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Dave Stuhlsatz's avatar

Sometimes I engage in a gruesome thought experiment: what if a Thanos snap wiped out half the population? This would create a massive surplus of homes across the country at the same time as a considerable inflationary surge in the monetary system. In real terms, house prices would fall considerably and filtering distribution would improve instantly---all of Kevin's price/income graphs would become flat lines. However, within a few years we would probably see considerable recovery, i.e. outpacing inflation, of price levels in desirable urban areas. And, many rural and exurban areas would simply be abandoned as population migrated back to cities and the lower density suburbs around them. In essence, the supply of existing houses in established population centers would create its own demand structure at the expense of outlying areas.

Granted, not a serious policy application here, except to demonstrate that supply improvements in housing don't result in broad based price declines that persist for very long. Incumbent property owners should always have an incentive to maintain the quality of their communities as much as the quality of their personal property.

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Dave Stuhlsatz's avatar

Good post. It seems fair to paraphrase Scott Sumner and point out "never reason from a supply change" when considering housing prices.

Before zoning, property owners had a choice when it came to extracting the maximum rent value from their land. They could buy new land in undeveloped areas and build new stuff, or they could tear down existing stuff and build larger and denser. In either case the new supply drove improvements in buildings and expanded options for renters. Granted, I'm glamourizing periods of history when slumlords were packing families into grim architecture, but the static conditions that we experience now are an anomaly.

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