A recent survey paper found: only about 30–40% of respondents believe that additional supply would reduce prices and rents. Using a conjoint design, we find that this “Supply Skepticism” is robust to question wording, stipulated counterfactual assumptions, and the cause of the supply shock. It also appears to be specific to housing: respondents generally gave correct answers to questions about supply shocks in other markets. Finally, we find that while nearly all renters and even a majority of homeowners say they would prefer home prices and rents in their city to be lower in the future, support for state preemption of local land-use restrictions depends on beliefs about housing markets. “Supply skepticism” among renters undermines their support for home construction.
" ...Your city allows 500 new homes a year. ... this year, 500 young adults decide to move out .... Local builders respond, and the city allows 750 new homes to be built this year. So, the local builder’s market expands by 50%, but 250 households still have to move away because there isn’t enough housing. Population declines."
I compute: 750 supply - 500 demand = 250 available. What am I missing?
Sorry. My writing wasn't clear. The assumption was that 500 units are being built in a baseline year for 500 extra households, and the extra households from the young adults moving out require an additional 500 units.
I'm glad that I can treat the whole affair purely as an intellectual exercise, as I don't live in the US.
Though I wonder what the results would be if someone applied even a small portion of your acumen to eg my adopted home of Singapore.
Singapore is a very peculiar city. We do a lot of construction; NIMBYs don't seem to have any power; but there's also lot of pent up demand: people typically live with their parents until their 30s, but would be more than willing to move out, if cheaper housing was available.
Kevin, let me try to summarize your observation succinctly:
1. During booms, demand for housing goes up;
2. higher demand leads to higher construction, higher displacement, and higher prices; and,
3. some people will misinterpret this correlation as causation: "higher construction causes higher prices".
Did I get this right?
This seems like a sensible thing to worry about. But the reality may be even worse. Imagine a city X that allowed much more construction than most do today, while most cities maintain today's policies. When other cities boom, X will be a magnet for the displaced. In-migration will keep X's housing prices from falling. Yes, construction kept X's prices from rising as much as they would have without the construction, but NIMBYs won't see that. They'll see construction and higher prices together, and will reject the "more construction means lower prices" Econ 101 theory. They will be unable/unwilling to imagine what X's price-path would have been without the in-migration (lower) or without the construction (even higher), and so will be unable/unwilling to see how helpful the extra construction was.
In other words, I think the spatial correlation between more construction and rising prices will be even worse to deal with than the temporal correlation you highlight.
My conclusion from all of this is that (1) as a matter of extant reality, no one locality can solve the housing supply problem (the problem is too big); and, (2) any locality that tries only winds up "disproving" the idea that more construction lowers prices, at least in the eyes of NIMBYs.
The only way I see out of this is much stronger leadership from state governments in preventing localities from regulating construction to death. I do think that if California really led here, it could "single-handedly" (as one state) change the trajectory of housing prices by simultaneously satisfying demand within the state, and also providing refuge for out-of-state people fleeing the forced deprivation of their own foolish localities.
You are right that a single location can't 'solve' the problem and will seemingly 'disprove' econ 101.
But see the upside! That single location can have a thriving construction industry, and not have to worry about an increase in supply leading to lower prices. That's the dream of any producer! Especially one that wants to produce in large volumes.
In addition, if your location in question has high property taxes (or even better, a high land value tax) local government revenues directly benefit from all that activity.
(And all the new refugees arriving don't pay those taxes, at least not in an economic sense: the property taxes will be capitalised into the land prices, ie the.new residents mortgages will be lower enough so that the total expense of mortgage plus property taxes will be roughly constant regardless of tax rate.
An increase in the property tax rate is borne only by existing land owners who pay for it via reduced land values.)
To make the rant short: the location in question would see exactly what you predict, but they would derive enormous economic benefit from this tupsy turvy world.
The whole discussion reminds me of those people who claimed that quantitative easing was ineffective at raising inflation. (This was mostly a concern in the 2010s, you don't hear a lot of complaining about too low inflation these days anymore.)
So the thing was that if quantitative easing fails to raise inflation, that's actually great, because you central bank can gradually buy up all the assets in the world, without any downsides.
Wouldn't it be great for Japan, if the BoJ would gradually buy up all the debt in Japan and then all the companies in the US, and all the gold in the world, etc? Without any inflation to worry about.
While we're all waiting for the "Californian Experiment" to play out, I think the positive example of Tysons Corner that Emily Hamilton documented is instructive. A prominent and concentrated transit corridor that embraces density can have a profound impact on an urban region. Another example could be the High Spine development area in Boston.
Hamilton has also shown how Houston implemented a more generalized approach to density by changing lot size requirements--I suppose you could call that the "Tokyo Technique" but it was the normal evolution of any urban area for a few millenia until 20th century zoning and transportation turned everything into a sprawling hellscape.
" ...Your city allows 500 new homes a year. ... this year, 500 young adults decide to move out .... Local builders respond, and the city allows 750 new homes to be built this year. So, the local builder’s market expands by 50%, but 250 households still have to move away because there isn’t enough housing. Population declines."
I compute: 750 supply - 500 demand = 250 available. What am I missing?
Sorry. My writing wasn't clear. The assumption was that 500 units are being built in a baseline year for 500 extra households, and the extra households from the young adults moving out require an additional 500 units.
Very nice analysis as usual!
I'm glad that I can treat the whole affair purely as an intellectual exercise, as I don't live in the US.
Though I wonder what the results would be if someone applied even a small portion of your acumen to eg my adopted home of Singapore.
Singapore is a very peculiar city. We do a lot of construction; NIMBYs don't seem to have any power; but there's also lot of pent up demand: people typically live with their parents until their 30s, but would be more than willing to move out, if cheaper housing was available.
Kevin, let me try to summarize your observation succinctly:
1. During booms, demand for housing goes up;
2. higher demand leads to higher construction, higher displacement, and higher prices; and,
3. some people will misinterpret this correlation as causation: "higher construction causes higher prices".
Did I get this right?
This seems like a sensible thing to worry about. But the reality may be even worse. Imagine a city X that allowed much more construction than most do today, while most cities maintain today's policies. When other cities boom, X will be a magnet for the displaced. In-migration will keep X's housing prices from falling. Yes, construction kept X's prices from rising as much as they would have without the construction, but NIMBYs won't see that. They'll see construction and higher prices together, and will reject the "more construction means lower prices" Econ 101 theory. They will be unable/unwilling to imagine what X's price-path would have been without the in-migration (lower) or without the construction (even higher), and so will be unable/unwilling to see how helpful the extra construction was.
In other words, I think the spatial correlation between more construction and rising prices will be even worse to deal with than the temporal correlation you highlight.
My conclusion from all of this is that (1) as a matter of extant reality, no one locality can solve the housing supply problem (the problem is too big); and, (2) any locality that tries only winds up "disproving" the idea that more construction lowers prices, at least in the eyes of NIMBYs.
The only way I see out of this is much stronger leadership from state governments in preventing localities from regulating construction to death. I do think that if California really led here, it could "single-handedly" (as one state) change the trajectory of housing prices by simultaneously satisfying demand within the state, and also providing refuge for out-of-state people fleeing the forced deprivation of their own foolish localities.
-Ken
You are too pessimistic.
You are right that a single location can't 'solve' the problem and will seemingly 'disprove' econ 101.
But see the upside! That single location can have a thriving construction industry, and not have to worry about an increase in supply leading to lower prices. That's the dream of any producer! Especially one that wants to produce in large volumes.
In addition, if your location in question has high property taxes (or even better, a high land value tax) local government revenues directly benefit from all that activity.
(And all the new refugees arriving don't pay those taxes, at least not in an economic sense: the property taxes will be capitalised into the land prices, ie the.new residents mortgages will be lower enough so that the total expense of mortgage plus property taxes will be roughly constant regardless of tax rate.
An increase in the property tax rate is borne only by existing land owners who pay for it via reduced land values.)
To make the rant short: the location in question would see exactly what you predict, but they would derive enormous economic benefit from this tupsy turvy world.
The whole discussion reminds me of those people who claimed that quantitative easing was ineffective at raising inflation. (This was mostly a concern in the 2010s, you don't hear a lot of complaining about too low inflation these days anymore.)
So the thing was that if quantitative easing fails to raise inflation, that's actually great, because you central bank can gradually buy up all the assets in the world, without any downsides.
Wouldn't it be great for Japan, if the BoJ would gradually buy up all the debt in Japan and then all the companies in the US, and all the gold in the world, etc? Without any inflation to worry about.
This is a great comment, thanks Matthias. How I wish more people were inclined towards this sort of thinking.
While we're all waiting for the "Californian Experiment" to play out, I think the positive example of Tysons Corner that Emily Hamilton documented is instructive. A prominent and concentrated transit corridor that embraces density can have a profound impact on an urban region. Another example could be the High Spine development area in Boston.
Hamilton has also shown how Houston implemented a more generalized approach to density by changing lot size requirements--I suppose you could call that the "Tokyo Technique" but it was the normal evolution of any urban area for a few millenia until 20th century zoning and transportation turned everything into a sprawling hellscape.
Very well put, Ken.
I think you've highlighted a follow-up post I will need to put together.