Tuesday, January 26, 2010

Economics 26/01/2010: House affordability in Ireland

Demographia International issued Housing Affordability Survey: 2010 (based on Q3 2009 data) (hat tip to Ronan Lyons).

Couple of interesting points highlighted below:
  1. Irish dynamics are improving, but not fast enough; and
  2. International evidence suggests that land (site) value taxation might be a better way of cooling the overheating markets than draconian planning and regulatory restrictions on land use.

The ratings are based on a house price relative to a median multiple of income, with table below showing the relative categories.The authors use gross median income, which, of course implies that taxes are not considered to be an impediment to affordability. Now, Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States are the markets considered, and in general Ireland stands out as the higher tax economy here.

The ratings are based on major urban centres' data for 272 markets surveyed across the countries listed above.

For the entire sample, the study found that in 2009 there were 103 affordable markets, 98 in the United States and 5 in Canada. None in Ireland.

Note that of 5 regional markets surveyed for Ireland, 3 were found to be moderately unaffordable and 2 were seriously unaffordable.

In other words, we are still way off from actually reaching affordability that would be consistent with our house price declines and income uncertainty (ca x2.5-2.75 multiple). Or, put differently, we are far away from getting support for this property market.

But what about regional variation?
Now, I am not going to pass a judgment as to whether Limerick is more desirable than Cork or Galway... One has to enjoy though a comparative: Limerick is ranked next to Portland (Oregon). I had a laugh. Galway is between Sacramento (California) and Austin (Texas). Cork is ranked next to Atlantic City (NJ) - somewhat reasonably, but more expensive than Quebec in Canada. Waterford is, apparently, comparable to Philadelphia and Tucson Arizona. Hmmm...

An interesting chart: relationship between housing affordability and land regulation. Notice the reds - these correspond with more prescriptive nature of land regulation - regulation based on more planning, stricter planning and more state/local authorities' controls. Predictably - greater controls, higher prices, lower affordability.
Unfortunately, I cannot tell out of this chart or the discussion in the report as to what exactly comprises prescriptive model of regulation. Only a glimpse:

"Severely Unaffordable Markets: There were 62 severely unaffordable markets this year, down from 64 in 2008. The least affordable markets were concentrated in Australia (22) the United Kingdom (19) and the United States (11). Nine of the 11 US severely unaffordable markets were in California. There were 5 severely unaffordable markets in New Zealand and 5 in Canada (Table ES-3). However, many of these severely unaffordable markets have experienced steep price declines in the last year. Among the major markets, Vancouver is the least affordable, with a Median Multiple of 9.3, followed by Sydney (9.1), Melbourne (8.0), Adelaide (7.4), London (7.1), New York (7.0) and San Francisco (7.0). As in the past, all of these markets were characterized by more prescriptive land use regulation (such as “compact city,” “urban consolidation,” “growth management” or “smart growth” policies), which materially increase the price of land, which makes housing unaffordable."

This is interesting, for it really does suggest that some other means - other than direct regulation/rationing of land - must be used to cool the markets at the times of excess demand. Not a restriction on supply, but, perhaps, a reduced incentive to speculatively invest in land? Indeed - bring on land (or site) value tax...


FPL said...

I am not sure your explanation of regulated versus unregulated land use tells the full picture. Many of the greens on your graphs are basket case cities that have witnessed massive unemployment from manufacturing industries e.g. Detroit, Pittsburg, Cleveland etc.

I would also wager that the others are massively sprawling, car dependent cities such as Huston, Phoenix etc. that are unsustainable in the long run due to energy costs and the need to reduce transport related carbon emissions.

Any comment?

hugh Pavletich said...

Note that the Demographia Suirvey references a full definition of what an affordable market is. This can be found on the Welcome Page of my website www,PerformanceUrbanPlanning.org .

Note also an article today on "Mish" (Mike Shedlock) website with respect to the Demographia Survey

Hugh Pavletich
Co author - Demographia Housing Survey.
New Zealand