Demographia has released their new "international" housing affordability survey (pdf), picked up locally here and here. Local readers will no doubt be attuned to the survey consistently showing that Vancouver is indeed unaffordable compared to most other North American cities. The thing to keep in mind about the Demographia survey is that they are openly advocating for less restrictive land use. This is done by showing how cities with "restrictive" land use guidelines are generally less "affordable" than those with "less restrictive" guidelines.
There are some obvious flaws in the study as it pertains to affordability on which I will now elaborate.
Owning != Living
The study shows how house prices and affordability are correlated to the degree of land restriction. Yet it is not just housing affordability that should be looked at for a city's overall affordability. While many choose to own property, there are alternatives, namely renting. For the survey to truly gauge a city's affordability in terms of its population's ability to afford to live (not necessarily own), we must also include the rental option. Property values are subject to swings due to speculation and in themselves are a poor measure if rents are not increasing as well.
The survey does argue that land restriction can more easily lead to speculation. Maybe. Though some cities were notably absent from their data set (more below).
Affordable in the Rust Belt
p. 20 of the report has the evil red "unaffordable" cities lined up on the same chart as the haloed green "affordable" cities. Let's look at the green cities a bit more closely. Notables are: Indianapolis, Detroit, Cleveland, Cincinnati, and Pittsburgh. Is it too obvious to say that these cities have flat to decreasing populations and high unemployment? No wonder their land restrictions are so loose. The local authorities need to pull out all the stops to PREVENT people from leaving!
Cart and Horse
A question to ask, again a pretty obvious one, is whether restrictive land use is causally linked to affordability. The survey certainly shows correlation but seems to gloss over causation.
As hinted above, the survey seems to leave out other first world cities and concentrates on only English speaking cities. Why not include Paris, Stockholm, and Frankfurt? Could it be that these cities have restrictive land use policies but more favourable affordability?
Restriction? What Restriction?
Check out mohican's last post on CMHC construction data. If Vancouver has "restrictive" land use policies, it seems there may be a few loopholes, given the MASSIVE housing supply coming online. How could a city with such tight reins on land use produce such oversupply? It blows the mind.
Overall I am surprised the survey is given so much press. Their exclusion of data is suspect, their conclusions not well backed by logic, and their basic premises around what "affordability" really is are not discussed in their analysis. Every year there is a debate on local blogs about this survey. Sure, Vancouver is severely unaffordable. We all know that and this survey confirms the obvious. (Another annoyance is the types of data used for certain markets vary so the affordability number for Vancouver is not apples-apples with other cities) But this survey is not really about displaying the data and I'll stick to a more holistic combination of Case-Shiller, rents, and incomes, without the suspect analysis, thanks very much.
Great post jesse.
Additionally, affordability is not exclusively a function of prices, which is all this study considers. Interest rates, property taxes, and other ownership costs (think home insurance in Florida or California) are VERY significant factors that are ignored in this study. A noteable side point.
A healthy amount of development regulation and restriction ensures proper long term land use. Making it easier for small developers to build is a great suggestion from the study as they are the ones most able to react quickly to add supply to meet demand.
I mentioned the horse cart thing when the 2007 Demographia spin made the rounds.
Obviously expensive cities are denser and denser cities are more likely to have land use restrictions.
Who is more likely to be on a diet? A skinny person or an overweight person?
My posts are really re-hashes of discussions in the comments of this and other blogs. Citations are necessary to many long-time commenters. I have felt for a while that some discussions are worthy of posts in and of themselves, not squirreled away in comments.
This was definitely worth a post. The survey itself was interesting, but I wanted to know the downside of what they were advocating, and now I do.
It reminds me of the time I wanted to attend an evangelical youth meeting with my best friend when I was 6 because they were promising brownies and lemonade. My mom wouldn't let me go...there's always a catch :)
I will just point out that Ottawa, which has just as many land-use restrictions as anywhere else (NCC), is the cheapest major city (prices) in English-speaking Canada. Much cheaper than Calgary or Edmonton, never mind Vancouver.
Inflated house prices (relative to rents) are the product of speculation, not supply restrictions.
Obviously expensive cities are denser
Well not so obviously - compare Calgary with Montreal, or LA with Chicago. What really matters is population growth and local earnings.
I agree the study has many flaws but I sent it around my office anyway with a caveat about the motivation of authors. Most of the people I work with still don't feel Vancouver is over-priced, just expensive. I thought this might highlight the obvious. One thing I find amazing is how deeply ingrained the absolute belief in real estate as an investment is, regardless of the price paid.
It continually amazes me that in an era which has seen the supposed triumph of capitalism (I say supposed because of the current crisis), and a plethora of bodies like the Fraser Institute that are supposed to "educate" people about capitalism, that hardly anyone understands the basic rule of how capitalism works - that the value of assets depends on the earnings that they return to the owner.
None of the "capitalist think tanks" including the FI have had anything to say against the housing bubble BTW, and many south of the border actively denied it.
An honourable exception is the Ludwig Von Mises Institute which not only called the bubble but took on the those who denied it:
Alan Reynolds' housing bubble denial
Check out the jackass neocon website townhall.com linked in the above article.
Here's a better link to the Cato Institute website:
No Housing Bubble Trouble: January 9, 2005
The start of each year is prime time for economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the "housing bubble" about to burst, with a supposedly devastating impact on household wealth. This has been repeatedly recycled since June 2002 by bearish economic forecasters like Ed Leamer of University of California-Los Angeles and Stephen Roach of Morgan Stanley.
And the same scary story has proven handy for policy wonks who abuse it to rationalize their agendas, such as lecturing the Fed to keep interest rates too low or lecturing Congress to push tax rates too high.
Although the overworked analogy between housing and tech stocks sounds dramatic, it is quite preposterous. "The downside of this [housing] bubble," said Mr. Roach last month, is "potentially far worse than that of the equity bubble". Really?
Yes really, you moron.
The piece on the Cato Institute website is awesome. It oozes arrogance. I hope he had all his money in real estate.
Post a Comment