Affordable housing: India edition

The New York Times details the disastrous impact of socialist-inspired government central planning on India's housing market:

A recent report by the McKinsey Global Institute estimated that by 2030, 70 percent of India’s jobs would be created in cities, and about 590 million Indians would live in them. To provide enough housing and commercial space, it said, India must build the equivalent of the city of Chicago every year.

But it has no such plans, and the cities already here are buckling under the strain of their new arrivals. From Mumbai to Bangalore, Delhi to Chennai, roads are perpetually choked. Sewers, water lines and electricity are lacking. Perhaps most important, housing is desperately short, especially for impoverished new arrivals, leaving India with more slum dwellers than anywhere on earth.

“We require a radical rethinking about urban development,” said K. T. Ravindran, a professor of urban design who frequently works with the government on urban issues. “It is not that there are no ideas. It is that there is no implementation of those ideas.”

Like those of many Indian cities, Delhi’s building codes and zoning laws were written for a much smaller city in a different time, with policies that actively discourage growth.

The number of floors in most neighborhoods is capped at five stories, and in many areas fewer. The government largely controls land, and government approval for new development is difficult to obtain, even to house the wealthy and middle class, never mind the poor.

The dilapidated state of Indian cities is in some ways by design. For decades, Indian governments tried to discourage migration to cities by making city life unaffordable and unbearable for new arrivals.

These policies were driven at least in part by a Gandhian belief that India should be a rural nation, and more broadly by a centrally planned, socialist approach to development. But rural Indians have voted against these notions with their feet.

A recent report on urban slums published by the Center for Policy Research and the Centre des Sciences Humaines concluded that these measures “have made formal housing expensive and unattainable to a large share of the population, reinforced both chronic urban infrastructure shortages citywide and squalid, precarious living conditions in urban slums.”

Indeed, cheap rental housing outside of slums, like the tiny room Mr. Sarkar and his family shared, is almost impossible to find because it is very difficult to create such housing legally.

“If I want to build for the poor, the current building codes wouldn’t allow me to do it profitably,” said Sanjeev Sanyal, and economist and expert on urbanization. “There is a demand that is not being met, and the only way to meet it is by breaking the law.”

But at least Indians are being spared the horrors of the free market, right? I previously noted the McKinsey report cited by the article here.

Geneva's alleged growth problem

Today's New York Times features that rarest of commodities -- a story acknowledging the virtues of low taxes:

The financial crisis may have crimped corporate investment across the West, but companies still appear willing to spend in one corner of Europe — the Lake Geneva region — for a simple reason: It saves them money on taxes.

Companies from Europe and the United States, and more recently, Asia, are being drawn to the area by low taxes, generous write-offs and labor laws that are more flexible than much of the rest of Continental Europe. Then there’s the central location and, of course, all that fresh air.

...Andrio Orler, a partner at the law firm Tavernier Tschanz, said the fiscal structure remained crucial. Outwardly, the tax structure appears complex, given the need to pay communal, cantonal and federal taxes. But companies end up saving money.

Geneva’s corporate tax rate has edged up to about 24 percent, Mr. Orler said, but that is a “starting rate.” Companies can negotiate with the canton to be excused from paying all or part of their tax bills for up to 10 years if they fulfill certain conditions, including creating jobs. That can reduce the applicable tax rate to as low as 7.8 percent.

The effective corporate tax rate, incorporating allowances, last year was 9.7 percent in Hong Kong, 27.7 percent in London and 34.1 percent in nearby Lyon, according to BAK Basel, a consulting firm.

This being the Times, however, the narrative presented is that all of this growth has come at a steep cost, pushing up housing prices and contributing to a surging cost of living:

The influx has brought this placid region revenue, jobs and other benefits. But the growth has not come without a price, pushing up the cost of living and, some say, detracting from the quality of life for local residents and expatriates alike.

In October, a leading Geneva politician broke a taboo by suggesting the city had reached its limits in its ability to absorb large foreign companies.

“We would hesitate to welcome a company with more than 5,000 employees because we would not know where to house the employees and their families,” Pierre-François Unger, the city’s economy and health minister, said during a news conference.

A senior official at an international organization, who spoke on the condition of anonymity out of fear of offending the authorities in Geneva, used to work in the United States for a nongovernmental organization. In Geneva, she said, she earns twice as much, “but now I’m clearing much less.”

“Most other cities have a range of price points,” she added. “Here, it’s all expensive.”

Basic economic theory teaches us to be suspicious of such explanations. After all, if prices go up, this serves as a signal for more housing to be built, thus increasing supply and bringing prices back down. Furthermore, a quick look at Geneva reveals that the storyline advanced by a "leading Geneva politician" of a city has simply reached its physical limits to be false:

Plainly there is plenty of green space, including farmland (which makes little sense given the country's topography and is best explained by lavish farm subsidies), which can be developed. This suggests one obvious culprit: government policy. Indeed, a bit of research indicates that this appears to be the case:

As [Philippe Brun, who teaches city planning at the University of Geneva] sees it, “There is no will to extend and develop. There is a fear to extend.”

He says this mentality penetrates circles of politicians, so even as everyone is saying ‘there is a problem, we must develop,’ that underlying fear keeps them from having the courage and force to impose the changes needed to actually get enough housing built.

“The building zones are full today, and Geneva is so built that we have the center and around the center we have the agriculture zone,” Brun illustrates, “like a greenbelt, and after you have the border. And so you have to change the use of the agriculture zones to make building zones but this attitude makes it very, very difficult to change even small plots.”

Low taxes aren't the problem, it's government meddling. Meanwhile, it's worth pondering that Switzerland's low corporate tax rate has produced an abundance of jobs while the unemployment rates hovers near 10 percent in the US, which has one of the highest corporate income taxes in the developed world.

Affordable housing

New York City has over one million apartments which fall under some sort of rent control law as part of a government-led effort to assure a supply of affordable housing. Predictably, the result is a shortage of the very thing such laws are ostensibly meant to promote. Tacitly recognizing this failure, the city government has resorted to mandating that certain percentages of new construction are set aside as housing for tenants who meet certain income parameters. Here is one such example:

Planned for more than four years, the [Hunters Point South] development has been positioned as something of a Stuyvesant Town of the 21st century. City officials want to restrict at least 60% of the apartments to middle-income tenants making between $63,000 and $130,000 for a family of four. 

With a city subsidy of as much as $90,000 being offered to the developer for each restricted-income apartment built, the project attracted considerable interest from the development world.

This is all so utterly ridiculous. First government creates the housing shortage both through rent control laws which serve as a disincentive to the construction of new units and zoning regulations, then it mandates that new projects include housing for those priced out of the resulting tight market, and lastly lavishes subsidies -- a wealth transfer from one group of citizens to another -- so that developers are willing to abide by such schemes. New measures are enacted to remedy the follies generated by earlier misguided forays.

Hey, kind of like health care.

The Fed and housing

Over most of the last decade the federal government has made it official policy to support the housing sector through various regulations and the activities of government entities such as the Federal Housing Administration, Freddie Mac and Fannie Mae. This policy corresponded with a dramatic increase in housing prices, a building boom which produced an oversupply, and a subsequent collapse which played a major contributing factor in the current recession.

You'd think that such an experience would chasten government officials, but you'd be wrong according to today's New York Times:

Despite extensive government intervention in the housing market, some policy makers at the Federal Reserve are worried that even more might need to be done.

Some people never learn.

Update: Related thoughts from Thomas Firey.

Freddie and Fannie update

The Washington Post:

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.

The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama's current term.

But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009.

But I'm sure a government-run "public option" in health insurance would be completely different.

More on the housing mess

Charles Lane:

The New York Times reports that a schoolteacher in Colorado recently got talked into buying a $134,000 fixer-upper with only 3.5 percent down. To afford that smidgen of equity, she liquidated her retirement savings. The bank rolled closing costs into the loan in return for a higher interest rate. Her monthly cost is 50 percent of her take-home pay. Happy for now, she may be a pink slip away from foreclosure and financial ruin.

Somebody, quick, call the government! The predatory lenders are back! Oh, wait: The U.S. government is supporting this transaction. The Federal Housing Administration made the loan possible by promising to pay it off if the teacher can't.

Read the whole thing. There is no reason for government policy to be biased either for or against home ownership. The intentions may be good, but the outcomes quite clearly are not.

The FHA mess

Steve Chapman:

Watching Washington policymakers in action, I sometimes think they make mistakes because of unrealistic goals, flawed thinking, blind obedience to party, or dubious information. And sometimes I think they make mistakes because they are—how to put this?—clinically insane

There is no other way to explain what is going on at the Federal Housing Administration, which provides federal guarantees for home mortgages. Given the collapse in real estate prices, the weak economy, and the epidemic of foreclosures, banks are acting with more caution than before. They now commonly require home buyers to make down payments of 20 percent to qualify for a loan. But the FHA often requires only 3.5 percent

That's the equivalent of playing pool with a guy named Snake, and it's had two predictable effects. The first is that the agency is insuring about four times as many home loans as it did just three years ago. The other is that the number of FHA-approved borrowers who are not repaying their loans is climbing. Since last year, the default rate has jumped by 76 percent.

Another likely consequence looms: you and I eating the losses. A former executive of mortgage giant Fannie Mae told a congressional subcommittee that the FHA "appears destined for a taxpayer bailout in the next 24 to 36 months."

Peter Wallison:

The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.

Read both columns in their entirety.

The housing boom and bust is not a creation of private sector greed or avarice, but poor government policy. And its folly to the expect the same people that got us into this situation to get us out.

Obama's housing plan

Literally the day after signing a $787 billion stimulus bill President Obama is now calling for a $75 billion bailout for homeowners. I don't know how much longer we can afford this guy:

President Obama pledged on Wednesday to help as many as 9 million American homeowners refinance their mortgages or avert foreclosure, an initiative he said would shore up distressed housing prices, stabilize neighborhoods and slow a downward spiral that he said was “unraveling homeownership, the middle class, and the American Dream itself.”

The plan, more ambitious than many housing analysts had expected, was unveiled by Mr. Obama in a high school gymnasium here, in a community that is among the nation’s hardest hit by the foreclosure crisis.

The article makes a lot more sense if you take out "help" and substitute "take money from taxpayers and redistribute to" and replace "ambitious" with "expensive". So essentially people that bought homes they couldn't afford are now going to have their mortgages paid for by the rest of us who acted prudently. Outstanding.

Who cares if you can afford it?

Further, I have no idea why shoring up housing prices should be a public policy goal. After all, if the price of houses declines it means that millions of more people can afford them. Indeed, with the recent declines in housing prices there have been increasing signs of first time home buyers jumping into the market. Similarly, builders are reducing output which means less supply, which combined with new demand from the cheaper prices will help stabilize the housing sector. Hey, markets work!

The declining housing market isn't unraveling the middle class. In fact, it's actually enabling more people to buy homes and move into the middle class. It's simply punishing those people who got greedy and thought that they could make a bundle by buying real estate. I can't fault them too much though given that the government was busy encouraging people to buy via Freddie and Fannie and measures such as the mortgage interest deduction (even though there is a good case that if anything we may want to promote renting).

And the American Dream unraveling? From what I can tell the American Dream these days is getting a bailout from the government.

Update: Barry Ritholz has some charts suggesting that this is a poor time to push for stabilization with the housing market likely still having a ways to go yet in its decline.

Update: Oh dear, it's even worse than I thought:

The three key elements of the proposal include a program to refinance 4 million to 5 million homeowners with little equity in their homes into cheaper mortgages; a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and a doubling of the government's commitment to Fannie Mae and Freddie Mac to $400 billion.

So it's not $75 billion, it's $275 billion. Oh, and you'll recall that Fannie and Freddie actually helped make the housing crisis worse, so of course they are being given more money.

It's hard to believe some of the stuff you read these days.

Update: In the interest of being fair and balanced I should point out the following from Harvard econ professor -- and I believe free-market guy -- Ed Glaeser:

To give Fannie and Freddie more resources, the government is infusing them with $200 billion. This may seem like throwing good money after bad, but few economists, even ardent libertarians, are willing to let them go belly-up. The cash infusion was necessary.

Promoting the housing sector

When government interferes in the economy it causes decisions to be made and actions to occur that otherwise wouldn't be the case. This is bad because if something wouldn't take place without government intervention you can make a safe bet that it's probably a poor idea. If it was a good one then you wouldn't need government to promote it.

An excellent example of this is housing. Most politicians take it as an article of faith that home ownership is a great thing and equate it with realizing the American dream. Democrats love it. President Bush promoted it. Senate Republicans even tried including a $15,000 home purchase tax credit into the stimulus bill.

As Richard Florida points out, however, there is a good case to be made that home ownership has some rather negative economic side effects:

If anything, our government policies should encourage renting, not buying. Homeownership occupies a central place in the American Dream primarily because decades of policy have put it there. A recent study by Grace Wong, an economist at the Wharton School of Business, shows that, controlling for income and demographics, homeowners are no happier than renters, nor do they report lower levels of stress or higher levels of self-esteem.

And while homeownership has some social benefits—a higher level of civic engagement is one—it is costly to the economy. The economist Andrew Oswald has demonstrated that in both the United States and Europe, those places with higher homeownership rates also suffer from higher unemployment. Homeownership, Oswald found, is a more important predictor of unemployment than rates of unionization or the generosity of welfare benefits. Too often, it ties people to declining or blighted locations, and forces them into work—if they can find it—that is a poor match for their interests and abilities.

As homeownership rates have risen, our society has become less nimble: in the 1950s and 1960s, Americans were nearly twice as likely to move in a given year as they are today. Last year fewer Americans moved, as a percentage of the population, than in any year since the Census Bureau started tracking address changes, in the late 1940s. This sort of creeping rigidity in the labor market is a bad sign for the economy, particularly in a time when businesses, industries, and regions are rising and falling quickly.

Not to mention the fact that government emphasis on home ownership helped stoked the boom that produced the bust we are now in. This is just another classic case of politicians shooting the messenger when confronted with information they disagree with.

The housing collapse: How we got here

I was going to write today about my take on how we wound up in the current mess but instead will quote from a few superb columns on the topic that I found today. Let me begin with Richard Rahn, who provides a nice overview:

First, a few basic facts: It is universally understood that the present financial meltdown began with the problems of two enormous government-sponsored enterprises (GSEs) -- Fannie Mae and Freddie Mac. These two enterprises purchased mortgages from banks to allow banks to issue larger and riskier mortgages with the explicit goal of increasing homeownership.

Fannie and Freddie were allowed to have a lower percentage of capital reserves, needed in case of losses, than other purely private banks were required to keep. Fannie and Freddie both engaged in accounting practices that the courts have ruled to be improper and fraudulent. Fannie and Freddie have contributed millions of dollars to political candidates, including most members of Congress.

During the Carter administration, the Democratic Congress passed the Community Reinvestment Act (CRA), which gave federal regulators the power to pressure banks into issuing loans to high-risk households and small businesses. During the Clinton administration, the CRA was given more power to force banks to issue even riskier loans to poor households. Officials of the Bush administration and members of Congress, who tried to rein in the CRA because they saw a train wreck coming, were accused of racism by some congressional Democrats and left-wing activist groups.

This totally belies the notion, currently being advanced by many on the political left, that what occurred was a failure to sufficiently regulate. Rather, government interference in the marketplace played a central role by encouraging lending to those least capable of managing their financial affairs. While Democrats may have been the instigators, a number of Republicans also bought into this. Recall that President George W. Bush in the 2002 State of the Union address called for "...broader home ownership, especially among minorities..."

It wasn't just minorities though that were effected, as Steven Malaga explains:

Quoting from a study which declared that “underwriting guidelines…may be unintentionally racially biased,” the Boston Fed then called for what amounted to undermining many of the lending criteria that banks had used for decades. It told banks they should consider junking the industry’s traditional debt-to-income ratio, which lenders used to determine whether an applicant’s income was sufficient to cover housing costs plus loan payments. It instructed banks that an applicant’s “lack of credit history should not be seen as a negative factor” in obtaining a mortgage, even though a mortgage is the biggest financial obligation most individuals will undertake in life. In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to “consider extenuating circumstances” that might still make the borrower creditworthy. When applicants didn’t have enough savings to make a down payment, the Boston Fed urged banks to allow loans from nonprofits or government assistance agencies to count toward a down payment, even though banks had traditionally disallowed such sources because applicants who have little of their own savings invested in a home are more likely to walk away from a loan when they have trouble paying.

Of course, the new federal standards couldn’t just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, in other words, these became the new standards in the industry. In 1999, the New York Times reported that Fannie Mae and Freddie Mac were easing credit requirements for mortgages it purchased from lenders, and as the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on the lending standards promoted by the government.

Meanwhile, those who raced to make these mortgages were lionized. Harvard University’s Joint Center for Housing Studies even invited Angelo Mozilo, CEO of the lender which made more loans purchased by Fannie and Freddie than anyone else, Countrywide Financial, to give its prestigious 2003 Dunlop Lecture on the subject of "The American Dream of Homeownership: From Cliché to Mission.” A brief, innocuous description of the event still exists online here.

Many defenders of the government’s efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren’t even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.

But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought. These justifications became the basis for a whole new set of values (or lack of values), as no-down payment loans and loans to people with poor credit history or to those who were already loaded up with debt became more common throughout the entire industry.

Steven Horwitz of St. Lawrence University then picks up the baton and adds this part:

The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were "greedy" for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the "free market."

Another factor he highlights, perhaps missed by most observers, is the role of land-use regulations:

At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What's interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom's effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.

All of these factors provided the spark for the housing boom. The Federal Reserve, meanwhile, supplied the gasoline, as Rahn notes:

The Federal Reserve engaged in a policy of excessively easy money, cutting the federal funds rate to only 1 percent in June 2003, a rate lower than inflation. Thus, banks were encouraged to provide many very low-rate adjustable mortgages that they, in turn, could offload on the GSEs. Everyone knew interest rates would eventually rise and many borrowers would then be unable to pay the mortgages. But each party in the chain thought it could pass off the bad paper to the next sucker. The result, the taxpayer becomes the ultimate sucker.

To summarize, we have politically correct government policies put in place to expand minority readership, abetted by the government-backed institutions of Freddie Mac and Fannie Mae and fueled by a Federal Reserve desperate to stoke the American economy in the wake of the tech bubble collapse and 9/11. Land-use regulations that drive up the cost of housing and put it even further out of reach of buyers, increasing the need to borrow more and engage in more risky lending schemes, served to fan the flames.

And yet many somehow think that a lack of regulation is to blame, including one individual that stands on the verge of being elected president.

Update: All of this explains chiefly how the housing bubble occurred. How this led to the destruction of the current financial crisis can best be explained here.

Pigs fly

I think that Paul Krugman is correct:

When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

Strangely that puts him directly in agreement with the Cato Institute.