New Geography

Author: Wendell Cox

  • Island of Broken Dreams

    A The New York Times editorial wonders why foreclosure rates are so high in the two Long Island counties it rightly calls the “birthplace of the suburban American Dream.” After all, the area has “a relative lack of room to sprawl.” which in Times-speak should be a good thing, since “sprawl” is by definition both bad and doomed.

    Yet it is precisely the constraints on new housing that has served as a principal cause for Long Island problems. Long Island was the birthplace of the suburban American Dream, in principal measure because new housing development was permitted to occur at land prices reflecting little more than its agricultural value plus a premium to the selling farmer. The same financial formula expanded the American Dream throughout the country and many parts of the world, at least until urban planners were able, in some instances, to drive the price of land so high that housing was no longer affordable to average households.

    Indeed, land use regulation throughout the New York suburbs downstate, in New Jersey and Connecticut has long since rationed land for development. As a result, once loose mortgage loan standards became the practice, house prices escalated. Throughout the New York metropolitan area, the Median Multiple – median house prices divided by median household incomes rose from 3.2 to 7.0, in the decade ending in 2007. In traditionally regulated markets – like Long Island in the past and still much of the country in the present – the Median Multiple has been 3.0 or less for decades.

    Various regulations have led to this precipitous decline in the area’s housing affordability, virtually all of them falling under the category of “smart growth.” There are the regulations that have placed large swaths of perfectly developable land off limits for housing. There are large lot zoning requirements that have forced far more land than the market would have required to house the same number of people, producing an entirely artificial “hyper-sprawl.” Much of this ostensibly has been done in the interests of controlling “sprawl.” Where quarter acre lots would have been the market answer, planning authorities often have required one-half acre, one-acre and even more as minimum lot sizes.

    In fact, however, Long Island’s housing cost escalation has not been visited anywhere with more traditional liberal land use policies. From the first world’s three fastest growing metropolitan areas of Atlanta, Dallas-Fort Worth and Houston, to much of the South (excluding Florida), to the Midwest, housing prices rose little relative to incomes during the period of profligate lending. The difference, of course, was that the liberal land use regulations in these places allowed sufficient housing to be built that supply kept up with demand, thus accommodating new demand. Speculators saw no potential windfall profits to bring them into the market.

    The Times is not alone in misunderstanding the dynamics of land use regulation and housing affordability. But there is a very clear, demonstrated relationship – where land use regulations constrain development, prices are forced upward. This is because scarcity raises prices of goods that are in demand.

    Fortunately, not everyone at the Times shares the wrongheaded views of its editorial department. Had the editors walked down the virtual hall of their own department, or taken the train down to Princeton, where he lives, they would have encountered someone who understands all this. He is Paul Krugman, Times economic columnist and, much more importantly, Nobel Laureate. In August of 2005, Krugman noted that house prices had escalated strongly in the more regulated markets, but had changed little in the less regulated markets. He further rightly associated the less regulated markets with more sprawl, not less. In January of 2006, Krugman noted: that the highly regulated markets accounted “for the great bulk of the surge in housing market value over the last five years.” Krugman further predicted “a nasty correction ahead.”

    Meanwhile the non-Nobelist Times also make a point to bemoan the high levels of racial segregation on Long Island. Is it beyond them to understand that the very policies they favor are at fault? When one considers that ethnic minorities tend to have lower than average incomes and that land rationing nearly doubled the price of housing relative to incomes, it’s not surprising that they have not moved en masse to expensive places like Long Island, with the exception of Hempstead and a few other pockets. There are costs to restrictive land use regulation. One of the most pernicious consequences is the denial of the American Dream to groups of citizens that have so long been excluded from the economic mainstream.

    It is time to recognize that the regulations that raise the price of housing – however well-intentioned – work against housing affordability and represent one of the prime contributors to the high levels of foreclosures in many communities across the country.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life”

  • Of Houses, Castles and the Universal Dream

    As I sit here in Beijing Capital International Airport waiting for a flight to Taiyuan, I realize something universal about people. Whether in the suburbs of Shanghai, Beijing, Wuhan, Xi’an, Shenyang, Shenzhen, Guangzhou, Nanjing or even in the historical accident of Hong Kong, some of the most beautiful single-family detached housing in the world is here. It is not extensive, because it is not affordable to the great majority of Chinese. The Chinese call them “villas.” It is, however, the most expensive of housing and a goal to which many of the nation’s rising entrepreneurial class aspire.

    It may be that it was called a dream first in America, but its beginnings go back much further. For much of human history, most people who lived in large cities were forced to put up with virtually inhuman densities. By definition, large cities were compact. Indeed, they were often not a lot larger in their geographical expanse than smaller cities. Why? To be efficient labor markets, cities had to be small, so that all of the workers could get to all of the jobs – and in those days the only way to get around was by foot. As cities got larger, especially during the industrial revolution, densities rose in some neighborhoods to 200,000 and more per square mile. The lower East Side of New York topped out at 375,000 in the 1910 census and has since dropped by 75 percent.

    The lack of sewers, clean water and the rampant filth bred disease and discomfort far beyond that experienced by any in today’s America, or for that matter today’s Europe, Japan or any other developed world country. The residents put up with it because it was better than staying in the countryside where there were fewer jobs, opportunities, or any hope for a better life. It says much about how difficult rural life was.

    But not everyone lived in such crowded conditions. Throughout history, the most wealthy have had their castles, estates and mansions. This was true in the cesspool of 19th century American and European industrial cities, just as it was in Rome.

    The coming of mechanized transport, especially urban and suburban commuter rail systems changed all this. In the latter half of the 19th century the upper middle class began to enjoy a small modicum of estate life. These communities were set in places like Riverside in Chicago and Llewelyn Park in New Jersey and even the semi-detached housing suburbs of outer London. In these places, better transport made it possible for a larger share of the population to live without urban crowding, with their own private grounds, however humble.

    Transport was to get even better and, as a result, the suburban option spread. The popular, modern start of the mass-produced automobile oriented suburb was Bill Levitt’s Levittown, built in a Long Island potato field. These modest less than 750 square foot homes, with their yard, seemed nothing less than estates to the thousands of military personnel and others who gave the name to the American Dream. Levitt and Detroit had combined to make it possible. For the first time in history a large proportion of households to own their own, albeit miniaturized, castle.

    Although not quite estate link, the average home has grown, with the average size approaching 2,500 square feet. Many Levittown homes have been expanded to accommodate a more affluent lifestyle. All of it is what I like to call the democratization of prosperity – an unprecedented sharing of the wealth that started not far beyond the borders of New York City.

    For the traveler interested in seeing urban areas beyond the touristic haunts, it is clear that the dream has expanded far beyond America. This is not surprising, because human beings, in general, seem to prefer their own space and will buy it if they can afford it. The Great Australian Dream involves detached housing that is nearly as large as new housing in the United States – even as planners struggle to force new houses on lots so small that a fire in one will likely spread to others. The large urban areas of suburbs from Canada to the United Kingdom, France, Japan, Sweden, Germany and all other developed nations all have experienced a rapid expansion of suburban living.

    The extent of the Universal Dream becomes even more compelling when one travels the developing world. Virtually the same pattern is evident in new suburbs of Beijing, Jakarta, Manila, Bangkok, Istanbul and Cairo. All have a smattering of single-family detached housing. Unlike the developed world, however, it cannot be afforded by much of the middle income population.

    None of this is to suggest that there are not some who would prefer a condominium on the upper East Side of New York, or in Chicago’s Gold Coast or in the precincts of the ville de Paris or the core of Stockholm. These people, however, constitute a minority, at least in part because a quality urban life comes with a price tag often far higher than that of the suburbs. For most people with middle class incomes, the best option remains a house that offers comfort, privacy and space at a price they can afford.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life”

  • Root Causes of the Financial Crisis: A Primer

    It is not yet clear whether we stand at the start of a long fiscal crisis or one that will pass relatively quickly, like most other post-World War II recessions. The full extent will only become obvious in the years to come. But if we want to avoid future deep financial meltdowns of this or even greater magnitude, we must address the root causes.

    In my estimation two critical and related factors created the current crisis. First, profligate lending which allowed many people to buy overpriced properties that they could not, in reality, afford. Second, the existence of excessive land use regulation which helped drive prices up in many of the most impacted markets.

    Profligate lending all by itself would not likely have produced the financial crisis. It took a toxic connection with excessive land-use regulation. In some metropolitan markets, land use restrictions, such as urban growth boundaries, building moratoria and large areas made off-limits to development propelled house prices to unprecedented levels, leading to severely higher mortgage exposures. On the other hand, where land regulation was not so severe, in the traditionally regulated markets, such as in Texas, Georgia and much of the US Midwest and South there were only modest increases in relative house prices. If the increase in mortgage exposures around the country had been on the order of those sustained in traditionally regulated markets, the financial losses would have been far less. Here is a primer on the process:

    1. The International Financial Crisis Started with Losses in the US Housing Market: There is general agreement that the US housing bubble was the proximate cause for the most severe financial crisis (in the US) since the Great Depression. This crisis has spread to other parts of the world, if for no other reason than the huge size of the American economy.
    2. Root Cause #1 (Macro-Economic): Profligate Lending Led to Losses: Profligate lending, a macro-economic factor, occurred throughout all markets in the United States. The greater availability of mortgage funding predictably led to greater demand for housing, as people who could not have previously qualified for credit received loans (“subprime” borrowers) and others qualified for loans far larger than they could have secured in the past (“prime” borrowers). When over-stretched, subprime and prime borrowers were unable to make their mortgage payments, the delinquency and foreclosure rates could not be absorbed by the lenders (and those which held or bought the “toxic” paper). This undermined the mortgage market, leading to the failures of firms like Bear Stearns and Lehman Brothers and the virtual failures of Fannie Mae and Freddie Mac. In this era of interconnected markets, this unprecedented reversal reverberated around the world.
    3. Root Cause #2 (Micro-Economic): Excessive Land Use Regulation Exacerbated Losses: Profligate lending increased the demand for housing. This demand, however, produced far different results in different metropolitan areas, depending in large part upon the micro-economic factor of land use regulation. In some metropolitan markets, land use restrictions propelled prices and led to severely higher mortgage exposures. On the other hand, where land regulation was not so severe, in the traditionally regulated markets, there were only modest increases in relative house prices. If the increase in mortgage exposures around the country had been on the order of those sustained in traditionally regulated markets, the financial losses would have been far less. This “two-Americas” nature of the housing bubble was noted by Nobel Laureate Paul Krugman more than three years ago. Krugman noted that the US housing bubble was concentrated in areas with stronger land use regulation. Indeed, the housing bubble is by no means pervasive. Krugman and others have identified the single identifiable difference. The bubble – the largest relative housing price increases – occurred in metropolitan markets that have strong restrictions on land use (called “smart growth,” “urban consolidation,” or “compact city” policy). Metropolitan markets that have the more liberal and traditional land use regulation experienced little relative increase in housing prices. Unlike the more strongly regulated markets, the traditionally regulated markets permitted a normal supply response to the higher market demand created by the profligate lending. This disparate price performance is evidence of a well established principle of economics in operation – that shortages and rationing lead to higher prices.

      Among the 50 metropolitan areas with more than 1,000,000 population, 25 have significant land use restrictions and 25 are more liberally regulated. The markets with liberal land use regulation were generally able to absorb from the excess of profligate lending at historic price norms (Median Multiple, or median house price divided by median household income, of 3.0 or less), while those with restrictive land use regulation were not.

      Moreover, the demand was greater in the more liberal markets, not the restrictive markets. Since 2000, population growth has been at least four times as high in the traditional metropolitan markets as in the more regulated markets. The ultimate examples are liberally regulated Atlanta, Dallas-Fort Worth and Houston, the fastest growing metropolitan areas in the developed world with more than 5,000,000 population, where prices have remained within historic norms. Indeed, the more restrictive markets have seen a huge outflow of residents to the markets with traditional land use regulation (see: http://www.demographia.com/db-haffmigra.pdf).

    4. Toxic Mortgages are Concentrated Where there is Excessive Land Use Regulation: The overwhelming share of the excess increase in US house prices and mortgage exposures relative to incomes has occurred in the restrictive land use markets. Our analysis of Federal Reserve and US Bureau of the Census data shows that these over-regulated markets accounted for upwards of 80% of “overhang” of an estimated $5.3 billion in overinflated mortgages.
    5. Without Smart Growth, World Financial Losses Would Have Been Far Less: If supply markets had not been constrained by excessive land use regulation, the financial crisis would have been far less severe. Instead of a more than $5 Trillion housing bubble, a more likely scenario would have been at most a $0.5 Trillion housing bubble. Mortgage losses would have been at least that much less, something now defunct investors and the market probably could have handled.

      While the current financial crisis would not have occurred without the profligate lending that became pervasive in the United States, land use rationing policies of smart growth clearly intensified the problem and turned what may have been a relatively minor downturn into a global financial meltdown.

    Never Again: All of the analyst talk about whether we are “slipping into a recession” misses the point. For those whose retirement accounts have been wiped out, or stock in financial companies has been made worthless, those who have lost their jobs and homes, this might as well be another Great Depression. These people now have little prospect of restoring their former standard of living. Then there is the much larger number of people whose lives are more indirectly impacted – the many households and people toward the lower end of the economic ladder who have far less hope of achieving upward mobility.

    All of this leads to the bottom line. It is crucial that smart growth’s toxic land rationing policies be dismantled as quickly as possible. Otherwise, there could be further smart growth economic crises ahead, or, perhaps even worse, a further freezing of economic opportunity for future generations.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life”

  • Regulating People or Regulating Greenhouse Gases?

    It seems very likely that a national greenhouse gas (GHG) emission reduction standard will be established by legislation in the next year. Interest groups are lining up with various proposals, some fairly benign and others potentially devastating.

    One of the most frequently mentioned strategies – mandatory vehicle miles reductions – is also among the most destructive. It is predictably supported by the same interests that have pushed the anti-automobile (and anti-suburban) agenda for years, often under the moniker of “smart growth.”

    Regrettably, these interests have never understood the economic importance of rapid travel – mobility – throughout the nation’s urban areas. Indeed, one of the factors that makes American metropolitan areas so competitive is that, judging by work trips, travel times are the best in the world for their population. The secret to that success is the ubiquitous mobility of the automobile, which allows people to travel from virtually any point to any other in an urban area in a relatively short period of time. It also helps that automobile travel has become so inexpensive that it is available to more than 90 percent of the nation’s households. Restrictions on driving would change that.

    At this point, it is unclear exactly how any attempt to restrict driving might be implemented. It is clear, however, that the consequences will weigh most heavily on the nation’s lower-income, disproportionately-minority households. Any price mechanism would put limits first on the low income households who cannot afford the higher prices. At the same time, attempts to reduce the demand for automobile use by forcing more new development into existing urban footprints (urban areas) would make traffic congestion more severe, increase travel times and intensify air pollution. This approach would fall more harshly on low income households simply because housing prices (and rents) would rise disproportionately in urban areas as the option of opening new suburban developments on inexpensive land is removed or severely restricted.

    Mobility is crucial to the economic viability of urban areas and to their citizens, rich and poor. It does no good to claim that alternative transit services will be provided, because they generally cannot compete. According to data from the 2007 American Community Survey, the average transit work trip takes twice as long as the average single-occupant automobile work trip. This means that the average commuter would spend at least an additional eight hours traveling to and from work in a week.

    For low income households, this could mean the difference between employment and unemployment. How will a low-income single parent, for example, drop children off at day care centers and continue to work by transit? It might be considered a fortunate case if this could be accomplished in triple the time of the automobile commute.

    These dynamics were further demonstrated when University of California Berkeley researchers concluded that African-American unemployment could be substantially reduced if cars were available to non-car households. Brookings researchers put it more directly: “Given the strong connection between cars and employment outcomes, auto ownership programs may be one of the more promising options.” Or, as a Progressive Policy Institute report suggested, “In most cases, the shortest distance between a poor person and a job is along a line driven in a car.”

    There is good reason to believe that technological solutions will make it possible for us – including low income households – to continue to live our lives as we do now while substantially reducing GHG emissions. People are already driving less and shifting to more fuel-efficient cars. Volkswagen plans to market 1,000 prototype 235 mile per gallon cars in 2010. They are only two-seaters but could be used for a large share of travel. If, in 2030, one-quarter of US car travel was by such cars, the average fuel economy would be about 75 miles per gallon and concern about cars as a source of GHG emissions would be a thing of the past. And this does not even consider the alternative fuel advances – electric cars, natural gas, hydrogen – that are on the horizon.

    There is a broader problem with the idea of restricting driving. This strategy is less about the environment and more about regulating people’s behavior. It is not people that require regulation, it is GHG emissions. There is a subtle but important difference.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • The American Dream: Alive and Well (Some Places)

    Even after the burst of the housing bubble, the American Dream of home ownership has remained alive in some places. As it turns out the “bubble” was far from pervasive, and as Nobel Laureate Paul Krugman indicated in The New York Times, the housing price increases were largely limited to the areas of the nation with stronger land use regulation.

    In all, at the peak of the housing bubble, 46 of 129 US markets had house prices at or below the historic ceiling of three times household incomes (see 4th International Demographia Housing Affordability Survey. Before the bubble, nearly all markets were at or below that norm, but many have risen to double, triple or even more than three times the standard.

    The American Dream can be said to have started with William Levitt, who revolutionized home building starting with his huge Levittown, New York development in the late 1940s.

    As Witold Rybczynski wrote in a recent Wilson Quarterly article, new Levittown houses could be purchased for three times the average wage in Levittown. This bought a detached 750 square foot house, without a garage. Interestingly, this was at a time when single-income families were still the norm.

    Levittown is the birthplace of the modern American Dream. It was only after the pioneering model of Levittown that home ownership became the norm by becoming affordable to middle-income and blue collar households in America. At the end of World War II, home ownership in the United States was 40 percent. By 1960, it exceeded 60 percent and since risen to above 65 percent.

    Levittown, and the automobile-oriented urban expansion it foreshadowed, resulted in the greatest democratization of prosperity in history. Wherever mass suburbanization occurred – whether in the United States, its first world cousins Canada and Australia, Western Europe or later even Japan – we have seen the unprecedented rise of a mass property-owning class.

    This economic and social advance was built on liberal land use regulation. It would not have been possible if the policies that have poisoned housing markets from Los Angeles and Portland to Miami and Boston had been in effect at that time.

    Yet there is still life outside the high-priced coastal regions. Indeed in much of the country today, new housing affordability is at least as good as it was in Levittown. Generally, where land regulation has remained reasonable, new houses can be purchased for less than three times median household incomes. Purchasers may need two incomes to get there, but the effect remains the same. Moreover, the houses in these markets generally boast two-car garages and living space nearly double that of the typical Levittown ‘starter’ house.

    The small selection of examples below is limited to metropolitan areas with high housing demand. These are not economic basket cases like those in and around certain old industrial cities. Nor are these places where the market has evaporated because so many people have left or are planning to leave. Instead these are places attracting domestic migrants from other parts of the country (especially from metropolitan areas with strong land use regulation). These listings are the result of a quick search; they may not necessarily represent the least expensive new houses available. Each has three bedrooms and all have two-car garages.

    Atlanta: A new 1,500 square foot for a base price of $130,000 – 2.3 times the median household income View listing.

    Austin: A new 1,200 square foot for a base price of $106,500 – 1.9 times the median household income View listing.

    Charlotte: A new 1,500 square foot for a base price of $133,000 – 2.5 times the median household income View listing.

    Columbia, South Carolina: A new 1,500 square foot for a base price of $130,000 – 2.7 times the median household income View listing.

    Columbus: A new 1,400 square foot for a base price of $130,000 – 2.5 times the median household income View listing.

    Dallas-Fort Worth: A new 1,250 square foot for a base price of $120,000 – 2.2 times the median household income View listing.

    Houston: A new 1,300 square foot for a base price of $100,000 – 1.9 times the median household income View listing

    Indianapolis: A new 1,500 square foot for a base price of $114,000 – 2.1 times the median household income View listing.

    Kansas City: A new 1,200 square foot for a base price of $150,000 – 2.8 times the median household income View listing.

    The list could go on and on, including virtually every area of the nation that has not driven up the price of developable land by land use regulations. The American Dream is alive and well where it has not been snuffed out by economics-be-damned urban planning policies.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • The Financial Crisis: Bubbles Deflating Worldwide

    The mortgage meltdown is much more than an American affair. Real estate bubbles have developed in all major English speaking countries – US, Canada, UK, Ireland, Australia and New Zealand.

    Over the past year, house prices have dropped 12 percent in the United Kingdom. The annual decline is approaching 10 percent in Ireland, while median house prices have dropped six percent in New Zealand. In each of these countries, the price declines started after the United States. Further, each of these nations has experienced massive nationwide housing inflation, in part, I believe, as a result of highly restrictive land use policies. These policies, often known as ‘smart growth’ have made it virtually impossible to build new housing on the fringe of urban areas inexpensively.

    Where prices will finally settle, no one knows. Some analysts soothe the market claiming that the bottom is near. But many, including The International Monetary Fund, predict the worst of the mortgage crisis is yet to come in the United States. Similarly, former chairman of the council of economic advisors, Martin Feldstein suggested last week that prices would fall to their pre-bubble levels, as did I in this space as well. That’s what bursting bubbles is all about – prices that drop to pre-bubble levels.

    Canada is another story. Like the United States, housing costs remain within historic norms where there is traditional land use regulation, while restrictive land use regulation has led to a housing bubble in some markets. This is especially true in Vancouver, where there has been some minor price softening in recent months. Bank of Nova Scotia officials have indicated that they do not expect the kind of bubble bursting in overpriced Canadian markets that has occurred in the United States, at least partially because there was a lower volume of profligate lending (subprime, etc.) in Canada.

    Janet Albrechtsen, a columnist for The Australian writes in The Wall Street Journal that the Australian financial system also is healthier than America’s, at least in part because of more stringent mortgage regulation. If her analysis is right, Australia could be spared the mortgage meltdown that is engulfing America, the United Kingdom, Ireland and New Zealand. Thus, far, there is little indication of declining house prices in Australia.

    That does not mean there is no bubble. Even with strong banks, Australia has a problem. A housing bubble as pervasive as the United Kingdom has developed in Australia, despite its wiser financial regulation, House prices have risen to from two to three times the historic Median Multiple (median house price divided by median household income) norm of 3.0.

    The Australian bubble, like in the United Kingdom, Ireland and New Zealand (as well as parts of the US) has been spurred by overly restrictive land use regulation, which forces land prices up and causes them to explode even with moderate increases in demand. In response, the Median Multiple has increased to more than double the historic norm in all major capital cities. As a result, younger and future Australians have to pay far more of their income for housing than those who came before. So, while superior regulation may have kept Australia’s banks healthy, the prospects of many younger members of society have been greatly diminished. They will have been the victims of the largest inter-generational transfer of wealth in the nation’s history.

    Despite Ms. Albrechtsen’s optimism, it is not yet clear that Australia’s bubble will not eventually burst. Certainly falling commodity prices could hurt the employment situation, particularly for middle and working class Australians who are now struggling to pay ever higher percentages of their incomes for housing. Australia may have remained ‘the lucky country’ so far in terms of real estate. But whether that will persist in the coming months is still open to question.

    Note 1: http://www.demographia.com/dhi.pdf.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • The Toronto Megacity: Destroying Community at Great Cost

    Regional governance is all the rage in some circles in America. But the Canadian experience demonstrates it might not have all the benefits advertised. More than a decade ago, the Ontario government forced six municipalities to amalgamate into the megacity of Toronto. This was not done by the residents of the six jurisdictions. Separate referenda in each of the municipalities (North York, East York, York, Etobicote, Scarborough and the former city of Toronto) all indicated strong disapproval.

    The government claimed that an amalgamated Toronto would be more efficient and that the city would be more competitive. More than $300 million was to be saved, according to the accounting firm hired by the government to study the issue. Early on it was clear that the efficiency claims were bogus. University of Western Ontario urban policy expert Dr. Andrew Sancton quickly raised questions about the analysis, pointing out that the harmonization of labor contracts and services among the six jurisdictions could only lead to higher costs and higher taxes.

    The government was wrong and Professor Sancton was right. By 2003, the Toronto City Summit Alliance reported the amalgamation of the City of Toronto has not produced the overall cost savings that were projected. The Alliance went on to blame “harmonization of wages and service levels.”

    Things have only gotten worse. The city of Toronto budget increased in constant dollar terms and the $300 million in savings have long since evaporated.

    Meanwhile, there is no point in arguing that amalgamation made Toronto more competitive. Despite the impressive residential development in the core, Toronto’s growth rate has become anemic — little more than one-half that of population growth whipping boy, Italy. Between 2001 and 2006, the first full census period after amalgamation, the city accounted for only five percent of the metropolitan area’s population growth. In the period immediately preceding amalgamation (1991-1996), the city-to-be accounted for 30 percent of the growth — six times that of the more recent period.

    None of this is to deny that municipal amalgamations can produce economies of scale. They do — for special interests, not the people. Large corporate interests find larger governments more susceptible to their influence. So too do public employee unions and other well-organized interest groups.

    As city hall is moved farther away, voters have less control over what goes on. There is not only a loss of income for taxpayers, but there is also a loss of community. Indeed, if larger local governments are more efficient, why not abolish municipalities altogether, or even provinces. Surely if all garbage collection were administered out of Ottawa, things would be better, to take the logic of the consolidationists to its extreme.

    Maintaining a sense of local community remains an important virtue. Equally critical, local governments have been proven to be far more cost effective and responsive. This is not just true in Toronto, it is true almost anywhere. There is good reason why municipal consolidation is unpopular — it costs more and it makes city hall more inaccessible. This is the principal reason cities forced into Montreal fled when given the chance. It is why municipal consolidation has led to demonstrations this year in the Australian state of Queensland. Where the scale of government is bigger, people are smaller — something the centralizers never seem to understand.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • How Low Can House Prices Go?

    There is much speculation among economists and others about how close we are to the bottom of the collapse of housing prices. This is, of course, an important question, and goes to the heart of the wisdom or folly of the proposed $700 billion government bailout of financial markets, which is a consequence of their own profligate lending practices.

    You would think that the experts would look at history. We have decades of experience with housing prices. Indeed, for at least the past six decades, median house prices have tended to be around three times an area’s median household income. It bears looking at where house prices are today compared to that standard.

    And looking at it from the perspective, we may have a long way to go. As late as 1999, there was only one major metropolitan market among the top 100 with a median multiple (median house price divided by median household income) exceeding 5.0 (Honolulu), according to data compiled by the John F. Kennedy School of Government at Harvard University. The national median multiple was less than 3.0. By 2006, 23 markets, all highly regulated, had median multiples of more than 5.0.

    Last week, we estimated that the aggregate value of the owned housing stock in the nation had risen nearly $5.3 trillion since 2000. Approximately 85 percent of that figure – $4.5 trillion – had occurred in metropolitan markets with severe land use regulations (strategies often called “smart growth”). These areas accounted for only 30 percent of the nation’s population. The large, more traditionally regulated markets experienced an estimated value increase approximately $200 billion, while outside the major metropolitan markets, the increase was approximately $500 billion.

    If you accept this logic we may not be close to the bottom yet in many markets. Based upon an analysis of housing price declines from the peak, it appears that the losses in the highly restricted markets have taken back between one-third and, at most one-half, of the unprecedented house price increases relative to incomes.

    If the economists and analysts had been paying attention, they might have looked at what happened in the last bubble, in bubble-land itself, California. From the middle 1980s to the housing bubble of the early 1990s, median house prices rose nearly 40 percent relative to household incomes in California’s largest markets (Los Angeles, San Francisco, Riverside-San Bernardino, San Diego and Sacramento metropolitan areas). By 1996, after a particularly deep recession in the early 1990s, the median house prices had declined to their previous household income relationship.

    Yet there the bubble of the 2000s dwarfs what happened in the 1990s, a decline set off by a severe economic decline, particularly in Southern California. In the latest run-up California house prices doubled relative to household incomes in the five largest California markets by 2007. In effect the present bubble topped out at about a 2.5 times increase from pre-existing prices relative to the previous bubble. In 1985, the median multiple in these Golden State markets was 3.7, not much above the historic norm. By 1990 the median multiple had peaked at 5.3 and fell to 3.9 by 1996, rising to 4.2 by 1999. By September of 2007, the median multiple in these markets had risen to 9.1, far above the 1990 peak of 5.3.

    It is not inconceivable that history will repeat itself – that prices will fall to the equilibrium level that has been the rule for so long. That would mean that the bottom may not yet be in sight. Moreover, it could well mean that the house prices reached at the peak of the bubble will never return except in another bubble, or in a hyper-inflating economy (another potential consequence worthy of concern).

    In the next few weeks there will be no shortage of speculation about whether or not the bottom has been reached. Before house prices began to collapse in the highly regulated markets, many analysts gleefully reported on the unprecedented house price increases as if could continue without relation to the economy. The law of gravity appeared to have been repealed.

    But my guess is Newton is still a very relevant person. If so, we should expect additional price decreases of 30 percent or more could occur in already declining markets such as Los Angeles, San Diego, Washington, D.C. and Miami. Similar declines from now could take occur in places like New York, Boston and Seattle, which have only recently experienced a downturn in prices.

    Of course, it is always possible that smart growth regulation in these markets might have created a new floor that prevents prices from falling to historic norms. That would be good news for the owners of real estate – largely older and Anglo – in these areas. On the other hand, it would be disastrous news for millions of households and the next generation, many of them younger and minority, who will now have to remain on the sidelines of the housing markets of their choice. For many the choice may be moving to one of those places – like Indianapolis, Dallas-Fort Worth or Kansas City, Houston or Atlanta – where the opportunity to own a home still will exist for those without trust funds and elite occupations.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • The Smart Growth Bailout?

    One way to see the federal rescue of the home mortgage market is to call it “the smart growth bailout.” True, the proximate cause lay with profligate lending practices. The flood of mortgage money covered the entire country, irrespective of state, regional or local land use regulations. That’s where the similarity stopped.

    During this decade there has been an unprecedented divergence of housing prices among U.S. metropolitan areas. Generally, the difference has been associated with strong land use regulations. Where restrictions are greater, house prices rose strongly relative to incomes. Where more traditional regulation remained, house prices also rose, but only modestly.

    This is illustrated by the change in the Median Multiple (median house price divided by median household income). In the more regulated metropolitan markets, it rose from 3.5 to 6.0, a 70 percent increase. In the more traditionally regulated markets, the Median Multiple rose from 2.7 to 3.0, remaining within historic norms.

    Economics teaches that scarcity or rationing leads to higher prices. Smart growth policies ration land for development through the use of urban growth boundaries and prohibitions or restrictions on building on vacant land. In such an environment, higher house prices can be expected.

    “The affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land,” said Donald Brash, governor of the Reserve Bank of New Zealand (the national central bank) for nearly 15 years.

    America has become two nations with respect to housing costs and housing cost increases. Princeton economist and New York Times columnist Paul Krugman put his finger on the cause of the difference more than three years ago. Others have made similar findings, such as Edward Glaeser at Harvard, Theo Eicher at the University of Washington and Kate Barker of the Bank of England. House prices have exploded in highly regulated markets, while they have changed little where traditional land use regulations still apply.

    The predictable economic effects have occurred with a vengeance in more regulated (smart growth) metropolitan markets. From 2000 to 2007, the median house price rose an average of $174,000 in the more regulated metropolitan markets with more than 1,000,000 population. In the less regulated markets, the average increase was $12,500.

    The easy money was available everywhere in the nation increasing the demand for housing in most markets. But in most of the nation, housing price increases were modest, as planning systems allowed new housing to be provided at historically competitive prices. For example, in Atlanta, Dallas-Fort Worth and Houston, the three fastest growing metropolitan areas in the high-income world with more than 5,000,000 population, housing prices changed little in relation to household incomes. Furthermore, from 2000 to 2007, 2,550,000 million people (domestic migrants) left the more restrictive metropolitan markets for elsewhere in the country. That pretty well dismisses the idea that demand was the primary cause of the price escalation.

    Demand, in and of itself, does not increase price. But, when higher demand is experienced in an environment of limited supply, price increases occur. Where there were strong land use restrictions, there were strongly escalating house prices. The restrictions drove prices up because land regulations had reduced the supply of developable land, thereby raising the price. The planners may have succeeded in their objection – slowing suburbanization (or if the pejorative term is preferred, “sprawl”) – but they also created a pricing bubble that made things much worse.

    It is estimated that the overall housing stock owned in the third quarter of 2007 was slightly over $20.1 trillion. If the Median Multiple of 2000 had been preserved, the aggregate value today would be approximately $14.8 billion. Of the $5.3 trillion increase in value, it is estimated that $4.5 trillion of this can be attributed to the 25 metropolitan areas with the most severe housing regulations. This means that 86 percent of the increase took place in areas accounting for only 30 percent of the nation’s population. The other 70 percent of the nation had an overall increase in value of less than $800 billion, or 14 percent of the total “bubble.” More than 65 percent of the higher value occurred in ten metropolitan areas – Los Angeles, San Francisco, San Jose, San Diego, Riverside-San Bernardino, New York, Boston, Washington, Miami and Baltimore. These metropolitan areas account for little more than 20 percent of the nation’s population.

    And just as the highly regulated metropolitan areas led the way up, they now are leading the way down. It is estimated that the house value losses in the more regulated metropolitan markets is approaching $1.5 trillion, while the losses in the more traditionally regulated metropolitan markets are estimated at less than $150 billion.

    None of this is to suggest that smart growth has only negative ramifications. To the extent that smart growth removes barriers to the development of higher density housing or less costly housing where it is demand is a good thing. But the land rationing policies proposed under “smart growth” clearly have reaped a very bitter harvest.

    The end of this catastrophe may be in sight (or it may not be). Housing prices, particularly in the inflated markets, have started to fall. This is true not only in the United States but in other highly regulated markets such as the United Kingdom, Australia and New Zealand.

    Yet the bottom line remains: Without smart growth’s land rationing policies, the severe escalation in home prices would never have reached such absurd levels. But the disaster in the highly regulated markets will be with us for years. The smart growth spike in housing prices turned what might have been a normal cyclical downturn into the most disastrous financial collapse since 1929. Now the taxpayers are being asked to bail out the mess that smart growth advocates, no doubt inadvertently, have created.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • Atlanta’s Atlantic Station: The Suburbs Come to the City

    Atlantic Station is a new development near the core of Atlanta being built on disused railroad tracks. It combines residential, housing and retail uses and, among proponents of the New Urbanist movement and is often held up as a model for developments to come.

    Atlantic Station is traditionally urban but is surprisingly suburban. On the surface, Atlantic Station appears to fit many of the New Urbanist design criteria. The buildings start at the sidewalk (pavement) line, rather than being behind parking lots. There are no indoor shopping malls. Instead the stores are directly on the streets, reminiscent of old downtowns or the first shopping centers, like Country Club in Kansas City.

    Some of the normally superficial New Urbanism, however, is even more ephemeral in Atlantic Station. For one thing, prime New Urbanist lynchpins — anti-automobile design, pedestrian orientation, transit orientation, paid parking, banning of big box stores — do not apply there.

    Throughout the development there are entrances at the sidewalk level that look like New York subway entrances. As in New York, they go down. But they don’t go down to a subway — that’s well beyond walking distance, across one of the nation’s widest freeways in Midtown. Instead, the stairs — at least 16 such entrances — lead down to a three-story parking lot that appears to be under the entire development. Houston could not have done it bigger or better.

    The architects did not design Atlantic Station from the ground up — they designed it with three levels of parking under the stores, residences and streets. Thus, this “pedestrian oriented development” sits on a foundation of automobile orientation. And don’t think that the parking lots are only below the surface. Virtually all of the tall office and residential towers have a number of floors above the parking lot platform, though to the credit of the architects, they are not obvious.

    Another rather suburban feature is free parking. A staple of current urban planning is that parking should not be free. The opponents of free parking believe that if only free parking were outlawed, people would flock to inner cities and transit. And to be sure, the little street parking provided in Atlantic Station is metered, which means people must pay. But on all of the parking meters there are signs to the effect that two hours of free parking are offered in the underground lots.

    As would be expected in a development theoretically designed for pedestrians, the sidewalks are sufficiently wide. Indeed, the sidewalk on the 17th Street overpass from Midtown to Atlantic Station is more than 30 feet wide (perhaps 10 meters). Yet it is a lonely place and ultimate proof that if you build sometimes they don’t come. There is another pedestrian oriented dimension in which Atlantic Station fails — for all the sidewalks and sidewalk store entrances, Atlantic Station provides a free shuttle bus for travel around the development.

    Toward the west side of the development is a “Millennium Gate,” which the Atlantic Station calls “Atlanta’s greatest monument.” This seems a bit hyberbolic. Millennium Gate is an imitation of the Arch d’ Triumph in Paris, even to the point of Latin inscriptions around the top. One doesn’t need the American flag hanging from the center to realize that this miniature imitation fails abjectly — it is reminiscent of the Paris Arch d’ Triumph no more than the pathetic Eiffel Tower is on the Las Vegas Strip. Something original would have been more appropriate.

    Then there is the general new urbanist problem with affordability. The lowest priced apartments in Atlantic Station rent for $1,100 per month, at least one-quarter above the median rent for the Atlanta metropolitan area. The lowest priced two bedroom residences appear to sell for at least 2.5 times the median house price in the area, except that the median house is almost four bedrooms.

    For all this, Atlantic Station is rather full of itself as visionary, noting that people can reduce their journey to work time by living and working there. The Atlantic Station website notes that “Atlantans spend more time commuting to work than most anywhere in the world.” In reality, Atlantans spend less time commuting than most people who live in large urban areas outside the United States. True, Atlantans spend more time commuting than most people in the United States and that is to be expected with what is close to N underpowered freeway and arterial street system.

    What sets Atlanta’s Atlantic Station off is not so much its unique design as the abandonment of old freight rail yards near the center of Atlanta that allowed it to be developed. The same kind of disuse made Portland’s Pearl District possible, and an abandoned airport made Denver’s Stapleton possible. They are all attractive, in my view, but with an important caveat: such developments cannot be replicated without using large swaths of abandoned land, which is not readily available or through massive condemnation (takings), which only the city of Portland’s radical political machine seems to be insensitive enough to do.

    Yet I would not suggest that Atlantic Station is simply faux New Urbanism. There are some legitimate New Urbanist touches. Although the development sprawls significantly, the housing elements are rather dense — and as in many New Urbanist efforts — also well-subsidized.

    Further, Atlantic Station appears to be urban on a much larger scale than other developments. Its buildings are much larger than in Portland’s Pearl District and its retailing more intense. But that is to be expected in Atlanta, which, in my view achieved world class status some time ago.

    In a sense, Atlantic Station may well reflect one aspect of the urban future in our newer cities. It remains fundamentally auto-oriented (note all that parking) and full largely of suburban-like chain shops. This may seem a somewhat contrived notion of urbanism, but at its core one that accommodates modernity. Atlantic Station does it largely by bringing the comforts of suburban living to the center city.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”