2005 November 25 Friday
On The Causes Of Rising Housing Prices

The Wall Street Journal reports on the causes of the large increases in real estate prices in recent years.

America still has lots of wide-open spaces, but many of them aren't where people want to live. And builders are finding it more difficult to get permits to put up new houses in many of the more economically vibrant metropolitan areas, particularly along the East and West coasts.

"The housing supply has been constrained by government regulation as opposed to fundamental geographic limitations," concludes a paper released in December 2004 by Edward L. Glaeser, an economics professor at Harvard University, and two colleagues.

Homeowners share the blame. Prof. Glaeser's paper says they have grown savvier about organizing themselves to block proposals that would bring new and more densely packed housing to their neighborhoods -- something that they fear could reduce the value of existing homes.

Think about this argument. It sounds like a complaint against people who oppose high density building. Economists argue that housing wouldn't cost as much if it was built more densely. True enough. But isn't higher density housing undesirable for most people. Doesn't the higher density also translate into lower perceived value by most potential buyers?

Consider the interests of existing homeowners. Why are homeowners fearful of higher density housing? The economists say the homeowners fear declining housing prices. But the declines in prices are due to declines in perceived value. Higher density housing lowers quality of life of lower density housing owners living in the same area. If a neighborhood gets more houses built on smaller lots then suddenly more cars are parked on the street, more cars are going by all hours of the night and day, noise levels are higher, and there's more pollution.

Higher density housing mixed with larger and more expensive houses is also redistributionist. The houses that have fewer occupants per dollar of assessed value end up paying more taxes per occupant and therefore those houses effectively subsidize the occupants of higher density housing. Why should homeowners want to subsidize the living standards of other people in the name of the free market?

The classic libertarian economic argument against building regulations just plain ignores the external cost problem. People who organize to resist new building are organizing to avoid external costs that lower their quality of life. They also avoid higher taxes. The higher taxes subsidize people in higher density housing who demand as much or more public services while paying less in taxes.

But why the increased demand for housing? More people. Imagine the United States with half its current population. Housing costs would be much lower in desirable locations for living because lower demand would lower land costs. Of course immigration is driving America in the opposite direction. We are long past the age of unexplored frontiers or sparsely populated coastlines. Every addition to the total population is another person to compete for limited land resources in the most desirable areas. Worse yet, the average immigrant is a member of the recipient class and makes less money, pays less in taxes, and generates more demand for government services and taxes than the white and Asian American populations.

Share |      By Randall Parker at 2005 November 25 09:22 AM  Economics Demographic


Comments
Invisible Scientist said at November 25, 2005 3:45 PM:

In addition to property owners who fear that high density apartment buildings would lower the value of their real estate, the housing industry might also worry about lower prices, and probably they are using their leverage in local governments to make it more difficult to build a lot of affordable buildings.

However, densely packed apartments, don't necessarily lower the quality of life if the entire city is very modern. For instance, if all cars are electrical, and if there is a very good public transportation system in the city, then almost nobody will need a car to go to work inside the city. Only for vacations people might need cars in this case. Already some New York city taxi cabs are hybrid vehicles, and some electric buses (powered by zinc-air batteries) are being planned for New York. Noise pollution can also be resolved by buiding better apartments with double-glass windows. Also the proximity of culture and many services can make the quality of life much higher in a well planned densely packed city. New York City is currently like hell, but if it get re-built and re-planned properly in another 25 years, then it will become excellent.


Also, thanks to the improving internet services, living in more remote areas in the mountain states, will be a good alternative. Thanks to the modern communication systems, culture and education will be more and more available in remote mountains.

Randall Parker said at November 25, 2005 4:22 PM:

Housing construction companies lobby for less obstacles to build. They support political candidates who make it easier to get building permits.

Most people do not build new homes. Therefore the theoretical possibility of making quieter homes doesn't do anything to help them. They buy what exists or they rent what exists. So they experience the noise. Also, when the weather is temperate they want to have their windows open and when they are outside they want it to be quiet.

Right now cars are not electric. Therefore right now higher population densities mean more air pollution and noise pollution. Also, electric cars will not solve the problem of traffic jams.

Cities are unlikely to be well planned. Also, you can not use planning as a way to make everyone civilized.

Engineer-Poet said at November 25, 2005 8:50 PM:

You can use residence permits to boot out the uncivilized.

Invisible Scientist said at November 25, 2005 9:36 PM:

In that case, how about REDUCING the population by having a maximum of 1 child per family, but also simultaneously INCREAING the IQ of each new baby to a minimum of 140. This way, robots would do all the dirty work, there will be less pollution and less consumption of raw materials, and the world will be a nice place to live. Thanks to the higher IQ of the society, the productivity will increase many-fold, and hence there will be no more poverty.

crush41 said at November 26, 2005 12:23 PM:

Well, why not increase each baby's IQ to 180 while you're at it? How would it be done?

John Dunshee said at November 26, 2005 10:16 PM:

Here in Oregon we have 1000 Friends of Oregon that has designated themselves as the guardians of the land. They oppose new development everywhere which is driving the housing prices higher here.

In my area the head guy is a wealthy retired California businessman who moved up here and bought himself a 30 acre estate in the country.

Remember! A Developer wants to build houses in the woods; A Conservationist HAS a house in the woods.

Kind of like having a multimillionaire politician running against "the rich".

Ivan Kirigin said at November 27, 2005 8:07 AM:

Yah, those crazy libertarians. Thank god for neighborhood coalitions & government intervention, cuz before them, low-density housing didn't exist!

It is becoming less important to live near urban areas, hence the rise of the exurbs. Want a big house? Move to an area whose economy is the most vibrant - probably the same area where there is still plenty of cheap land.

I have never agreed with housing regulation & zoning, save for industry with a great deal of pollution. The market has taken care of these issues for centuries when allowed.

The complaints of current home owners are valid. But what right do they have to impose their views on a developer a few blocks away? The concern for the value of their homes is the most ridiculous. How about someone push congress to ban new cars, because I don't want the value of my VW-wagon to go down!

It is this simple, and has been for centuries: if you want more space, less pollution, and quieter environments, then move away from the city. If you don't want to leave the added value in the variety of urban life, then get a better job, and get a bigger place in the city.

As for your concerns of population, do you think it unrelated that rich people in rich nations have fewer children?

Randall Parker said at November 27, 2005 8:36 AM:

Ivan,

The areas with cheaper land have lousier climates.

Yes, the complaints of current home owners are valid. What right do developers have to impose higher taxes, pollution, and traffic on them?

The market can't solve the problem caused by larger populations. People do pay far more for housing in many parts of the nation than they did a few decades ago and that change looks to be permanent.

Rich people in rich nations who have fewer children should build strong barriers to immmigration or they will be overrun by dumber people who have much larger families.

Nogales said at November 27, 2005 8:43 AM:

"The complaints of current home owners are valid. But what right do they have to impose their views on a developer a few blocks away? The concern for the value of their homes is the most ridiculous."

Homeowners have every damn right to "impose their values" in such a way, Ivan. It's funny how some so-called "libertarians" raise such a hue and cry about how these zoning and building-permit laws frustrate the free market, while failing to recognize that these restrictions *are* the voice of the free market-- yelling loudly that its participants don't want to see the value of their assets reduced by stupid, ill-thought-out immigration policies and lax building codes. In an area where I used to live, the housing codes were gutted so much (and the City Council became so shamelessly pro-development) that a ridiculous amount of high-density housing was constructed in a region that had been known for its family-friendly community, decent schools and safe playgrounds. After the new housing was built-- in the teeth of bitter objections-- the roads went to crap as they became clogged up in traffic, it took a damn hour to get to work every day when it had been a mere 15 minutes before, crime shot up through the damn roof, the playgrounds were all closed down, the kids were forced to stay in after-school programs for their own safety, a fairly beautiful forest next to the houses was razed to the ground (what about the plants and animals who live *there*, Ivan? Do they have no rights to survive?), the local stream became a polluted mess, and generally the whole series of neighborhoods went to crap. Oh and, since the housing prices did plummet so far, it made it that much difficult for everyone else to sell their homes and move elsewhere. Lest you put on your Bolshevik hat and shout "NIMBY racist," our neighborhood area was only a little over half white with plenty of Asians and many middle-class blacks who'd worked their way up the ladder in jobs like construction and law, and they were all pretty much unanimously pissed off at the decisions of the Council-- so much so that every single member of the council was kicked out at the next election. (They didn't exactly receive much gratitude from the mostly-immigrant new residents either, who'd found they'd just moved into a shithole.)

"It is this simple, and has been for centuries: if you want more space, less pollution, and quieter environments, then move away from the city. If you don't want to leave the added value in the variety of urban life, then get a better job, and get a bigger place in the city."

You truly are an addle-headed dumbass aren't you? Were you born with a silver spoon up your ass? Do you actually live in the real world? "Just get a new job"?? "Just move out and buy a new place"? Do you have any clue how difficult this is to do in the real world these days? Especially for a family with kids??? Zoning, housing codes, and restrictions on new construction are precisely the vehicle through which a community expresses its economic desires, and since the addition of substantial high-density housing tends to ruin things for everybody-- the earlier residents, the newcomers, and the environment-- there are some pretty damn obvious and legitimate reasons why these codes have become so prevalent throughout the country, and become more so every day even in the Red States. If you ever manage to get off your ass and visit a densely populated urban tenement like Detroit or Newark, you'll know exactly what we're talking about.

Mark said at November 27, 2005 10:21 AM:

The average education level in California is predicted to fall. California's going to get a shocking education

Randall Parker said at November 27, 2005 11:14 AM:

Mark,

There's no way a dumber population can maintain the same standard of living. They can't do the high productivity and high paying jobs. The job mix will have to shift toward those types of jobs the dummies are actually capable of doing.

No Child Left Behind, racial preferences, and the rest of the "solutions" put forward by liberals will fail miserably.

Libertarian policies would also fail if tried. But the dummies aren't going to vote for libertarians. The dummies will vote for liberal Democrats. The state of California will become less libertarian while the libertarians will claim that if only libertarian policies were put into practice utopia would be right around the corner.

Libertarians are every bit as bad as liberals in denying the truth about human nature.

John S Bolton said at November 27, 2005 4:12 PM:

One overpowering factor that everyone seems to leave out of account, is that housing prices, to rise, must have effective demand. The source of this today is the $500 billion+ dollar support from foreign central banks. Population increase need not result in any effective demand for new housing; they can crowd in on existing housing, if financing for housing price increases is not available. If one wants to limit the increase of housing prices, the foreign dollar support would have to be reduced. Large amounts of new credit can't help but flow into the housing speculation in today's circumstances.

Big Bill said at November 27, 2005 10:48 PM:

So what beef do the libertarians have with private government? Anything at all? Are they upset about Homeowners Associations or covenants established by developers for entire neighborhoods? Or do they only get upset when public entities (cities, towns, counties) do exactly the same thing through zoning committees and the like?

I really would like to know what their beef is.

D Flinchum said at November 28, 2005 9:08 AM:

In an odd twist to zoning laws, homeowners' covenants, etc, I read recently that Mexico is apparently threatening to lodge "Human Rights" violations against the US because local zoning laws are preventing their citizens living illegally in the US from packing 20+ people to a single-family house. How's that for a broad interpretation of "Human Rights"?

Kurt said at November 28, 2005 10:49 AM:

I saw a poster here about an environmental organization that opposes further development of land in Oregon. Since population increase is the fountainhead of environmental degredation, why don't the "greens" put two and two together and support efforts to reform our immigration system? Is it because this is too sensible for "pie in the sky" environmentalists?

Steve said at November 28, 2005 4:51 PM:

As usual, the folks at Marginal Revolutions have interesting things to say about this topic. Here Alex Tabarrok points out that private homeowner's associations make homes more valuable:

http://www.marginalrevolution.com/marginalrevolution/2005/11/the_mansion_war.html

The Robin Hanson has thoughts about why density actually ADDS value:

http://www.marginalrevolution.com/marginalrevolution/2005/11/not_enough_toge.html

I think that Hanson and Invisible Scientist have a point - high density does not necessarily lead to lower property value or lower quality of life. Here in downtown Chicago, there are many expensive high-rise condos going up, including the new Trump tower. The primary appeal of these buildings is the population density. There are lots of people here, and therefore lots of things to do. And the density in a downtown district actually reduces traffic problems. The city has clean, reliable public transit system, lots of cabs and is also quite walkable. The denser it gets, the more things you can walk to, the more frequently the trains and buses run and the more cabs there are. The result is less driving per person, and yet greater convenience.

There are a few keys to making high density work. Chicago has invested in lots of very nice public areas, such as the new Millennium Park, many museums and the entire Lake Michigan waterfront. Chicago has allowed low income housing to be pushed out to less desirable districts by market forces - for example, the Cabrini Green projects are being replaced by expensive townhouses. Chicago has also gotten serious about crime - the murder rate has plummeted in recent years and the downtown district, including those nice public areas, is very well policed.

We do have immigrants here in Chicago. Some are rich and live in my building. Many are poor and live in cheaper, outlying areas of the city. They take long train or bus rides into the downtown area to get to work. Some of them do jobs that we'd have a hard time filling without immigrants - like planting flowers in the median of Michigan Avenue at 3 am or washing high-rise windows.

But, of course, increased density wouldn't improve property values or quality of life in Winnetka or Marin County or New Canaan. The appeal of those places is that they are not dense.

dave said at November 28, 2005 6:09 PM:

Increased density is usually a result of higher housing prices. Higher density means higher construction costs. For- Profit Developers will not invest in higher density developments unless the housing prices are high enough to justify the investment. This is ALL about trade-offs. Those who already live in a nice area have an incentive, through zoning and Nimby-ism, to keep higher density development out of their area. However, if there is high demand for housing, they should be the last ones to complain that their kids can't afford to buy a house nearby. If you want something done about high housing prices, you must build new housing to keep up with demand, which almost always means higher density. You can't have it both ways. It is irresponsible of our public officials (or at least the local newspapers) to be less than honest about these trade-offs. What's worse is when cities enact affordable housing mandates which force developers to set aside a certain percentage of their apartments, condos or houses as "affordable" for those less well-off. The impact of this is that housing creation slows down once these mandates go into effect until housing prices rise enough to cover the added cost of building units that are not profitable to the developer. This slow down in new housing means prices go that much higher and make all housing less affordable. It's a Catch-22, but at least we should all apply a little bit of basic economics when presenting this trade-off to those stakeholders (i.e. homeowners) in neighborhoods and cities. If the neighbors decide the trade-off is higher housing prices, fine, but don't expect prices to go down. If neighbors are ok with higher density, then don't bitch about the traffice.

John S Bolton said at November 28, 2005 9:22 PM:

Housing prices of the kind that get tallied in the publicized figures, and new housing permits, would be down without the dollar support from foreign central banks. Supply and demand for housing in general, is almost irrelevant, in comparison to the supply of, and demand for, long term credit at negative real rates. The demand for such credit has to go into that which will rise in price accordingly, unlike, say, manufacturing facilities which are being undercut by currency intervention overseas.


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