Leith argued that Houston's apparent price bubble was a mere mild blip, especially on the grounds of price to income multiples. In his typically evenhanded fashion Leith does note many of the demand side factors at play during that time - the oil boom, liberalisation of loan standards and population growth. He brings together these points with the following conclusion.
What makes Texas’ home price performance in the early 1980s particularly impressive is that prices managed to remain relatively stable in the face of significant demand-side influences that should have caused home prices to rise significantly and then crash.
An additional point is made that Houston has managed to avoid the 2000s property bubble infecting most of the rest of the US, and much of the world.
My reply.
Houston prices declined around 40% in real terms following the 1982 market peak - that is indeed volatile - and it took 15 years for prices to recover in nominal terms. The Case-Shiller 10 city index has dropped by a similar amount since the US peak in 2006 (30.5% nominally) - so much for the volatility aspect.
But why do prices in Houston still appear so dramatically affordable?
One major reason is the relatively high property tax rate.
Property tax rates in Houston more that doubled from 1984 to 2007 becoming one of the highest rates in the US. Depending on your area you can pay between 2-3% of your properties improved market value in annual State taxes, while the US National average is 1.04%.
One would expect areas with higher property taxes to have structurally lower prices, reduced price volatility, and much lower price to income ratios.
An illustrative example is shown below. The three comparisons are intended to roughly represent the early 1980s, the early 2000s and today. The Houston property tax rates increase from two to three percent, while the comparison taxes increase from half to one percent. Interest rates also represent mortgage rates at the time.
From these examples we can see that from just this single factor, the property tax differential, we should expect prices in Houston to currently be structurally around 30% lower than national averages (more on the impact of the property tax differential here).
An important factor at play in this example is that at lower interest rates a fixed percentage property tax leads to greater price differences. Therefore, over time, we would expect Houston to home prices to be a smaller fraction of comparable homes elsewhere as the property tax differential has a greater price impact at lower interest rates. Remember in the table above, rents and returns are the same for each comparison - only the tax rate is different.
Of course, this does not mean that housing is lower cost. It just means that cost of housing is borne by annual tax obligations rather than capitalised in the price. A far better comparison of whether housing is structurally cheaper in Houston would be to compare quality-adjusted rents to incomes over time and across cities.
Lastly I would add that the memory of such a deep and prolonged property price slump would be motivation enough to dampen speculative housing demand in Houston. Who in their right mind would bid up prices in Houston knowing that increased tax liability and the history of dramatic losses on the property market?
But why do prices in Houston still appear so dramatically affordable?
One major reason is the relatively high property tax rate.
Property tax rates in Houston more that doubled from 1984 to 2007 becoming one of the highest rates in the US. Depending on your area you can pay between 2-3% of your properties improved market value in annual State taxes, while the US National average is 1.04%.
One would expect areas with higher property taxes to have structurally lower prices, reduced price volatility, and much lower price to income ratios.
An illustrative example is shown below. The three comparisons are intended to roughly represent the early 1980s, the early 2000s and today. The Houston property tax rates increase from two to three percent, while the comparison taxes increase from half to one percent. Interest rates also represent mortgage rates at the time.
From these examples we can see that from just this single factor, the property tax differential, we should expect prices in Houston to currently be structurally around 30% lower than national averages (more on the impact of the property tax differential here).
An important factor at play in this example is that at lower interest rates a fixed percentage property tax leads to greater price differences. Therefore, over time, we would expect Houston to home prices to be a smaller fraction of comparable homes elsewhere as the property tax differential has a greater price impact at lower interest rates. Remember in the table above, rents and returns are the same for each comparison - only the tax rate is different.
Of course, this does not mean that housing is lower cost. It just means that cost of housing is borne by annual tax obligations rather than capitalised in the price. A far better comparison of whether housing is structurally cheaper in Houston would be to compare quality-adjusted rents to incomes over time and across cities.
Perhaps once the property tax differential and other demand side factors are properly considered we will see Houston's supply-side impact on housing prices diminish to zero.
Lastly I would add that the memory of such a deep and prolonged property price slump would be motivation enough to dampen speculative housing demand in Houston. Who in their right mind would bid up prices in Houston knowing that increased tax liability and the history of dramatic losses on the property market?
Evidence of supply-side effects on home prices remains elusive.
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