A guest post – Debunking the debunker

by Phil Hayward

The annual Demographia Housing Affordability Report always brings out a bit of discussion but little or nothing in the way of strong committal to reform. On the core issue of housing supply, this is a sensitive issue of “local democracy”.

The battle for public opinion has obviously been dominated by the supporters of “compact city”, anti-car planning; Auckland’s democratically re-elected Mayor is the personification of this ideology, and the Councillors who have been re-elected are largely the same people who signed off on notification of the grossly flawed Spatial Plan.

The arch-Greenie urban planner Joel Cayford has now posted a criticism of the latest Demographia Report that is typical of the arguments mounted by the compact city ideologues and vested interests. 

He actually has the gall to accuse the NZ Herald and the Auckland Council of “giving the Demographia Housing Affordability survey an easy ride”, which is rich given the entrenched position of both in support of the grossly flawed and under-scrutinised Spatial Plan and the whole compact city concept.

One form that denial of the existence of a housing affordability problem takes, is that “everyone had it tough in their day and our young people should harden up”. Principally this involves the argument that mortgage repayments relative to income might be not a lot higher now in comparison to historical episodes of very high interest rates when house prices were lower. Cayford’s “debunking” covers this – Demographia “doesn’t take interest rates into account” – shock, horror.

But why should it? Demographia are demonstrating the difference between housing markets with well-functioning supply of houses, and those without. In the latter, house prices inflate as fast as interest rates are cut, leaving no buyer any further ahead; and the lower the interest rate (and larger the loan) the higher the risk of future interest rate hikes leaving young first home buyers dangerously exposed. The large size of the principal really matters.

But if the advocates of a measure of “affordability” want one that does take interest rates into account, perhaps they should examine the affordability under this criteria, of houses in the affordable-price cities in the USA. Here is a graph of the rates at which a mortgage can be obtained in the USA, with rates fixed for 30 years.

30yearinterestrates Approximately 4.5%

Bring on those revised affordability comparisons, Joel. We can’t wait.

Cayford’s whole “debunking” is a case of so much B.S., so little time. Evidently a median multiple of 8 (which has gone higher since the data was crunched) in Auckland, versus a median multiple of 3 (a historical norm even in NZ) can be explained away by fandangled differences between countries, in methods of calculating household income. One wonders just how much shame, decency and conscience the planning types possess. What level do Auckland prices have to rise to before they will admit that Hayek was right: minds that are attracted to a career in “central planning” almost never possess any understanding of basic economics and “causes and effects” in real life? Alain Bertaud, who wrote the introduction to this years’ Demographia Report, is an honourable exception.

Cayford also complains that Demographia does not take house size into account, as if this is a factor that will tell in favour of his arguments……!  Of course he complains that the Australian data leaves out apartments and hence overstates the median price (even about this, it would not surprise me if he is wrong). But the data is full of very high density cities with very small average dwelling size, and high median multiples. For example, the UK’s cities, and of course Len Brown’s favourite city, Hong Kong. 

Hong Kong’s median multiple?  14.9

Hong Kong housing

Housing in Hong Kong

Does it sound like Cayford is really, really someone we should be trusting with policy on “housing affordability”? Or, for that matter, Len Brown?

He argues at length, in spite of inconvenient reality, that apartments are necessary for systemic affordability. But even in the “Numbeo” data he provides as an alternative to Demographia, focused on 90 square meter apartments in the 486 cities compared, it is obvious that cities with higher density, and more apartments as a share of housing, have the biggest problems with affordability, while all the most affordable cities – all in the USA – succeed in having the lowest prices even though the houses are the largest.

But there is more yet to Cayford’s deep thinking: one of the things that according to him, makes housing more expensive relative to gross incomes (which is what Demographia measures) is “lower local living costs” and higher disposable incomes. Now this is a very curious thing, seeing that people like Cayford have always assured us that part of their utopia involves reduced costs for everyone, especially of transport, but also of local taxes (rates) because of all the wonderful savings on infrastructure that we are going to make. So of course it follows that the affordable US cities are affordable only because the residents are having to pay far more than residents of the carefully-planned cities do, in transport costs and local taxes. According to Cayford.

So how does Cayford explain median multiples in the major Californian cities having trended between 5 and 12 over the last decade, when their living costs (transport, utilities, groceries, everything) are also higher than the affordable-multiple cities, according to authoritative data? 

Here is my advice to people wanting to cut through the B.S. and see who is right. Look at the Real Estate sites for yourself. This is something the internet is especially useful for. It is also something that the mainstream media in NZ is getting a free ride on, contrary to Cayford’s biased perception. The NZ Herald has published several comparisons of actual houses for sale at actual prices, ostensibly to “inform” the public about comparative affordability. Not one actually affordable city has ever been included in these comparisons. Aucklanders are deceived by the Herald, into believing their position is unremarkable because housing is so expensive in Hong Kong, London and Vancouver.

Any median-multiple-3 city will do for the purposes of comparison. Find a good site. Apply a few search filters. See what you can get for under $100,000. See what you get for $1,000,000. See what a large condo right in a CBD will cost you. Note that even the centrally located 90 square metre apartments (if you can find one this small) are a fraction of the rental cost of those in unaffordable Auckland. My conclusion after doing a bit of this research, is that the Demographia median multiples are a pretty good indicator of relative affordability, but their weak point is that they do not show that the most severe impact by far when prices have been inflated as they are, is at the bottom end of the market. It is not rocket science to work out that this is because “land” is what has inflated in price (and the cost of added fees etc in new houses, capitalises into land prices throughout the entire city).

Now we live in a society and an age where concern for the poor is allegedly paramount. Wealth redistribution, and a “living wage”, and “free” essentials such as health and education, as a matter of human right, are articles of faith, especially on the left. Yet apparently no such right exists to affordablehousing, or to not be gouged by the property rentier class that the left’s Patron Saint Karl had so much to say about. The price of land is always inflated when supply of it is constrained, by more than the trade-offs people can make in living space. “Housing” cost rises, living space falls. Cui bono – “who benefits”?

It is people like Cayford who need scrutiny regarding who is backing them, not people who are defending “sprawl” and systemically affordable housing. Who makes undeserved windfall profits like incumbent property owners do under “containment”, in the free-market alternative of competitive development with infrastructure planning “following the market”? Even the evil big oil companies actually take risks and invest heavily and employ a lot of people, to supply the energy that people can’t do without – and don’t make unusual commercial net profit margins in the process.

The crowning insult for young house-hunters in Auckland, is that the other disparate impact of forcing compactness on a city, is on the cost of high density centrally located apartments, which are typically 3 to 4 times more expensive than in the affordable city. And a favourite phrase of the “planning” propaganda department, is “increased housing choice”. Apparently the choice of a condo near a CBD for around $1,000,000 versus a fringe McMansion for $700,000 upwards, is “increased housing choice” compared to the affordable cities where a condo near a CBD is $100,000 – $200,000 and a new fringe McMansion is $200,000 upwards.

Cayford also sneers that “it is ironic that a survey called Demographia ignores basic demographics….”

But the fastest-growing cities in the first world by a wide margin, are all affordable cities in Southern USA. If this is not “basic demographics”, I wonder whatever twisted definition Cayford has in mind? For the period from 2000 to 2010, there are examples of stable-house-price cities in the USA that grew from 3.8 million to 5 million people (Houston); from 4.1 million to 5.1 million (Dallas – Fort Worth); from 3.5 million to 4.5 million (Atlanta); from 900,000 to 1.35 million (Austin); from 760,000 to 1.25 million (Charlotte, NC); and from 540,000 to 880,000 (Raleigh, NC). Any of these cities are an excellent Real Estate site choice for investigation; but there are other well-known cities like Nashville, Indianapolis and Salt Lake City that have lesser growth rates – and housing affordability – that would still fry “can’t-do” Kiwis tiny minds.


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