A housing absorption rate and upzoning thought experiment
Leave your answer to my question in the comments
A city has 100 active new housing projects.
Each project is owned by a different developer who is staging their project in batches of 20 new dwellings. Some of the stages are individual apartment buildings, some are new townhouses, and some are lot subdivisions for detached homes.
Each project has been designed to be carried out in 20 stages. There are 400 dwellings in each project across all stages. These are all approved by the planning system.
So that’s 100 projects that each have 400 new dwellings approved or 40,000 total possible dwellings in the pool of already approved housing projects.
Dwellings are only built after they are sold, and each project is selling 1 new dwelling per month from its currently released stage. So that’s a rate of new housing supply of 100 dwellings a month, or 1,200 per year.
The market appears competitive, as any market with 100 alternative suppliers does.
The city council has been listening to concerns about the price of housing and is convinced that the rate of new housing development is too low.
To accelerate new housing development they upzone the remaining 19 stages of each of the 100 projects, so that now each developer can build 800 new dwellings instead of 400, increasing the pool of zoned and approved dwellings from 40,000 to 80,000.
What happens to the rate of new housing supply per month when the stock of potential new homes instantly doubles?
Answers in the comments please.
Also, you can find my academic paper on the absorption rate concept via this post.
A housing supply absorption rate equation
You are a housing developer with a large plot of land on the fringes of a major city with no planning constraints. How quickly should you sell these lots to supply them to the housing market? This is the question I answer in a new working paper entitled A Housing Absorption Rate Equation (published version
The case study controls for demand, as each dwelling is built after one is sold, at a rate of 1 per month per site. If demand increased then the build out rate of the 40,000 approved dwellings would increase. It makes no difference if 40,000 are approved or 80,000 are approved. The rate of new housing supply is already responsive to demand, so no change.
I’m going to go for ‘stays the same’.
If I put myself in the shoes of a developer the additional upzoning is a gift, in that it has increased the size of my land portfolio, but I’m not going to squander that gift by selling each property for less than the maximum I can get for it. That is - I don’t want to release so many in a given month that I exceed the number of buyers in the market, and thus giving buyers more bidding power, thus causing a temporary dip in prices. So the rate I’m going to build out and sell at is still determined by how many potential buyers there are each month (ie the diameter of the pipeline, not the length of jt).
Possible exceptions might be:
- if for some reason (eg increased net migration into the city or a new demand-side subsidy) there is a sudden increase in the size of the number of households looking to (and able to) buy at my top market price in a given month. So I can release more, faster, without prices going down.
- if there’s a bubble on, and speculators and landlords are in gold rush mode. Prices are rocketing but I don’t think it’s sustainable. I think there’s a crash coming so I want to cash-in quick before the music stops.
- I’ve got a cashflow problem so I need to release them faster, even if it means selling them for less.