Stephen Rees's blog

Thoughts about the relationships between transport and the urban area it serves

Peak-oil spike reshapes the suburbs

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Georgia Strait

A series of interviews about the impact of rising gas prices on places that are car dependant.

But the recent rise in gas prices is more to do with short term supply issues than an awareness of peak oil plus the rapidly growing demand from China and India. And, the price is expressed in US dollars, which means that the real cost of oil for people who do not use that currency has not changed nearly as much as it appears to those that do. I think we have passed peak oil – but most people in the oil business deny that. However, big oil companies no longer dominate oil production. National oil companies in the producing states do that and they do not think they have an obligation to keep America’s big cars supplied with cheap fuel.

A new study by Oregon-based economist Joe Cortright suggests that spiralling oil prices in the last five years burst the American housing bubble that swelled partly due to relaxed lending practices and speculation.

Properties located in cities and neighbourhoods that require residents to go on lengthy commutes and don’t provide many transportation alternatives have fallen in value more deeply than those in “more central, compact and accessible places”, Cortright wrote in Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs.

“The collapse of the housing bubble, punctured by the gas price spoke, marks a watershed point for the nation’s suburbs,” Cortright wrote.

But it wasn’t punctured by gas prices. It was punctured by investors becoming unwilling to buy commercial asset backed paper (the hideously complicated packages of mortgages taken out by people who could not afford them that were being traded like securities). Mostly because no-one could agree on how to value them. Now, some of the growing number of mortgage defaults (which made the packages hard to value) may have been caused by people impacted by higher driving costs, but mostly the problem was the type of mortgage. Many were only affordable at a low introductory rate and became unaffordable after a couple of years as market rates kicked in. Since we did not have these new, riskier mortgages here, our suburban house prices have not (yet) fallen, but people here are being hit just as hard by higher gas prices. And higher food prices too, come to that. So far what we have seen is an increase in houses for sale i.e. they are staying on the market for longer but prices are not yet falling. Though the phenomenal rates of increase seen in recent years will be a thing of the past. At the same time of course, in BC we are also being hit by rapidly rising hydro bills after a long period of having the lowest electricity rates in North America. Plus the shift to fees and charges from income tax, which hits poorer families hardest who are at the margins of the housing market.

Yes, the American suburb is in trouble now. But oil is only part of that story. The shenanigans of Wall Street are more to blame in my view. Which actually means that the process of adjustment may take longer. Because doing something about it will require financing, and that is now harder to find.

We also know that choice of housing location in this region has not been driven by commuting costs, but mostly by availability of the housing type people wanted. Whenever this got discussed in recent years it was always said to be about “lifestyle choices” – and also the recognition that the decentralisation of employment had made the commute pattern not only more complex but also more car dependent. At the same time as we were building rapid transit and commuter rail to connect the suburbs to downtown Vancouver, so employers were moving out to cheaper locations. And very few of those are accessible by any transit service, let alone rapid transit.

Oh, that thing about house prices and distance from the centre is not news either. It has been around for as long as urban economics and was referred to in my student days as the “rent gradient”.

Written by Stephen Rees

May 15, 2008 at 10:25 am

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