Urban Planning: An Academic Who “Gets It”

Hugh Pavletich FDIA
Performance Urban Planning
Christchurch
New Zealand

March 8, 2010

On December 3, 2009, Dr Gerard Mildner of the Portland State University spoke before the Institute of Real Estate Management at the Oregon Convention Center. Dr Milder had recently moved from teaching a generation of student’s at the Institutions Planning School to the position of Director of Real Estate within the School of Business Administration.

Within this important speech, Dr Mildner reflects on his time as an economist teaching within the Planning School, reminding attendees of some basics of Economics 101 and the importance of thinking and acting in terms of the wider public interest.

Dr Mildner commenced by stating –

“Also, I know that many of you work for firms and clients who probably benefit from the development restrictions of the UGB (urban growth boundary). Recently, one of my friends told me he hoped that city planners would block one of his competitors projects, helping his own project to succeed.”

“We need to challenge this kind of zero sum thinking. Most of you make you living by leasing, selling, developing, managing, designing or financing property space. For the sake of your career, it is the volume of activity and the size of the market that matters, not the price. It is the urban growth boundary that will influence how wide and how vibrant that market will be. And as Adam Smith taught us, out of the narrow commercial interest of your individual activity, the broader and nobler goal of the prosperity of the region will result.”

“Let me take you back to Economics 101 . Land prices tend to decline from a peak at the center of a metropolitan area until they meet the underlying value of agricultural land.”

“At the margins, urban and agricultural land prices will equalize as farmers and developers compete for land. Through the interaction of real estate markets, land is allocated to its highest and best use. The demand for urban land grows in two ways. One, as incomes and employment grow and people demand more land, Two, as transportation costs fall, inaccessible areas become more accessible.”

In specifically discussing Portland, Dr Mildner stated –

“Implementing a growth boundary for urban development constrains population growth, causing land and property prices inside the boundary to rise higher than otherwise………”

“Between 1994 and 2005, we estimate that land prices in the region grew by 18% per year. Under these conditions, the wise investor bought land and kept it off the market. The inelasticity of supply shifts the burden of the regulation to (the) consumer.”

“As a general rule, low income households rely upon the stock of aging housing to find something affordable. But if we aren’t building sufficient new properties, the rich outbid the poor for the older housing stock and affordability suffers.”

The article adapted from Dr Mildner’s speech Public Policy & Portland's Real Estate Market , masterfully traverses the different political pressures constraining normal urban growth and development for Portland, Los Angeles, Boston, Washington DC and London, as examples of urban markets with inelastic supply.

And too, he provides examples of normal urban markets with elastic supply, that are allowed to meet consumers needs, such as Dallas, Chicago, Phoenix and Atlanta.

The Annual Demographia International Housing Affordability Surveys (this years 6th Edition), which surveys the 272 major urban markets of the United Kingdom, Ireland, Canada, United States, Australia and New Zealand, identifies clearly the affordable urban markets (i.e. those that allow housing to be provided at or below 3 times household incomes), and most importantly, those that need to improve their governance and management standards, to restore affordability to normal levels over a reasonable and realistic time frame.

The unemployed or soon to become unemployed within the political, finance, planning, property and construction communities of California, now have the time to learn Economics 101. Before too long, their counterparts in Australia will have the (obviously) needed spare time to learn basic economics as Mish (Mike Shedlock) explains, when the housing bubbles crash there.

These people would be well advised to read earlier articles of the writer regarding the shortcomings in the training of planners and economists . Being unemployed or under employed should be seen as a wonderful opportunity to learn a few basics. Within the latter article I quoted the wise words of John Alexander Smith, Professor of Moral Philosophy at Oxford University message to new students during the early years of the 20th Century –

“Gentlemen – you are now about to embark on a course of studies that will form a noble adventure…. Let me make this clear to you…...nothing that you will learn in the course of your studies will be of the slightest possible use to you in afterlife – save only this – that if you work hard and intelligently, you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole purpose of education.”

“Smart growth” or forced urban consolidation is “rot” – and should never have been condoned, let alone taught in tertiary institutions.

The above comments may appear to be “harsh” – but the reality is that we get the governance we deserve. They are a reflection of us. As citizens we have a civic responsibility to ensure that the needs of the wider community are met.

As the writer has pointed out, in the simplest and clearest terms possible (home page) a normal (yes – normal) affordable growing urban housing market can be defined as follows –

“For metropolitan areas to rate as “affordable” and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household income. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market. The fringe is the only supply or inflation vent for an urban market. The critically important Development Ratios for the new fringe starter housing should be 17 – 23% serviced lot / section cost – the balance the actual house construction. Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3 through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.”

If the Median Multiple for an urban market falls much below 2.3, it suggests that a particular market is experiencing an abnormal economic shock, population loss, grossly excessive new housing supply – or a mix of these.

Artificially strangling the supply of new housing stock on the fringes, so that fringe new house and land packages, for example, can only be provided at $400,000, $600,000 and beyond, understandably ripples through inflating the rest of the urban market, creating housing bubbles.

The new fringe starter house and land packages need to be put in place at around $140,000 or thereabouts (whatever the 2.5 fringe Median Multiple works out to be), to ensure that unnecessary and massively destructive housing bubbles are not created.

Dr Mildner explains clearly the problems of inelastic markets, but most importantly, he is capable of thinking through balanced and workable political solutions, something unfortunately one rarely finds in academia. Dr Mildner states –

“What can we do to change the city’s fate? The lesson from London is that once central authorities monopolize development permission, affordability suffers. As a result, we need to think clearly about the purposes of Oregon’s land use planning system and develop better ways of achieving its intended purposes.”

“The first objective is to find new ways to protect unique natural areas and agricultural areas such as Columbia Gorge or the Willamette Valley’s wine producing region, without constraining human settlement. I contend that we should draw lines around those unique natural areas to protect them, rather than draw lines around urban areas to constrain human settlement. We should establish corridors for new urban growth that allow the population to grow in the Willamette Valley without significant impacts on housing prices.”

“Second, we need to return land use planning back to county government. It is quite clear from the last 20 years that communities within the Portland region have different visions of how they should develop.”

“Third, we need to tackle our transportation congestion problems more effectively……..”

Dr Mildner concluded by clearly setting out the civic standards and responsibilities of his Center for Real Estate, Portland State University and of the real estate industry of Portland –

“The real estate industry in Portland needs to continue to be a player and participant in local, regional and statewide decision making. We need to advocate for a growing and competitive real estate industry. We need a vision to counter the view that we will all be living in small housing units, working in smaller offices, taking longer commutes, and paying more of our incomes for housing. Within the Center for Real Estate, we have taken a leadership role to insure that the future generations of real estate leaders has a solid training. But the industry has a larger purpose in insuring that our region remains a vital place to live and do business.”

The New Zealand Government “gets it” too……………

Soon after the release of this years Demographia Housing Survey January 25, the Minister for the Environment Hon Dr Nick Smith announced the formation of a Technical Advisory Group , to which the writer responded soon after . This Group is to report back to the Minister by the end of March this year.

Just recently, a well known and highly regarded New Zealand economist, Mr Rodney Dickens, Managing Director of Strategic Risk Analysis Limited, reviewed the recently released Annual Demographia Housing Survey and its recommended solutions to these issues, within an article “Housing Affordability; A solution in the wings?”

It is clear that it is these responsible people of New Zealand and Portland in the United States in understanding their civic responsibilities, who are leading the way in exploring solutions to allow affordable housing to be provided. And importantly - ensuring too, that the reasonable and responsible environmental needs of their communities are met.

ENDS

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