In January of each year, the Annual Demographia International Housing Affordability Survey is released. The 2008 4th Edition (data September Quarter 2007) covers the 227 major urban markets of the United States, Canada, the United Kingdom, Republic of Ireland, Australia and New Zealand.
The methodology employed in assessing affordability is the "median multiple" – as recommended by the United Nations and World Bank – where the median house price is divided by the median annual household income of individual urban markets to arrive at a multiple.
The Demographia Surveys clearly illustrate that house prices should not exceed three times annual household income.
If housing does exceed three times household income, it is a warning sign that there are likely regulatory impediments to that particular urban market's ability to supply affordable housing around the urban periphery.
So if the median annual household income of a particular urban market is $50,000, the median house price should not exceed $150,000. And as the urban peripheries are the supply or ‘inflation vent' of an urban market, we should expect peripheral starter housing to be priced lower, possibly around $125,000.
By restricting the supply of land around the urban peripheries – coupled with inappropriate infrastructure financing arrangements – city planners and officials set the stage for housing bubbles to form. This is exactly what has happened to many North American urban markets (other than 59 middle North American urban markets identified within the Demographia Survey), the United Kingdom, Republic of Ireland, Australia and New Zealand.
The housing bubbles of these dysfunctional urban markets are wreaking havoc throughout the global financial system – distracting policymakers from dealing with the underlying structural problems – which provided the environment for these bubbles to form in the first place. One only has to compare the comparative performances of the urban markets of Texas and California to see that the reasons for the housing fiasco in California are blindingly obvious.
Put another way – where are the $140,000 conventional starter homes and $73,000 manufactured homes including lots on the peripheries of the Californian urban markets? The reality is that they are not in California – because the regulatory environment simply does not allow them to be built.
Within its 2007 World Population Report, the United Nations was scathing of urban regulatory authorities that failed to act responsibly and allow affordable housing to be built – where it states within the Introduction:
"Three policy initiatives stand out in this connection. Preparing for an urban future requires at a minimum, respecting the rights of poor people to the city. As Chapter 3 shows, many policymakers continue to try to prevent urban growth by discouraging rural – urban migration These attempts to prevent migration are futile, counter-productive and, above all, a violation of peoples rights".
The question that then needs to be asked is – how has the planning profession internationally performed over recent decades in its duty to protect the rights of the poor to basic shelter?
Sadly, it is clear that the planning profession has too often lost its way by allowing itself to become captured by ideologues, less important aesthetic issues and those (both commercial interests and existing home owners) determined to exclude others from their rights to ownership and community participation.
As the devastation – in economic and social terms – of these unnecessary urban housing bubbles become obvious, there is a growing recognition within the planning profession internationally and outside of it that "things must change".
This necessary process of change will be assisted enormously by the survivors of the finance sector, who will be in no hurry whatsoever to provide the debt finance to fuel further housing bubbles. As the political and commercial pressures grow for more disciplined lending practices, urban regulatory authorities will be forced to act responsibly, as happened after the Second World War when the housing needs of returning troops had to be met.
Already, the housing construction industries of California and the United Kingdom have virtually collapsed – with build rates well below replacement – simply because the regulatory authorities do not allow affordable housing to be built on the urban peripheries.
Within my discussion paper "Getting performance urban planning in place" (hyperlink below), I suggest the need for the establishment of Local Government Performance Authorities at the state and national level – and the inculcation of simple performance measures in to Local Government Plans – to allow housing affordability to be restored over a reasonable and realistic timeframe. There is no simple solution, and each jurisdiction should discuss the best way to incorporate the appropriate Phased Housing Affordability Targets and performance measures into Local Government – mindful of its own political culture and traditions.
I am of the view that the Phased Housing Affordability Targets and performance measures should be as simple as possible. After all, this is not a complex issue, and both historically and currently, there are abundant examples where affordable housing is provided.
Nothing needs to be "invented" here.
The key performance indicator or measure should be the Median Multiple as outlined above – supported by further easily understood Supplementary Indicators. Within this discussion paper, I suggest six supplementary indicators – for population, peripheral urban / rural land price differentials, housing stock per 1000 population, build rates per 1000 population, age of housing stock in decadal bands and residential rental vacancy rates.
With these simple indicators in place, one has a helpful "snapshot" of the health or otherwise of a particular urban market and, most importantly, a clear picture of the pressures impeding the provision of affordable housing.
Therefore, the focus must be on (a) getting performance indicators in place, and (b) ensuring provision of adequate peripheral land so that raw peripheral urban land is near the price of adjoining rural land, and (c) infrastructure is appropriately financed. We have the examples of the Municipal Utility Districts (MUDs) of Texas as a guide, which no doubt could be refined further as well.
I was privileged to spend May and June of this year in the United States, studying various housing markets and enjoying immensely the civility, openness and tolerance of all I met. And enjoying "temptations" such as the Cheesecake Factory and Texas barbecues! In my view – there is no nation on the planet with America's capacity to "make things work" – when Americans decide to do so.
Within the United Kingdom, Australia and New Zealand over the past few years, there has been comprehensive public discussion of these urban structural issues impeding the provision of affordable housing. This "public conversation" has yet to get underway in the United States and Canada.
It needs to – with urgency.
Hugh Pavletich is a New Zealand commercial property developer, fellow with the Urban Development Institute of Australia, Past President of the South Island Division of the Property Council of New Zealand and co-author of the Annual Demographia International Housing Affordability Survey.