Economists, planners and the media often focus on the extremes of real estate — the high-end properties or the foreclosed deserts, particularly in the suburban fringe. Yet to a large extent, they ignore what is arguably the most critical issue: affordability.
This problem is the focus of an important new study by Demographia. The study, which focuses largely on English-speaking countries, looks at the price of housing relative to household income. It essentially benchmarks the number of years of a region’s household income required to purchase a median-priced house.
Overall, the results are rather dismal in terms of affordability, particularly in what Wharton’s Joe Gyourko dubs “superstar cities.” These places — such as London, New York, Sydney, Toronto and Los Angeles — generally tend to be more expensive than second-tier regions commonly found in the American South and heartland.
Even with their usually higher incomes, these regions, for the most part, still have a ratio of five years median income to median house price; this is far higher than the historical ratio of three. In some areas the ratios are even more stratospheric. Sydney and Melbourne, for example, have ratios over nine; London, New York, San Jose and Los Angeles approach six or more.
Urbanists often assume that these high prices — unprecedented in a tepid economy — reflect the greater attractiveness of these regions. This is somewhat true, particularly for parts of London and New York, which can survive high ratios because their markets are less national and middle-income and more tied to the global upper classes.
In places like Mayfair or New York’s Upper East Side, the buying “public” extends beyond the local market to high-income markets in places like the United Arab Emirates, Moscow, Shanghai, Singapore or Tokyo. Many owners are not full-time residents and consider a home in such places as just another expression of their wealth and privilege.
Yet such markets are exceptional. In most regions, the vast preponderance of homebuyers are either natives or long-term migrants. Their less glamorous tastes — notably access to affordable single-family dwellings — drives migration from one region to another. Over the past decade, and even since the crash, this has meant a general trend of migration from high-end, unaffordable markets to less expensive regions. In the U.S., for example, people have been flocking to the South, particularly the large metropolitan areas of Texas.
One factor driving this migration, the Demographia study reveals, is differing levels of regulation of land use between regions. In many markets advocacy for “smart growth,” with tight restrictions on development on the urban fringe, has tended to drive up prices even in places like Australia, despite the relatively plentiful supply of land near its major cities.
More recently, “smart growth” has been bolstered by claims, not always well founded, that high-density development is better for the environment, particularly in terms of limiting greenhouse gases. Fighting climate change (aka global warming) has given planning advocates, politicians and their developer allies a new rationale for “cramming” people into more dense housing, even though most surveys show an overwhelming preference for less dense, single-family houses in most major markets across the English-speaking world.
Limits on the kind of residential living most people prefer inevitably raises prices. As the Demographia study shows, the highest rise in prices relative to incomes generally has taken place in wherever strong growth controls have been imposed by local authorities.
Perhaps the poster child for “smart growth” has been the U.K. Long before the climate change debate, both of England’s major parties embraced the notion of strict constraints on suburban development — not only in London, but across the country. As a result, even places with weak economies are not as affordable as they should be. Liverpool, Newcastle and the Midlands have affordability rates higher than Toronto, Boston, Miami and Portland — and not much lower than those of New York or Los Angeles.
But the most remarkable impact of “smart growth” policies has been in Australia, which once had among the most affordable housing prices in the English-speaking world. Houses in Sydney and Melbourne, for example, are now less affordable than in London or San Francisco. Even secondary markets like Adelaide and Perth are more expensive than Toronto, New York, Los Angeles or Chicago. Most recently these policies have even caught the attention of the OECD, which linked overly regulated housing markets not only to the Great Recession, but to a continued slow economic recovery.
Compared with the U.K. and Australia, the U.S. housing market is more hopeful, with a host of regions — notably Houston, Dallas, Austin, San Antonio, Phoenix and Kansas City — with affordability rates around three and under. Low prices by themselves, of course, are no guarantor of success; in economically challenged places like Detroit and Cleveland, out-migration and high unemployment have driven prices down.
But in many, if not most, cases affordability has promoted economic and demographic growth. Generally speaking, affordable markets tend to draw migrants from overpriced ones, for example to Houston or Austin from Los Angeles or New York.
Nor is this necessarily a case of “smart” people heading to dense, expensive cities while the less cognitively gifted head to the low-cost regions — as news outlets like The Atlantic have claimed. In fact, the American Community Survey reveals that between 2007 and 2009 college graduates generally gravitated toward lower-cost, less dense markets — such as Austin, Houston and Nashville — than to the highly constrained, denser ones. Overall growth in affordable markets — with a ratio of three or four — among college graduates was roughly 5%; in the more expensive places , it was barely 3%.
How could this be, if everyone with an above-a-room-temperature IQ supposedly favors hip, cool, dense cities? Perhaps it’s because of factors often too small or mundane for urban pundits to acknowledge. Most people, particularly as they enter their 30s, aspire to a middle-class lifestyle — and being able to afford a house constitutes a large part of that.
So what does this tell us about future growth? Clearly affordability matters. Areas that combine strong income and job growth, along with affordable housing, are poised to do best. This will be particularly true once the economy recovers and a new generation of millennial buyers, entering their 30s in huge numbers over the next decade, start their search for a place where they can settle down and start raising families.
This piece originally appeared in Forbes.
Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History
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time warp housing
An excellent article clarifying much of what makes housing prices so steep. Two factors seem to be at play: desireability and modernity, both of which are directly proportional to price. For those living in highly desireable locations, the prices are usually out of reach - those "cool, dense cities" Kotkin writes about are leaving those of us behind who can't afford to be cool or dense.
Modernity is quite another thing. Even cool, dense cities have affordable housing stock - as long as one is willing to live in an unmodernized dwelling in an unmodernized neighborhood. The minute you want to rehabilitate your house, however, you have to bring everything about it up to current standards, and the older the house, the more costly this effort. This is why neighborhoods get left behind, because the economics of modern life are so demanding.
Older housing stock typically was built with scant electrical power and no air conditioning. Upgrading both costs huge dollars - and this is simply because our lifestyle expectations today are higher than they were even 30 years ago.
Older housing stock also fails to meet our insurance-driven protection against disasters, and structural reinforcement to older buildings either ruins their character or costs more than a replacement structure.
Most tragically, however, older housing stock suffers from being in lower-income neighborhoods where hardship and class resentment makes it a challenge to live, and there is scant political interest in reducing both types of suffering.
Like Mr. Kotkin's more recent article, the re-discovery of the midwest could be similar to re-discovery of these affordable neighborhoods in cities all over. Our dish-shaped economy (where investment in the fringe outpaced investment in the center) resulted in a great sense of disenfranchisement and righteous indignation among those in the flat area of the dish (look at the Tea Party and you see a lot of victim psychology aimed directly at the edges). By rebuilding a strong center - like America did in the 30s, 40s, and 50s, where the midwest and middle class were so strong - we will surely soothe this built-up resentment and re-energize the country again.
Cities too must look at reversing their dish-shaped economies and rebuilding a mountain-shaped economy, reinvesting in their centers once again. In this way cities will build a strong, vertically integrated population and avoid descending into Cairo-style stratification of haves and have-nots.
Some of the cities have natural restrictions also.
Consider the Bay area between the Bay and the Hills a lot of area is really not safe to build on. Likewise LA once you get to the seashore or the mountains you are out of land, otherwise why did folks go to San Bernadino for housing. New York has the same problem. So beyond man made regulations nature imposes some land use regulations, the Central US cities between the Eastern and Western Mountains don't have natural limits, just man made. Depending upon how far you want to go with Terraforming you could fix some of the problems on the coasts, for example fill in Chesapeake Bay, and the East River in NYC and the western part of Long Island Sound. (The Hudson is probably to deep to do this however) This would have been the old soviet solution, damn the environmental effects let the engineers build their dreams. Blast canals with nuclear weapons, revers rivers etc. (See the engineering dream books of the 1950s for details)
"Land" IS an important "factor", period
What I am discovering, the more I research this issue, is that the consequences go way beyond "affordable housing". Inflated land prices introduce so many distortions to healthy free market allocation of land use, that "unintended consequences" follow that are far worse than the alleged "costs of sprawl".
I strongly recommend Alain Bertaud's papers on "the Spatial Distribution of Density". Density per se does NOT correlate with economic efficiency, reduced VMT, reduced emissions, and so on. What really matters is the "spatial distribution" of this density. Inflated land prices distort this spatial distribution in the wrong direction and REDUCE efficiency.
This is the cause of what some people are starting to note as "dense sprawl" or "dysfunctional density".
What's even more frustrating
What's even more frustrating is how some cities decide to adress affordable housing. Here's a recent example from NYC:
A new high rise goes up, all rentals, with a certain number deemed "affordable" by law. The market rate units start at $4000/mo and go up from there. The rental application page clearly states that you won't be considerd unless your gross salary is at least 40x the rent. So even to be considered for a market rate apartment (and a relatively low-end apt at that), you have to be making 160K. Salaries are high in New York, but thats still a decent chunk of change. And you can extrapolate the minimun salaries required for the bigger, nicer, higher apartments....
Now for the "affordable" units? You can't make any more than 40K.
So, that begs the question, what about those who fall in between 40K and 160K (i.e. most New Yorkers)? Well, "tough luck - you're on your own" ..That is basically NYC housing policy in a nutshell..Luxury playground for the better off plus some token welfare for some good PR and political gain.
The rest of us are voting with our feet...
"Smart" people moving to the coasts? R U Kidding, Richard?
Third para. from the bottom, referencing The Atlantic article.
A chart attributed to Richard Florida is presented.
"Bachelor's Degrees Per Square Mile"
Per Square Mile?
Is Richard kidding? Has he really lost his mind this time? And he uses this wholly irrelevant relationship upon which to hang his entire thesis? Percentage of Pop. w/Bachelor's in a metro area DOES matter, to a degree. I'll grant you that. But per square mile?
This is a felonious assault on the statistical sciences.
What's next? Number of mailboxes per square mile? (I bet that's pretty high in Manhattan.) Or the number of Papaya Dog outlets....per square mile, of course.
Flailing Florida has become Farcical.
I've been fascinated with
I've been fascinated with the trends that seem to occur in the US in regards to where people move to and from. As the article pointed out, the Southern US is basically being totally swamped with "refugees" from the coasts. As a Southerner who has lived in the Bay Area, California for the last decade I've seen what it is like having lived in a more affordable region then moving to one of the least affordable ones.
Go to any party or talk to any number of people in the Bay Area and the subject tends to turn to housing rather quickly. Many of those you meet are actively talking about future plans to relocate out of the state entirely. Usually to places like Oregon, Texas, North Carolina, etc. We're not talking poor working class people either. Most are like myself and make a fairly decent above average income.
I have to admit that I have been thinking of relocating for years. I have been eying up the current popular relocation cities like Austin, Raleigh ,and others. The problem I've found is that these cities aren't exactly cheap either. Sure- they're cheaper than NYC or SF. But at least in my field the average pay in these cities is a fraction of what I make now. We're talking like 50% or more. I am actually ok with that because we have been saving for years and years. But if we had to rely on our incomes as the only means to buy a house in either of these markets the cost of housing would be almost as high in comparison as it is in SF. Of course that's just in our case and in our field.
Secondly, if you look at how a lot of the cities are growing in the South, you'll see almost the exact same patterns. I see this not only in the cities we have visited, but where I grew up as well: There's usually a smaller downtown area that is in turn surrounded by a huge sprawly suburban shell fed by freeways. Traffic in a lot of these places is pretty bad because so much of the suburban areas are a good 15-20 miles from the city core and since fewer people live in the city, more must commute in and out every day. As a result the freeway traffic is more concentrated. The traffic is still not as bad as it is in say- SF, LA, or NYC, but given the small size of these cities the traffic is still pretty bad. As a result a lot of the inner city core neighborhoods in places like Austin are becoming expensive as the desire to avoid this traffic compels people to spend more for the privilege. We visited Austin a few years ago to check things out and were shocked to see a number of central neighborhoods with $500,000-$600,000 homes. To be sure though if you want to live in the burbs in Austin there were countless homes in the newer subdivisions for under $150,000. In comparison that same house would be $600,000+ in the Bay Area. So for those who have kids Austin at this point still remains a relatively affordable city.
Ultimately I'm not sure where we'll wind up. Its clear that a lot of the larger metros are no longer anything other than overcrowded, overpriced, gentrified "destinations". But due to the enormous influx of newcomers a lot of the 2nd tier cities are rapidly turning more and more into their overpriced cousins. If anything I'm starting to look at small cities and possibly even rural areas instead.