Urban planning: it’s a cultural problem

Now we are in to the “blame game”, with requests for government support from those who were more than happy to support the bubble pricing, load themselves up with excessive mortgages, buy houses on the strength of a bit of government paper and pile their life savings in to companies they didn’t have a clue about.

These same people need to be asked: how much concern did you show for the young, poor and disadvantaged denied the opportunity of affordable housing, while these housing bubbles were inflating?

Most seasoned property people could see all this playing out years ago and took the appropriate steps to protect themselves - and more importantly, their customers and those they deal with. In the writer’s case, I shut down the development business mid 2004, and to keep occupied in the meantime, have engaged in political advocacy work to deal with these problems. If nothing else, it’s a better idea than going broke as a “bubble bunny” developer.

The reality is that bubble property markets are simply lethal, and as a seasoned development practitioner, I will attempt to explain why.

There is a saying in the property game that “property is only worth the underlying income supporting it”. Forget that and you are a dead duck.

If the pricing moves outside the norm (price to income ratio - with the affordable housing market definition provided above), it is into inflated price territory and these distortions have costs and consequences.

Experienced developers and builders know that while a bubble is inflating, they are likely losing money as their cash dries up. This is because as they are forced to pay higher land and construction costs for new projects and tax on their previous projects, before long, they run out of cash. In essence, the taxable profits on the previous project are an illusion. They are in reality going broke, developing poor quality stock and dragging their financiers and unwitting depositors in to the hole as well.

Those that do manage to “hold on” will then likely go broke as the bubble collapses and they and their financiers are left carrying inflated land and property stock.

Most importantly though, poorly governed and regulated property markets, (that artificially create land scarcities and inappropriately finance infrastructure) creating bubble conditions, degrade the whole culture of the industry. The good people exit, leaving the “bubble bunny’ developers, builders, financiers and consultants to wreck havoc.

What was once a disciplined commercial culture becomes a political cowboy culture.

As property prices are artificially inflating, land and building costs inflate and performance declines as I explained within an article two years ago How Urban Planning Degrades Housing Productivity. We are currently paying near double per square metre build costs because of this, the British, near four times as much as they should be. The British have had 60 years of poor quality land use governance and destructive prescriptive planning, while in New Zealand, it has been going on for near 30 years.

In poorly governed and regulated markets, property development degenerates in to a political circus, to the extent it begins to feel to development practitioners like a criminal activity!