I had the opportunity --- and pleasure --- to share views with Wendell Cox, a well known expert of transportation and land use policies in the Anglo-Saxon world, who co-authors every year a report on the evolution of housing affordability (PDF) throughout USA, UK, Canada, Australia, Ireland and New Zealand. Wendell is one of the most prominent advocates of market-based solutions for land development, although he doesn't reject state intervention dogmatically, but sees state as a complementary actor of private development, not a big orchestra director of all development operations.
Here's a free transcription of our interview. “Read different”!
( Note aux lecteurs non anglophones: traduction française disponible )
Vincent - Wendell, could you define yourself in a few words?
Wendell Cox – I'm a consultant in transportation and land use policies, generally advocating free market based solutions to development problems. I define myself as a liberal, according to the European meaning of this term. I'm happy to come back in France every year, so I can use for myself the word “liberal”, which has been stolen by the American left in the 1930s ! What makes me a liberal is not a philosophical commitment to a way of thinking, it is rather a passionate belief in maximizing the spread of affluence and minimizing poverty. If communism did that, I would be a communist. My principal interest is objectives, not means.
You've been publishing, since 4 years, an annual report analyzing the evolution of housing affordability in several Anglo-Saxon countries...
To be fair, Canada is partially a French speaking country!
That's right! Is housing affordability such an important concern today?
It's the most prominent economic problem of our times. Housing, in most western countries, is the first expenditure line in families’ budgets. Houses represent the main assets in individual wealth. In the whole USA, they can be valued at about 20 trillion dollars (approximately $7 trillion of which represents overvaluation due to the distortions of smart growth), which can be widely converted into borrowing abilities. If housing markets doesn't work fine, this can lead to huge economic disorders.
Can you say, today, that we're experiencing one of these disorders?
To put it simply, the big credit crunch we're experiencing today is the direct result of the recent inflation of housing prices that occurred in areas which implemented "smart growth" policies (urban containment policies) in the latest 30 years. Artificial housing price hikes, provoked by excessive land use restrictions (which raise the price of land inordinately), have given bad signals simultaneously to borrowers and lenders, leading to unsound investment decisions, either from unsophisticated home purchasers, or from big loan originators.
Are you saying that subprime crisis is a smart growth crisis? This is not a commonly heard explanation!
To be fair, let's say that smart growth is one of the causes of the current crisis, and dysfunctional mortgage finance system is the second cause. In terms of the extent of financial blame, there is no question that smart growth is by far the larger of the two influences. Let me explain further.
On the financial market side, you have in the USA a system where the bank often doesn't directly negotiate the loan with the borrower. Loans may be negotiated by brokers who are interested in concluding the more deals they can, even by encouraging borrowers to give incomplete or false information on their situation.
On the other side, banks have developed since the turn of the new millennium, new debt securitization techniques that you've perhaps heard of, under the acronym of CDO or collateralized debt obligations. By doing so, banks have completely disconnected the financial aspect of housing credit from the real value of the transactions that purchasers were doing. Even if prime and subprime defaulting loans don't represent that much of originated loans, the fact is that banks are unable to locate precisely the riskier parts of the CDOs they're detaining. This has lead to a bad evaluation of risks hidden behind many loans.
In France, banks are directly lending to people without broker’s intermediation, and our civil code mandates, for professionals, to be not only service providers, but advisors. This part of our legislation put responsibility on banks if they originate unreasonable loans. Do you think such regulation would have avoided the current US mess?
I'm a firm liberal, but I don't believe in a totally deregulated world. The regulation has to be written carefully, because the evil is in the details, but every regulation that makes easier, for people engaged in a deal, to identify further responsibility if the deal is broken, is good, as far as it doesn't becomes bloated and doesn’t give too much power to the regulator. Current regulations of bank system are cumbersome, but are clearly not working. They have to be rebuilt in a quest for greater responsibility, either from credit lenders, or borrowers. In that sense, for once, French legislation seems interesting.
Let's come to « smart growth crisis ». How, according to you, did smart growth policies play a huge role in the current bubble bust?
The data we’ve compiled for the Demographia report (PDF) show, in an undisputable manner that the current housing price bubble was born only in places that have put important restrictions on land use for building new homes, most of these restrictions being so called « smart growth policies ». When demand for new housing was low, in the middle of the 90's, prices in these areas were above, but not hugely above what they were in areas where land use policies are more liberal.
But actual data, based on the ratio between median household revenues and median level of housing transactions in the same areas, show without doubt something that few observers are reporting: 10 years after, as the demand soared, due to the fall in interest rates, house prices have been widely inflated only in the places where land use restrictions were strongest. Urban areas with freer land use regulations were mostly spared by this housing price hike, even if they have known a huge demographic boom, like Houston, Dallas-Fort Worth or Atlanta. In fact, these urban areas have been kept dynamic d...