Patient property owners

...and the illusion of competitive land markets

No property owner is in the business of maximising gains from density but then minimising them when it comes to the rate of supply per period (the absorption rate).

In this article, I will clarify the absorption rate trade-off further and show why the most patient owners, who understand and expect this trade-off, always end up owning property.

This is why competition in property markets can’t take the form many assume.

Some relevant FET articles as a background to this argument include:

1. If planning constrains housing supply, how does it do it?

2. Will removing planning controls crash the market?

3. Making sense of property as a monopoly.

Density versus the rate of supply

Imagine a single property owner who owns half a million square metres of land (50 hectares). At current dwelling prices, it is optimal to produce 1,200 housing lots on the site, each with a lot size of 400 square metres.

These lot sizes represent the optimal density, which is determined by the current market demand for larger or smaller lots. But in addition to an optimal density, there is an optimal rate of development over time (an optimal absorption rate).

Building and selling 1,200 new housing lots in a year would flood the local market, depressing prices. It will also cost more to accelerate the construction of earthworks, roadways and other necessary internal infrastructure. So faster sales and development won’t maximise the present value of the flow of sales because of the effect of speed on 1) reducing prices and 2) increasing costs.

Some slower rate of housing production per period will be optimal, regardless of the number of feasible lots in your project or the number of feasible projects in a market. And that rate will depend on market conditions that vary over time.

To illustrate this trade-off, I’ve created the table below showing the cashflows in our hypothetical 1,200 lot land subdivision with different choices of the rates of sales per period.

In the top section of the table is the case where 600 dwellings are sold from the project each year for two years. Because of this enormous number of sales, prices fall so that although a $300,000 per lot average price is received in the first period, in the second period the next 600 are sold at a lower price of $250,000.