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One city has diversified its economy, the other still relies largely on oil. Yet home prices are rising in both thanks to lack of supply.

During the great US property bubble of 2000 to 2007 Dallas, Texas, was a bit of a dud. While the residents of other big cities were getting rich flipping condos and withdrawing endless equity from their homes, house prices in Dallas rose only 24 per cent. The same happened across Texas: pre-bubble a house in Texas cost about 80 per cent of the median house elsewhere in the US. By 2006 it was down to 60 per cent. In other words, there was no property bubble in Texas.

If you still think of the likes of Houston and Dallas as purely oil towns this might come as something of a surprise. After all the oil price fell 50 per cent in 2014 and is now about $45 a barrel. That is not exactly a boom time price — and, with the Saudis determined to keep pumping, it is not one that is going to rise anytime soon either. Any casual observer would therefore expect the market in, say Dallas, to look more like that of Aberdeen (where the volume of house sales has fallen with the oil price) than that of San Francisco. If the oil money isn’t pouring in, what is paying for the mansions? The answer is money from many other industries.

Tuscan-style farmhouse in Chapel Hill Road, Dallas, $7.5m

Texas learnt one helluva lesson in the last oil crisis and has spent the past 20 years working to make sure that it entered the next one with a better diversified economy. So it has its own Economic Development Corporation (Texaswideopenforbusiness.com) and a whopping pot of money to hand out to incentivise companies to set up in the state. It has five of the 10 fastest-growing cities in the US. American chief executives have named it the best state in which to do business for the past 11 years in a row. Texas has created a third of all private sector jobs in the US since 2000 and four state colleges now have a better record of placing MBAs in tech jobs than Stanford and Harvard. Austin and San Antonio have thriving high-tech and financial sectors (Facebook, Google and Charles Schwab all have a presence in Austin) while boom boom Dallas, which specialises in tempting big business to move its way, appears to have a finger in every pie: Barclays has its “technology hub” in Dallas and this year Toyota announced it was moving its headquarters from the west coast to Dallas. The upshot is that there are jobs aplenty in Dallas. Chuck into that mix a super-low cost of living (energy costs under half those of New York for example), excellent infrastructure (Dallas has fabulous roads — and lots of them), low house prices (relative to the east and west coasts of the US), low income taxes and good schools, and it makes sense, as one resident told me, to make “conscious choices” to move to Dallas. The equation here is simple. Low supply plus high demand equals rising prices.

Four-bedroom home in Piney Point Village, Houston, $35m

Yet what happens when supply rises to meet demand? This is what has occurred in the oil market. During the “super cycle” supply was constrained, demand was huge and prices went nuts (hitting near $150 a barrel). Then supply rose sharply and boom turned to bust. The dynamic for all other commodities, including houses, is the same. Produce (or build) lots more and prices will fall. The realtors of Dallas will tell anyone willing to listen that the diversification of the Dallas economy means that the falling oil price isn’t that big a deal for the city’s market. It is, they say, totally different to Houston, which has not pulled off the same trick during the past few years: there is no Facebook and no Toyota, just a long list of expansions from the likes of Chevron, Exxon, Baker Hughes, Southwest Energy and Noble Energy. That is why, according to the Dallas Fed, in the first half of 2015 manufacturing jobs in Houston suffered the largest decline since the 2007-09 recession. Defenders point to the fact that Houston’s refining industry does well from low oil prices and also note the rise in the service industry (albeit without mentioning that it services the oil industry). However, the residents of Dallas can still, I think, say with some certainty that while Dallas may have diversified, Houston is still very much more of an oil town — one in which house prices always fall when the oil price is below $55. Houston can’t boom with falling oil prices any more than London could if fund manager margins halved.

If Dallas isn’t the same as Houston in terms of its business mix, it is exactly the same as it — and for that matter the rest of Texas — in another, more vital way. It is surrounded by millions of acres of buildable land and its developers can bump up supply at speed. A friend who lives in Dallas told me that it “isn’t London, and it isn’t New York”. He meant culturally but the point stands for land too. You want to build on new land in London? You can’t. You want to build on more land in Texas? You can. The roads are already there. The land is cheap (you can’t do much else with it). Labour costs are low (Mexico is next door). And people don’t mind driving to work (particularly with fuel prices so low). High prices drove new supplies of oil and crashed prices. The same is happening across the Texan housing market where the builders are working on the supply problem by, as they put it, “turning a lot of dirt”. Housing starts in Dallas are up 9.6 per cent on last year and agents across Houston are worrying about the oversupply of high-end condos. Supply is rising everywhere.

Three-bedroom house in Rydington Place, Dallas, $1.27m

The jobs offered to Dallas residents by the likes of Pepsi, for instance, prevent the Dallas market being hit as hard as the Houston market by any fall in demand for housing resulting from the collapsing oil price. Yet the panicked buyers chucking in open-day offers would do well to remember that prices aren’t just about demand — they’re about supply too. In the last housing cycle Texas didn’t bubble. So it didn’t bust either (note to the Fed: this is a good thing). In this one, it is beginning to look like it will do both. The good news is that if it does, anyone who wants to live there is in for a treat post-bust: give an oil town a boom and its developers build amazing houses — houses you might soon get for less than their list price as more of them are built.

I am taken with 4636 Chapel Hill Road in Dallas, a five-bedroom, “Tuscan farmhouse-inspired” mansion covering an extraordinary 13,555 sq ft (see what I mean about no shortage of land?). Yours for $7.5m from Dave Perry Miller Real Estate. Those with less than $2m will have to suffer less space but the same agency has a three-bedroom house that could take away some of the pain: 13 Rydington Place is a “Colorado chalet” with 5,424 sq ft and a pool that is a snip at $1.27m. In Houston, Sotheby’s Realty is selling my modernist dream for $35m. The four-bedroom home in Piney Point Village has some of the nicest bathrooms and best views I’ve ever seen.

Merryn Somerset Webb is editor-in-chief of MoneyWeek