Avoiding Housing Bubbles: Regulating the (Land Use) Regulators

Federal Reserve Chairman Ben Bernacke called for stronger regulation to avoid future asset bubbles, such as the housing bubble that precipitated the international financial crisis (the Great Recession) in an Atlanta speech.

The Chairman appears to miss the fact that regulation itself was a principal cause of the Great Recession. The culprit, however, was not financial regulation, but rather land use regulation, which drove house prices so high in highly regulated markets. When households that could not afford their mortgages defaulted, the losses were far too intense for the mortgage industry to sustain, and thus the Great Recession.

This is not to ignore the role of Congress and others, which fueled more liberal mortgage credit, and created the excess and credit-unworthy
additional demand for home ownership.

This higher demand, however, was only a necessary, but not a sufficient condition for creating the bubble, which when burst, precipitated the worst economic crisis since the Great Depression. In many markets, there was relatively little increase in house prices relative to incomes, as prices remained at or below the historic Median Multiple (median house price divided by median household income) standard of 3.0. In other markets, however, prices reached from 5 to 11 times incomes.

Already, a new bubble may be on the way to developing. Even after the huge losses, house prices in California were only beginning to return to sustainable historic levels (3.0 Median Multiple). Since bottoming out, however, prices in California have risen 20%, at an annualized rate greater than that of any bubble year.

Perhaps the first principle of regulation is understanding what to regulate. In the case of the housing bubble, it was land use regulations themselves that needed to be regulated.
To avoid future housing bubbles, no more effective action could be taken than to repeal the restrictive land use regulations, without which the last bubble would have been, at most, only slight compared to the destructive reality that ensued.

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Federal Reserve Chairman Ben

Federal Reserve Chairman Ben Bernacke called for stronger regulation to avoid future asset bubbles, such as the housing bubble that precipitated the international financial crisis (the Great Recession) Chihayafuru 2 watch in an Atlanta speech.
The Chairman appears to miss the fact that regulation itself was a principal cause of the Great Recession. The culprit, however, was not financial regulation, but rather land use regulation, which drove manga comic house prices so high in highly regulated markets. When households that co

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Show me how

Your statement that land use regulation drove housing prices is erroneous and ridiculous. To the contrary, it could be argued that blind-eye zoning regulators helped create the real estate bubble and our current oversupply and high vacancy rates. One should be careful of making such simple cause and effect comments.

Let me make sense of it for you, Peter.

Peter, let me tell you about a country whose government, 30 years ago, began to auction import licenses for motor vehicles. The QUANTITY of import licenses was historically in line with previous rates of importing and sales of new motor vehicles; no-one could accuse the government of "restricting supply" so as to drive prices up.

But prices did go up, in fact there was a kind of bubble in car prices, as motor vehicle importers desperately outbid each other year after year for import licenses if they wanted to stay in business. This all ended with the collapse of all demand for the grossly overpriced new vehicles in that country, and widespread bankruptcies of motor vehicle importers.

Exactly the same happens when urban limits are put in, even though the AMOUNT of land released is historically "adequate". The land goes up in value ten, twenty, thirty times as developers try to stay in business by securing land ahead of their competitors, and have to finance holding it for several years. (If the land released by the planners is "ten years supply", then developers will have to buy up the land and possibly hold it for ten years before being able to build if they do not want to cause an oversupply collapse in prices).

If you could analyse the breakdown between land value and house value when these bubbles and crashes occur, you will find that ALL the movement has been in the price of the land. The price of houses, whether new built or old and depreciated, remains roughly consistent.

When urban fringe sections are $300,000 instead of $30,000, ALL urban land is enabled to "bubble" in value by a similar factor. An inner city property that should have been $100,000 for the section and $40,000 for the old, run-down house on it, ends up $1,000,000 for the section and $40,000 for the house.

Planners failure to grasp urban economics and all the flow on effects, which negate and even reverse the INTENDED effects of regulation, has cost us all dearly. For example, the people the urban planners wish to live closer to work at higher densities, are rendered LESS able to do so, not more able to do so; because the land, even if divided up into 3 or 4 tiny lots, is still more expensive than the whole SHOULD have been if urban limits were NOT in place.

World Bank Economist Alain Bertaud is the outstanding authority on this. All Urban Planners should be made to read every paper he has ever written.

OK, then why did the bubble burst?

This argument makes no sense to me at all. If the principal cause of the housing bubble was a shortage in the supply of housing caused by land use reuglation, then why did housing prices increase by so much at a time when housing construction was soaring? In some of the fast-growing sunbelt cities (Phoenix, Las Vegas, Tampa, etc.), housing units were being built faster than households were moving in. Housing starts grew by 50%+ from 2000 to 2005, yet housing prices increased, not decreased. Then from about 2006 through 2009, when housing starts were falling, housing prices also fell. If supply and demand were the only forces governing housing prices, then housing prices would have fallen throughout the 2000s, until housing construction finally fell below the rate of household creation in 2008 or 2009.

Bernanke all at sea on housing bubbles

It is extraordinary in how Federal Reserve Chairman Ben Bernanke failed completely to make mention whatsoever of why housing bubbles erupted in some United States urban markets and not in others - the latter being Texas and much of the rest of middle North America.

The evidence is staring Mr Bernanke in the face.

Why doesnt Mr Bernanke understand the simple realities that if housing exceeds 3 times household income and new stock is not allowed by local land use regulators to be supplied on the fringes at 2.5 times that particular urban areas gross annual median household income - that the stage is set for housing bubbles to erupt.

Its called "the law of supply and demand" Mr Bernanke.

Spelling this out in very simple terms - if the specific urban areas median household income is $60,000 - the median house price should not exceed $180,000 and new starter stock should be going in on the fringes at around $150,000.

The fringes are the only supply / inflation vent of an urban market. New supply of an acceptable standard cannot be supplied at these prices with high density development - where construction costs are often twice as high per square foot.

Where is this happening on the east and west coasts of North America?

These issues are now well understood in Australia and New Zealand - but for inexplicable reasons, the Americans have yet to "get it".

There are obviously extremely serious problems in the training of economists, if the Bernanke speech is any guide. I touched on this serious issue within an article January last year "Housing Bubbles & Market Sense".

Hugh Pavletich
Performance Urban Planning
www.PerformanceUrbanPlanning.org
Christchurch
New Zealand