NewGeography.com blogs

Despite panning Texas Governor Rick Perry’s initiative to draw businesses from New York, Slate’s business and economics correspondent, Matt Yglesias offers sobering thoughts to growth starved states along on the West Coast and in the Northeast.

“…the Texas gestalt is growth-friendly because, quite literally, it welcomes growth while coastal cities have become exceptionally small-c conservative and change averse. But if New York and New Jersey and California and Maryland and Massachusetts don't want to allow the construction of lots of housing units, then it won't matter that Brooklyn, N.Y.; and Palo Alto, Calif.; and Somerville, Mass.; are great places to live—people are going to live in Texas, where there are also great places to live, great places that actually welcome new residents and new building.”

The entire country would benefit if states like California, New York, Massachusetts and New Jersey were to enact policies to compete with Texas, as Yglesias suggests.

For years, some justified high pay for college educated professionals because they served as a data base for certain types of knowledge – medicine, dentistry, pharmacy, law, accounting or any number of other disciplines taught at the college level. But with the advances in information technology and robotics, those salaries might not be justified in the near future. Information technology is currently forcing downsizing in the law sector, as fewer lawyers are needed to research cases or produce wills, trusts and divorce decrees. And robots will eventually do the jobs of dentists and surgeons and pharmacists.

But technology encroaching on the jobs of college educated professionals doesn’t mean an end to the relevance of institutions of higher learning. Our country’s technology hubs are based around universities, as they provide the necessary research and development for the formation of such companies. However, it must be added that military research and procurement also play a role in our technology sector. In addition, academics in the humanities produce knowledge that enhances our communities, cities and country.

We must also look at the burden that student loan debt on our economy, as the more young people owe on student loans the less they spend on the consumer economy. Cities and suburban municipalities could and should charter universities for city residents, and a university education should be free to all residents. This would help combat the problem.

Reform could help our country build on its past. Doctors, lawyers and college professors didn’t always spend years in school to learn their trade. A Midwestern lawyer named Abraham Lincoln studied for the bar on his own before becoming a successful railroad lawyer and President of the United States. And in the late 1800s, the country was dotted with medical schools that would train doctors. In fact, there were more medical students back then than today, and this put the downward pressure on prices for the consumer.

There have been numerous press reports about the expansion of micro housing, and expectations that Americans will be reducing the size of their houses. As the nation trepidatiously seeks to emerge from the deepest economic decline since the 1930s, normalcy seems to be returning to US house sizes.

According to the latest new single-family house size data from the US Census Bureau, the median house size rose to an all-time record of 2306 square feet in 2012. This is slightly above the 2277 square feet median that was reached at the height of the housing bubble in 2007 (Figure). The average new house size (2,505 square feet) remains slightly below the 2007 peak of 2,521 square feet.

There was little coverage in the media, with the notable exception of Atlantic Cities, in which Emily Badger repeated the expectation of many:

“It appeared after the housing crash that the American appetite for ever-larger homes was finally waning. And this would seem a logical lesson learned from a recession when hundreds of thousands of households found themselves stuck in cavernous houses they neither needed nor could afford.”

But she concluded “Perhaps we have not changed our minds after all.” Well stated.

The New York Times restates basic economics in a June 9 editorial that should be required reading for planners and public officials who fail to comprehend how restrictions on housing raise prices. The Times expressed concern about the extent to which investor involvement in some markets has raised the price of houses for new homebuyers and others who actually plan to live in the houses that they purchase. The price increasing impact of excess demand on housing markets from institutional investors is no different what occurs when urban planning policies restrict housing supply, as occurs with urban containment policy.

Referring to the recent house price increases, The Times said “Those gains, in turn, have propelled rising home prices nationwide, in part by reducing supply and in part by fostering a shift in perceptions about the housing market that has drawn some potential home buyers off the sidelines.” In this, The Times simply expresses the economic reality that when demand exceeds supply, house prices (or any other prices), other things being equal, will tend to rise. The cause of the imbalance is of no account.

But The Times did not limit its analysis to economics. Venturing into the social dimension, The Times went so far as to endorse home ownership: “Given the traditional role of homeownership in building wealth, fostering communities and driving the economy forward, a lower rate of homeownership is a troubling development.”

The Times editorial board has taken a position challenging the agendas of some of the most prominent retro-urbanist theorists, who favor more renting and less home ownership, clinging to the fantasy that, somehow housing markets constrained by excessive planning regulations are exempt from the laws of supply and demand.

For a few years, concern has been expressed about house price increases in Canada, which have been disproportionate compared to household incomes.

In this regard, the latest, semi-annual Bank of Canada Financial System Review points to the overbuilt multi-unit market, especially the Toronto condominium market, as having the potential to inflict serious harm on the economy (see A Toronto Condo Bubble?), including “reduced household net worth.” In its report, Canada’s central bank said:

“…the total number of housing units under construction remains significantly above its historical average relative to the population. This development is almost entirely attributable to multiple-unit dwellings (which include condominium units). In the Toronto condominium market, the number of unsold high-rise units in the pre-construction and under-construction stages has remained near the high levels observed since early 2012. If the investor component of demand has boosted construction in the condominium market beyond demographic requirements, this market may be more susceptible to shifts in buyer sentiment. Furthermore, if the upcoming supply of units is not absorbed by demand as they are completed over the next 12 to 30 months, the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity.

Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations. Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment. These adverse effects would weaken the credit quality of banks’ loan portfolios and could lead to tighter lending conditions for households and businesses. This chain of events could then feed back into the housing market, causing the drop in house prices to overshoot.”

(Emphasis by author)

Canadian analysts have long been concerned about the potential for its rising house prices to collapse, as occurred in the overheated US markets. Just as the housing bust in California, Florida, Arizona and Nevada threw the US economy and that of the world into the worst economic decline since the Great Depression, a housing price bust could inflict serious damage to the Canadian economy, which has performed strongly in recent years.

In the United States, the housing bust led to a nearly 20 percent reduction in household net worth, while recent reports show that the loss has been recovered. However, this recovery has been anything but equal. Many households who suffered losses, such as in investments intended to finance retirement, have not seen their wealth restored.

There is plenty about housing market distortion for Canada to be concerned about.