that is an interesting insight about regulations not changing what buyers will pay. however, what if regulations are so extreme that they do not merely increase the cost of development (reducing residual land value as you put it), but reduce the amount of land available for development? the authors of that study suggest that this is a cause of high prices in some areas. regarding Manhattan, they write:
Since 1980, housing prices have soared and there have been few new units.(5) The physical character of Manhattan has not changed between 1960 and today. If the rise in housing prices during the 1990s were the result of demand pushing along a stable supply curve, then surely we would see an explosion in new construction as we did in the past. The increasingly common combination of rising prices and tiny amounts of construction pushes us to focus on housing supply.
obviously, if demand continues to grow and supply is stagnant (due to developers' hands being tied by regulators), then i guess higher prices are the only way to clear markets. but maybe they are missing the forest bubble due to their focus on the Manhattan tree: their argument may have validity w/r/t narrow segments of the market, but i wonder how many areas really have the kind of extreme regulations that put outright curbs on supply. certainly for much of Southern California, there is abundant supply sprawling inland.
OTOH, we have watched the steady rise in homeownership from the low 60%'s to nearly 70% today, over the last decade. this is obviously a function of more "qualified" buyers; i.e., lower hurdles to cross from the demand side. when you combine such a rise in demand with the natural population growth, the supply would have had to rise by epic proportions to maintain stable real prices. (it is even more extreme if you think of demand not just as percentage of buyers, but as percentage of household income devoted to housing, coupled with all the easy-credit steroids that pump up end prices.)
considering how far the bubble has advanced, i do not think it will/can end until there is an utter collapse of the credit mechanisms (i.e., widespread failures among credit purveyors and insurers). |
