at the time, things have not worked out. Toronto’s spending has risen strongly under the consolidated government. Despite its much smaller population, the risks are similar in Seneca Falls.