More houses and higher density will bring down housing costs over the long term
More housing supply will reduce the competition among workers for available properties. More housing supply is certain to bring down housing costs in the long-term.
California Governor Jerry Brown recently proposed to reduce the regulatory burden on real estate developers to facilitate construction of more new homes to increase supply and make housing more affordable. A bevy of special interests line up against the proposal, and most homeowners in California would prefer to maintain the status quo because a shortage of housing benefits them personally. Most of the arguments put forth against providing new supply lack merit, and the alternative is to do nothing and watch as house prices climb beyond the reach of all but a select few citizens.
One of the spurious arguments put forth is that more supply will never bring down the cost of housing. While it’s true that in absolute terms new construction is unlikely to lower the price of housing, over time if enough new supply comes to the market, the rate of home price appreciation could fall below the level of wage inflation. If that occurs, house prices can still go up, but the cost of ownership consumes a lower and lower percentage of a worker’s take-home pay. Affordable housing advocates hope to turn the tide against housing costs rising faster than wages — that’s what victory in the affordable housing arena looks like, not a decline in house prices overall.
A more pernicious argument put forward is the futility argument. There are many versions, but they all share the common theme that the problem is so intractable that we shouldn’t even attempt to solve it. This kind of helpless, defeatist nonsense infuriates me. There is no problem so intractable that the efforts of good people embracing sound policy can’t make a difference. The defeatist arguments are most appealing to Nimbys who would rather win without a fight.
So what other arguments need debunking?
Good news if you’re in a NIMBYish mood of late: A new study from Chapman University in Orange County gives you the anti-Manhattanization rationale you’ve been waiting for. In “Building Cities For People,” author Joel Kotkin, a former San Franciscan turned urban studies fellow at Chapman, argues that increasing building density actually makes the housing crisis worse, and also makes San Francisco less likely to attract and retain anyone except the super-rich.
Kotkin contradicts the common supply-side argument that a modern metropolis can only drive down housing prices (and retain populations of working and middle class families) by building more, thus reducing scarcity and bringing supply in line with demand. That sort of thinking only makes sense to a point, he says.
If there is a point where that thinking doesn’t make sense, we are nowhere near it. In fact, we are at the other extreme where any additional inventory is helpful.
“Once I started talking to developers, they pointed out that once your building gets higher than four stories, your price goes through the roof,“ Kotkin says. “That has to do with seismic safety, the switch from wood to steel frames, bigger crews of union labor, lots of things.”
Cost may limit supply when considering different construction methods, but once a price threshold is met where higher-cost construction methods are warranted, developers would react to market forces and produce the more expensive product. Irvine provides plenty of evidence for this truth. For many years garden apartments (three stories or less on grade) dominated the market because rents weren’t high enough to justify podium construction. Now that rents are high enough to justify this construction, many of the new apartment complexes in Irvine were built using this more expensive method.
In San Francisco, it also means a much longer planning and approval process. The result, Kotkin argues, is that the only way big buildings can be commercially attractive to those building them is by catering to the rich. The “pack and stack” method of approving bigger and bigger development in an attempt to relieve the housing shortage only pushes prices higher, because builders want a return on those huge investments.
Builders generally appeal to more affluent customers, and they won’t build unless they believe they can make a profit. Unfortunately, sometimes developers are wrong, and they provide a new project that fails to catch on. These become the more affordable properties 20 years later. We don’t need builders to provide anything affordable today, but the more they provide, the more they will erode the value of marginal properties from yesteryear. That’s how housing becomes affordable.
“In San Francisco, townhome building can cost more than double that of detached buildings. Units in condominium can cost as much as 7.5 times” to build, according to “Cities for People.”
“It surprised me too,” Kotkin says, since it flies in the face of basic assumptions about supply and demand. But it does explain a few things, like why the world’s biggest cities have been unable to build their way out of soaring home prices. Kotkin cites East Asian cities such as Singapore — so dense that it’s a miracle light can escape its borders — as the ultimate case study. There, housing prices only come down when government steps in and converts buildings to public housing. …
The worlds biggest cities didn’t build to counteract soaring home prices. They built in reaction to soaring home prices, the new supply made those home prices soar a little bit less when it came to market.
Large metropolitan hubs have tremendous home price growth because they have stellar job growth. In fact, job growth generally exceeds housing supply, so there is a persistent shortage of housing that keeps prices up. The fact is that house prices would be even higher if the additional supply were not brought to market.
If the present building trends continue to proliferate, even the young Millennials who are supposed to fuel our tech economy will eventually drift away, back toward the suburbs or to cities in places like Texas, where housing costs are on average less than 30 percent of monthly take home pay. That means a city that becomes older (we have the smallest percentage of child residents of any large city), whiter (white people now count for only a fifth of suburban flight), and, of course, wealthier, since only those who can afford those giant buildings will stay. …
Otherwise, we only need to look abroad to see what the future might be. “A place like San Francisco will end up what H.G. Wells called ‘an appliance of luxurious extinction,’ home mostly to the rich and childless, plus a few of the poorest people, who qualify for public benefits,” Kotkin says. “Wells was talking about the future of London. And he was right.”
Yes, H.G Wells was right. London has the same problem as San Francisco: they don’t build enough homes to house their people either.
Shelter is a product that millions of Americans will purchase each year, but what economic factors cause growth or decline in the purchase of this product? … why has the level of growth in mortgage home sales this 8 year economic cycle disappointed many housing pundits and experts?
The basic underlying problem stems from the housing bust. When we reflated house prices to bail out homedebtors and the banks, we artificially raised home prices and forced people to price their homes above market in order to bail out their bad debts. As a result, housing inventory is abundant at prices buyers can’t afford.
I give them (minor) credit that they no longer blame tight lending. That completely unsupported thesis has finally succumbed to a slow and painful death. The new “stalking horse” that has replaced tight lending as the favorite unsupported thesis to explain the low sales numbers, is tight inventory. According to the “experts” we simply don’t have enough homes to address the high demand. …
One of the problems with buying into the low inventory thesis is that what follows from this is the assumption that if builders build more homes, we should see purchases increase. And because supply has increased, home prices should be more affordable.
The obvious problem with this thesis is that builders are not building starter homes. For the past four decades, in fact, builders are building bigger and bigger homes and flooding the market with higher prices homes for the wealthy. This will not do anything to make homes more affordable for the rest everyone else.
If you need proof of this, look behind you. We already ran this experiment. Did the ramp-up in home building from 1994-2007, especially the massive over building from 2002-2006, make housing cheaper? …
Actually, during the housing mania, the cost of ownership of housing did get cheaper — if you consider the teaser rate payment that people actually made. The entire housing bubble was inflated on the idea that a very tiny monthly payment could support a huge debt. The ramp-up in house construction was a reaction to the high home prices. Further, in the end when this inventory needed to be absorbed with stable buyers using stable loans, prices crashed, and the overbuilding from the mania certainly did add to the inventory woes pushing down home prices and depressing homebuilding.
Mortgage rates could fall by as much as 2% in the next economic cycle, making the 30-year rate 1.25% – 2.25%. If this doesn’t happen then we will have broken a multiple decade streak of having 2% lower rates in each new housing cycle. If it does happen we can expect another mini-boom of refinancing but how much it will help home purchasing is unclear.
It is unlikely that this demographic bolus of first time home buyers will be able to afford a new home. I call this the “Tiffany Effect.” Just like most new couples cannot afford an engagement ring that comes in that distinctive blue box, only the very fortunate few will be able to afford a new home. The massive demographic push that will come in years 2020-2024, will increase housing demand but it won’t be as strong as some of my bullish friends in the housing community are betting on.
We are heading for a society of landed gentry — a land of haves and have-nots. A very small and select group of people will own houses, probable due to inheritance or some other windfall. Everyone else will be stuck out in the cold.