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A new website conceived by Hugh Pavletich, co-author of the annual Demographia International housing affordability survey, aims to encourage public discussion on issues such as “the destructiveness of the current global housing bubbles”.
He says the current trends on markets all around the world will only be arrested when realistic solutions are put in place.
Based in Christchurch, Mr Pavletich (pictured) is a fellow of the Urban Development Institute of Australia (FDIA) and is a former president of the southern division of the Property Council of New Zealand.
He says the immediate focus should be on exploring ways to reverse the current decline of the residential construction industries – then take steps to ensure that housing affordability is restored over a reasonable and realistic time frame within urban markets currently experiencing housing stress.
When the 2008 Annual Edition Demographia International Housing Affordability Survey was released early this year, it showed that urban markets had been experiencing housing stress.
“Soundly governed urban markets housing should not exceed three times gross annual household income,” says Mr Pavletich.
“Too many markets exceeded that –with the worst example being Los Angeles, California, where housing had inflated out to a stratospheric 11.5 times gross annual household incomes.”
The average median multiples of the urban markets for the countries surveyed were – Canada 3.1; United States 3.6; Republic of Ireland 4.7; United Kingdom 5.5 with Australia and New Zealand overall “severely unaffordable” at 6.3 times annual household earnings.
“By allowing urban governance and planning performance to fail - almost collapsing the global financial system - these bubbles began the inevitable process of collapsing. Because housing markets in total asset terms are substantially larger than stock markets – collapsing housing market-induced recessions are generally far more serious and long lasting than stock market induced recessions.
“The global recession that is getting underway now has been caused by what is generally regarded as the mother of all bubbles and will therefore likely be the longest and most painful in living memory.”
Mr Pavletich says these inevitable “shifts from fantasy to reality” cannot be re-inflated with what he calls splash economics – Governments throwing taxpayer money at them. He says generally this approach only aggravates and stalls the recovery process.
“The recovery process cannot get underway again – until the structural regulatory impediments within dysfunctional urban markets are dealt with – allowing affordable new housing stock to be provided at or below three times the gross annual household earnings of prospective purchasers.
“The trauma currently being experienced by the global financial system will ensure that surviving financial institutions will definitely remain unwilling for the foreseeable future to engage in ‘inflation-based lending’. As the costs of “inflation based lending” continue to mount over coming years, financial institutions will become increasingly insistent on stricter “cash flow lending” for houses at three times or less of gross annual household income."
He says residential construction volumes are understandably falling around the world, with volumes during 2008 in California and the United Kingdom for example – based on the build-rate per 1000 population measure – being below the average annual builds through the Great Depression years of the 1930s.
“It is clear that policymakers at federal, state and local government levels must start dealing with real structural issues and refrain from treating these serious issues as public relations exercises with splash economics in a vain endeavour to re-inflate these housing bubbles."
On a related point, he says the language with respect to urban markets has to change.
“Property commentators and the media generally must refrain from referring to property inflation as growth – and start recognising that the price of housing must be a reflection of the underlying incomes supporting these prices.
“Professionals involved with urban issues - particularly economists, urban planners and property appraisers / valuers - need to urgenly incorporate ‘performance urban planning’ and ‘structural urban economics’ within their training and re training – so they can play a constructive role in assisting local communities to deal with these issues.”
(Web link: www.performanceurbanplanning.org).
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