No Light Rail in Vancouver!

Did Urban Planners Cause the Next Recession?

Dec 17

2007

The New York Times asks six economists, “Are we in a recession?” Of course, they don’t agree: one says, “the American economy is slipping into its second post-bubble recession in seven years.” Another says, “as to the factual question of whether we are in a recession given the data in hand, the unambiguous answer is no.” A third says, “Nobody knows.”

If we are entering a recession, most agree that the housing crisis is the cause. And the evidence is overwhelming that the housing crisis was caused by urban planning.

The truth is that only a dozen or so states have had major housing bubbles. Almost all of these states have passed strict growth-management planning laws. Housing prices in those states became unaffordable only after those laws were passed.

As the chart above shows, there is a definite correlation between housing affordability (median home price divided by median family income) and the percentage of homes under sub-prime mortgage contracts. (Statistically, the correlation is about 0.43.) If planning had not made housing unaffordable, fewer homebuyers would have had to resort to subprime loans, and our economy would not be in such a precarious state.

So are we entering a recession? And if we are, will it be armageddon or merely a slowing economy?

I am no macroeconomist, but experience suggests that housing prices will decline for several years in the high-cost states. As the figure below shows, housing prices in coastal California (which pioneered with growth-management planning in the early 1970s) declined for about four years in the early 1980s and for five to six years in the early 1990s. Each time, it took a little longer for prices to recover, but when they did, they grew to higher than ever before.

The reason is that housing is an inelastic good, meaning that small changes in supply can lead to large changes in price. The supply restrictions that come with growth-management planning thus lead to huge swings in housing prices.

The declines in housing prices will definitely hurt some sectors of our economy, and we may see employment decline for a brief time. But thanks to globalization, our overall economy is pretty resilient. As one of the New York Times economists notes, increased exports are likely to help — provided Congress doesn’t do something stupid like pass another Smoot-Hawley Act.

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Reprinted from The Antiplanner