What if I want to buy a home and not a plot of land to build on? Could that possibly affect the prices of homes? Supply and demand works the same for housing as any other product.
“The price of toilet paper is the cost to make it.”
It’s shocking how “affordable housing” degrades and inflates housing options. A builder in my towns planning committee meetings recently admitted the luxury condo community they planned needed to be downgraded to rental apartments because the ownership requirements for “affordable” housing were too onerous.
The point about land prices going up is of course true--it's not clear why concern about building costs means someone is a "denier." Decent quality construction labor especially post-GFC is very expensive. Maybe it should be, but it's not cheap at all and can be prohibitive. The "big builder new build" quality is atrocious and they're basically building homes out of construction paper (so materials are also an issue).
It seems very possible that the supply is constrained by multiple factors including the low amount of skilled labor and *inflation* (pushing up the normal prices of housing as well as the money needed to encourage development of a skilled labor sector--but because benefits of inflation are uneven, people who need the homes do not have the incomes to support the industry)
The reason I lump that take in with the deniers is that it is usually an argument made to say that supply isn't as important. But there is a clear distinction between elevated land cost and elevated structure cost, and the cause and consequences of them are very different. Costs are elevated, and that has led to things like smaller new home sizes, etc. But, if high costs were the binding issue, land prices would have moderated, not inflated. The low quality you are referring to is a reaction to the main driver here - high land prices - which forces builders to compromise on other margins to get prices back down.
I'd be interested to know if you've compared the UK and US situations. Over here land is pretty much always included in house prices, and by extension rental prices. Land rents are never mentioned, and depreciation isn't a thing here, not remotely. Mortgage and rental costs have risen above retail and wage inflation for decades, with pauses during financial crashes but no reversals since the early 1990s.
There is an obsession with affordable housing which I'd agree is counterproductive. Nobody seems to appreciate that undersupply of luxury housing forces the well off to trade down and inflate the 'affordable' housing prices.
But I'd disagree that house builders don't delay builds. It's no conspiracy, just good business! Why build now, when you've fixed the land deal, and in 2 years the houses will be worth 10-20% more? You can't invest to get that return reliably, but it's virtually guaranteed in housing.
Not building homes you've got 'ready to start' is a sound investment!
The land rents and structure rents are bundled here too. I am conceptually separating them.
I don’t know the UK market well, but in the U.S. it is common for pundits to claim that builders slow the rate of construction when the claim is ludicrous.
You hear conspiracy or cartel accusations over here too, which is unhelpful at best. But I think the emergent ‘good business’ argument does hold. Case in point: a major development near me will be 10,000 houses. The first houses are being marketed at premium prices, way above what the market will bear. They’re not selling, and build has slowed, so why not lower prices to sell? Why would you when the market will catch-up at way above interest or inflation rates? Limited construction workforce creates a bottleneck of course, but it’s not a problem the housebuilders seem incentivised to address when they can wait it out.
I miss working in housing policy but I do not miss the endless debates with supply-side deniers. I am on my hands and knees BEGGING them to look up the Census Department definition of vacancy before telling me that vacancies went down because of Airbnb.
Since the excess value all goes to land value under shortage conditions, I think that a fairly administered property tax is a reasonable enough version of a land value tax in practice to suffice.
Relatively high and uniform property taxes are helpful, so Texas has a better tax program than California does.
I don't think there is that much to gain from trying to reinvent the wheel from there.
LVT can only be shown useful using a smaller lens, I think. regional housing stock/ housing prices (broader macroeconomic factors) are independent* from actual civic composition. looking at cities themselves vs regions.
So LVT incentivizes proper city design ( use of vacant lots, building up and not out), benefits which may not be seen from afar
Everyone in NYC says they want affordable housing. But, as you point out, and as most people do not seem to understand, land costs make it impossible to build NEW affordable housing. A half acre lot in Brooklyn now costs between $5 and $20 million dollars. I'm sure that zoning etc has something to do with that but it isn't everything. Are there any credible estimates of how much regulation adds to cost in NYC, LA, or SF? Or, for that matter in the NYC suburbs.
Do you understand what is going on in Florida? I've heard prices are collapsing, but I assume that's an exaggeration . I assume insurance is the big problem.
Prices are collapsing. People with the low rates from 2020/2021 2-3% refinance want out, but people who have to buy at 6-7% rates can't afford it. Pandemic population flows have slowed down, and builders are still building like crazy.
This is a general national issue but it shows up in markets like Florida first. DC metro is also experiencing a downturn because of the Trump firings. I'm trying to sell my house there and it's taking at least a 15% price cut compared to a year ago (still trying to sell).
In 2024 there was rough parody between buyers and sellers (both were very low). But people don't want to stay in their 3% mortgages forever (life circumstances change and they desire different housing) and eventually they put it on the market but the rate differential means buyers have way less purchasing power. 2025 the dam has broke.
There will definitely be a correction in the housing market for the foreseeable future regardless of building rates. Rates are the the drivers seat.
Lots of interesting stuff there on the different measures of household growth, etc.
I would be careful about benchmarking to household formation trends. The housing shortage has lowered household formation, so when more homes get constructed, household formation will move higher relative to trends over the past 20 or 30 years.
Also, I would argue that home prices haven't risen unusually recently. They have tracked pretty closely with rent inflation.
And you probably have seen my updates on monthly residential construction and know that I would say that the builder inventory isn't really elevated.
I 100% agree it's going to be a buyers market for the foreseeable future.
I guess I should have rented but when you've got a big family with small children and an elderly mother you like the idea of locking in your place of residence.
I don't have a firm grip on what's happening in Florida, but I think it is mostly a small reversal of recent trends together with some one-time shocks like the new building code mandates for condos, insurance, etc. Prices could decline a bit more, especially on existing homes, and sales could remain a little bit slow for a bit, but I don't think we should expect some bottomless collapse.
The tricky thing with high costs of regulation, Re: NYC, etc., is that I think they are sort of downstream of the zoning issue. Let's say we start with zoning and general obstruction slowing the growth of housing so a lot goes from $1 million to $10 million in value. The market equilibrium starts to get funny, because one form of obstruction is the long wait times and queues for permits, community feedback, etc. Without that waste, the lot might have gone to $15 million. The builders consider that wasted time a cost. It shows up as a cost in their spreadsheets, but it's really just one of the manifestations of zoning and land use obstruction. And then municipalities start throwing all sorts of mandates at new construction. Labor rules, special changes to the building code, etc. Maybe that adds an extra $5 million to the cost of whatever building can be built on that lot. If that's the case, it's really a $20 million dollar lot discounted by $5 of queueing costs and $5 million of construction rules. Once the marginal value of new housing is embedded in land value, those impositions stop having a visible effect on the final cost of housing, so there is less public resistance to them.
Those sorts of things aren't easy to reverse, and they get sort of baked in to local systems, so I think it will be interesting to see how much high costs prevent housing from becoming fully affordable again in the expensive cities, but I think that the condition we are in now is more of a disequilibrium than an equilibrium. If enough homes start getting built, the effect of costs will mainly be smaller units, etc. rather than elevated expenses relative to incomes.
What if I want to buy a home and not a plot of land to build on? Could that possibly affect the prices of homes? Supply and demand works the same for housing as any other product.
“The price of toilet paper is the cost to make it.”
No.
It’s shocking how “affordable housing” degrades and inflates housing options. A builder in my towns planning committee meetings recently admitted the luxury condo community they planned needed to be downgraded to rental apartments because the ownership requirements for “affordable” housing were too onerous.
That was some sort of inclusionary zoning requirement?
Massachusetts section 40B. Can override local zoning if 20-25% of units are “affordable”. But then the project may not make sense for a builder.
The point about land prices going up is of course true--it's not clear why concern about building costs means someone is a "denier." Decent quality construction labor especially post-GFC is very expensive. Maybe it should be, but it's not cheap at all and can be prohibitive. The "big builder new build" quality is atrocious and they're basically building homes out of construction paper (so materials are also an issue).
It seems very possible that the supply is constrained by multiple factors including the low amount of skilled labor and *inflation* (pushing up the normal prices of housing as well as the money needed to encourage development of a skilled labor sector--but because benefits of inflation are uneven, people who need the homes do not have the incomes to support the industry)
The reason I lump that take in with the deniers is that it is usually an argument made to say that supply isn't as important. But there is a clear distinction between elevated land cost and elevated structure cost, and the cause and consequences of them are very different. Costs are elevated, and that has led to things like smaller new home sizes, etc. But, if high costs were the binding issue, land prices would have moderated, not inflated. The low quality you are referring to is a reaction to the main driver here - high land prices - which forces builders to compromise on other margins to get prices back down.
I'd be interested to know if you've compared the UK and US situations. Over here land is pretty much always included in house prices, and by extension rental prices. Land rents are never mentioned, and depreciation isn't a thing here, not remotely. Mortgage and rental costs have risen above retail and wage inflation for decades, with pauses during financial crashes but no reversals since the early 1990s.
There is an obsession with affordable housing which I'd agree is counterproductive. Nobody seems to appreciate that undersupply of luxury housing forces the well off to trade down and inflate the 'affordable' housing prices.
But I'd disagree that house builders don't delay builds. It's no conspiracy, just good business! Why build now, when you've fixed the land deal, and in 2 years the houses will be worth 10-20% more? You can't invest to get that return reliably, but it's virtually guaranteed in housing.
Not building homes you've got 'ready to start' is a sound investment!
Would be interested to share notes!
The land rents and structure rents are bundled here too. I am conceptually separating them.
I don’t know the UK market well, but in the U.S. it is common for pundits to claim that builders slow the rate of construction when the claim is ludicrous.
You hear conspiracy or cartel accusations over here too, which is unhelpful at best. But I think the emergent ‘good business’ argument does hold. Case in point: a major development near me will be 10,000 houses. The first houses are being marketed at premium prices, way above what the market will bear. They’re not selling, and build has slowed, so why not lower prices to sell? Why would you when the market will catch-up at way above interest or inflation rates? Limited construction workforce creates a bottleneck of course, but it’s not a problem the housebuilders seem incentivised to address when they can wait it out.
I miss working in housing policy but I do not miss the endless debates with supply-side deniers. I am on my hands and knees BEGGING them to look up the Census Department definition of vacancy before telling me that vacancies went down because of Airbnb.
So how would a Land Value Tax fit into the situation as you see it?
Since the excess value all goes to land value under shortage conditions, I think that a fairly administered property tax is a reasonable enough version of a land value tax in practice to suffice.
Relatively high and uniform property taxes are helpful, so Texas has a better tax program than California does.
I don't think there is that much to gain from trying to reinvent the wheel from there.
LVT can only be shown useful using a smaller lens, I think. regional housing stock/ housing prices (broader macroeconomic factors) are independent* from actual civic composition. looking at cities themselves vs regions.
So LVT incentivizes proper city design ( use of vacant lots, building up and not out), benefits which may not be seen from afar
Thanks for your take on it.
Great piece. Two questions
Everyone in NYC says they want affordable housing. But, as you point out, and as most people do not seem to understand, land costs make it impossible to build NEW affordable housing. A half acre lot in Brooklyn now costs between $5 and $20 million dollars. I'm sure that zoning etc has something to do with that but it isn't everything. Are there any credible estimates of how much regulation adds to cost in NYC, LA, or SF? Or, for that matter in the NYC suburbs.
Do you understand what is going on in Florida? I've heard prices are collapsing, but I assume that's an exaggeration . I assume insurance is the big problem.
Prices are collapsing. People with the low rates from 2020/2021 2-3% refinance want out, but people who have to buy at 6-7% rates can't afford it. Pandemic population flows have slowed down, and builders are still building like crazy.
This is a general national issue but it shows up in markets like Florida first. DC metro is also experiencing a downturn because of the Trump firings. I'm trying to sell my house there and it's taking at least a 15% price cut compared to a year ago (still trying to sell).
In 2024 there was rough parody between buyers and sellers (both were very low). But people don't want to stay in their 3% mortgages forever (life circumstances change and they desire different housing) and eventually they put it on the market but the rate differential means buyers have way less purchasing power. 2025 the dam has broke.
There will definitely be a correction in the housing market for the foreseeable future regardless of building rates. Rates are the the drivers seat.
Thanks so much for this intelligence. I'd be interested in your thoughts about my post from January. https://charles72f.substack.com/p/housing-goodbye-drought-hello-glut
Lots of interesting stuff there on the different measures of household growth, etc.
I would be careful about benchmarking to household formation trends. The housing shortage has lowered household formation, so when more homes get constructed, household formation will move higher relative to trends over the past 20 or 30 years.
Also, I would argue that home prices haven't risen unusually recently. They have tracked pretty closely with rent inflation.
And you probably have seen my updates on monthly residential construction and know that I would say that the builder inventory isn't really elevated.
I 100% agree it's going to be a buyers market for the foreseeable future.
I guess I should have rented but when you've got a big family with small children and an elderly mother you like the idea of locking in your place of residence.
I don't have a firm grip on what's happening in Florida, but I think it is mostly a small reversal of recent trends together with some one-time shocks like the new building code mandates for condos, insurance, etc. Prices could decline a bit more, especially on existing homes, and sales could remain a little bit slow for a bit, but I don't think we should expect some bottomless collapse.
The tricky thing with high costs of regulation, Re: NYC, etc., is that I think they are sort of downstream of the zoning issue. Let's say we start with zoning and general obstruction slowing the growth of housing so a lot goes from $1 million to $10 million in value. The market equilibrium starts to get funny, because one form of obstruction is the long wait times and queues for permits, community feedback, etc. Without that waste, the lot might have gone to $15 million. The builders consider that wasted time a cost. It shows up as a cost in their spreadsheets, but it's really just one of the manifestations of zoning and land use obstruction. And then municipalities start throwing all sorts of mandates at new construction. Labor rules, special changes to the building code, etc. Maybe that adds an extra $5 million to the cost of whatever building can be built on that lot. If that's the case, it's really a $20 million dollar lot discounted by $5 of queueing costs and $5 million of construction rules. Once the marginal value of new housing is embedded in land value, those impositions stop having a visible effect on the final cost of housing, so there is less public resistance to them.
Those sorts of things aren't easy to reverse, and they get sort of baked in to local systems, so I think it will be interesting to see how much high costs prevent housing from becoming fully affordable again in the expensive cities, but I think that the condition we are in now is more of a disequilibrium than an equilibrium. If enough homes start getting built, the effect of costs will mainly be smaller units, etc. rather than elevated expenses relative to incomes.
Thanks. You still need to factor in political donations and unions. I'm sure Mr. Mandami will straighten things out.
Those are examples of higher costs that slip in because in an inflated market they lower land values instead of raising rents.