Property owners hate more supply and competition...

even though they pretend to love it

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There is a puzzle at the heart of the public debate on planning regulations and housing.

Property owners and the development lobby make money from selling and renting property. Yet they claim that land use regulations decrease housing supply and should be removed, despite standing to benefit financially from higher prices and less competition.

There are three ways to resolve this contradiction:

1. Housing supply does not operate the way they imply, or

2. The industry puts the interests of the community before its own shareholders, or

3. They are incompetent.

Option 1. seems most likely.

No industry lobby would argue for deregulation if it genuinely believed stronger competition and lower prices would be the result.

For example, the taxi industry did not seek deregulation to facilitate competition from Uber. Instead, they argued for more regulation in response to this competitive threat. The ACT branch of the Australian Taxi Industry Association (ATIA) called Uber “a political manipulator” for its successful drive to deregulate the industry and the Taxi Council of Western Australia (TCWA) pushed for more regulation when Uber began taking away its customers, noting the following:

​​In response to the adversary Uber X and regulatory reviews calling for wholesale reform and significant deregulation of Perth’s taxi industry, the TCWA developed a policy of reform that instead of deregulating the industry, would maintain and heighten regulation, creating a Smarter Taxi Service for Perth.

The Pharmacy Guild of Australia argues that competition is not in the interests of its pharmacy-owning members, producing material like “Supermarket pharmacies… bad for health?” where it states clearly that the “...Guild does not believe it is in the best interests of patients to allow pharmacies in supermarkets”. They further support laws that restrict competition from new pharmacies through location rules that prohibit too many pharmacies from locating close together to improve options for customers, and ownership rules that require qualified pharmacists to own retail pharmacy businesses.

Yet, when it comes to the housing development industry, this type of lobbying does not happen. Industry representatives claim they are lobbying for more competition from other property owners who they say will compete with them and lower prices, undermining their own profits.

The Property Council of Australia has argued for this very outcome.

National Competition Policy-style supply and housing incentives could boost state housing supply and spur state housing production within 3 years (p4)

This bizarre contradiction strongly suggests that many of the stories about land use regulation and its apparently deleterious effects on housing supply and price should not be taken seriously.

As I have said many times, developers have billions of dollars of undeveloped property in their landbanks. A 20% reduction in the price of housing, holding development costs fixed, would result in a leveraged reduction in the value of those land holdings, wiping off billions in value from their balance sheets.

For example, if the price of a home is $500,000 and the development cost is $300,000, the residual land value is $200,000. If the home price falls to $400,000, with the same development cost, the land is now worth $100,000 per lot, or a 50% lower value.¹

The reality is that private property markets are a monopoly and there is no incentive for any owner to defect and start competing on price, which only serves to undermine their own future economic gains. Just like there is an optimal density of housing development, there is an optimal rate of supply (new dwellings per period of time, or time density).

I’ve also argued that if we did enact a policy that reduced prices and increased competition, these same groups would lobby hard against it, despite spending the past few decades pretending to lobby for it.

This happened in the United States in the post-war period when large-scale public housing projects began.

Here’s a long quote that demonstrates exactly this response from the industry. It’s from Rachel G. Bratt in her terrific 1986 book chapter entitled Public Housing: The Controversy and Contribution.

Within Congress, conservative members labeled public housing a socialist program and opposed it on the grounds that it would put the government in competition with private property.

Largely as a concession to the private housing industry, the public housing legislation included an "equivalent elimination" provision requiring local housing authorities to eliminate a substandard or unsafe dwelling unit for each new unit of public housing built. Public housing could replace inadequate units, but it was not to increase the overall supply of housing, since that could drive down rents in the private housing market.

The argument that public housing should not interfere with the private market logically led to the view that public housing should be clearly differentiated. This had important implications, for example, for its physical design: Public housing, with its austere appearance, is usually easily distinguished from the overall housing stock.

The early public housing program was shortlived. World War II interrupted all non-war-related programs, and public housing construction fell victim to defense needs. However, because thousands of units were in the "pipeline" prior to the war, it was not until 1944 that production virtually stopped. Before the program was reactivated in the 1949 Housing Act, the real estate lobby launched an all-out attack on public housing. The familiar cry of socialism and the warning that public housing would destroy the private building industry were again heard. President Truman, a supporter of the program, responded with this pointed counter-attack:

I have been shocked in recent days at the extraordinary propaganda campaign that has been unleashed against this bill [Housing Act of 1949] by the real estate lobby. I do not recall ever having witnessed a more deliberate campaign of misrepresentation and distortion against legislation of such crucial importance to the public welfare. The propaganda of the real estate lobby consistently misrepresents what will be the actual effect of the bill, and consistently distorts the facts of the housing situation in the country.

Ultimately, proponents of public housing prevailed, but the legislative intent was clear: Public housing was to serve only those people who could not compete for housing on the private market. Private interest groups were willing to tolerate public housing as long as it was explicitly serving a different consumer.

It goes on.

But not all low income people were eligible for a public housing unit.

From the program's inception, it was aimed at providing housing only for the deserving, temporarily poor- -the "submerged middle class". The program therefore targeted those who could not find decent, affordable housing on the private market but not the so-called unworthy poor and those with no means to pay rent.

It pays to look at the underlying financial incentives of interest groups rather than take the stories they tell the media on face value.

1. Please refrain from the usual response of “but if you can double density then the total land value is the same even though the dwelling price is 20% lower”. This is true. But there is no mechanism to get to this situation from the current equilibrium price and rate of supply. Why would all property owners collectively panic and develop so fast as to return the total value of their assets back to their old value? Do shareholders panic when the value goes up and sell so quickly as to return the value of a company back to its original value?