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Jonathan Diskin's avatar

Thanks for this great explainer. This fits well with your emphasis on the need for better economic theory to understand housing markets and your critical work, such as "Evidence-Lite Zone". There are theoretical simplifications that are linked to statistical work that attributes too much causation to correlations, despite 'controlling' for this and that. All of this aligns with my own view that far too much weight has been placed on regulation as an exogenous barrier and not attention on the endogenous layering of forces that are housing markets. If I can add a simple example, if the clustering by income and the positive amenity affects of valuable locations and densification create higher land values, that may induce land owners to expect escalationg prices and to reduce their willingness to sell in the present but wait for even higher prices. There are feedback effects here. If something like this is happening, then as D shifts out due to higher incomes and higher amenity (just what Glaeser used to argue in his "Consumer City" pieces) then higher land prices are an increased cost on the S side. In short, a Demand increase will cause the S curve to also shift upward or to steepen (lowering elasticity) and this will further increase housing prices. No regulation needed to grasp this effect, just an endogenous link between increased willingness to pay and the price needed to induce more supply. I think areas with higher housing prices, such as coastal California and parts of the US eastern seaboard, have been leaders in this process and that the dynamics of a longer-term increased willingness to pay to live in valuable urban spaces is unfolding across the US and in other places too. This is a historical shift related to incomes, lifestyles, and the complex dynamics that sets off in the housing markets. Regulation that protects higher income areas from rental housing and lower-income residents is pernicious in itself as I see it. This requires targeted opposition on equity grounds, but this is not the same as the broader faith in de-regulatino as the 'solution' to an inadequately understood housing crisis. Thanks for your continuing to link policy to more nuanced theory! This is desperately needed before we over incentive developement in ways that we may regret as a new type of 'urban renewal'

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Noah Caldwell-Gatsos's avatar

This theory seems like it requires developers to be able to costlessly hold onto land indefinitely, which isn't realistic for most developers who use leveraged financing and face interest payments, face carrying costs like property taxes/ongoing site security, and would encounter capital constraints when they go to their next deal.

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