The housing supply mechanism
I dunno, man. There's a golf course just down the road from me where I live in SE London. That land would be worth 10-20x as much with permission-to-build.
— no employers, don't google me (@sudonimbus) August 17, 2020
You can argue that a massive increase in building wouldn't affect *prices* much but arguing nothing would happen is crazy
This Twitter statement contains some hidden assumptions and two main points; 1) that land is worth different market value depending on the rights attached to it, and 2) that massive amounts homebuilding will affect prices.
Points 1) and 2) are correct. But the hidden assumption that because land has a different value with a planning permit (or with different zoning) that overall homebuilding rates will rise if a plot is rezoned. This part of the mechanism is wrong, in my opinion.
It is not obvious to me that changing planning will greatly affect the rate of market supply. If you assume that planning is the reason new housing supply is not higher, then you are assuming the outcome. I don’t think it would do much at all.
This challenge was put to me.
Let's hypothetically suppose that a new regime grants permission to build literally anything up to 10 stories and compliant with building control on any site within 30 miles of Big Ben.
— no employers, don't google me (@sudonimbus) August 17, 2020
What happens, in your model?
I responded that not much would change.
Let us be clear. Many cities effectively have this type of planning system. Sydney councils, for example, allow tall towers in vast areas of the city and had record new housing construction for nearly a decade. That doesn’t stop people from saying these new apartments should be taller, or that supply isn’t a problem.
Sure a large scale planning change would be a shock to an equilibrium. It will probably stimulate a flurry of activity—site trades, new types of development proposed, and maybe extra buying of these new dwelling types. During this adjustment period, prices would probably rise rather than fall, as is usually the case. But this would quickly calm down until there is no sustained change to the rate of supply.
The effect will be like any other small shock to a dynamic system.
Developers slow their sales when prices fall, and increase them when prices rise. They build to order. I do not see what mechanism there it so sustain faster supply and falling prices with these economic dynamics at play. Would it make sense for any developer to sell out their apartments at lower and lower prices to sustain a faster sales rate?
The zoning and land value issue
Additionally, the fact that changing zoning, or permitting development, affects the price of a property seems to be evidence about supply constraints for many people.Not sure the blog helps the author’s argument, as
— Chris Giles (@ChrisGiles_) August 19, 2020
1) land values and changes in value differ hugely depending on housing permission rights, that supports @s8mb point about interest rates
2) density of rental accom (people per flat and location rel to Work) have deteriorated
This exact argument was the second paragraph of a recent RBA paper about housing supply.
There is a hidden assumption at play to make the leap from “different property rights have different values” to a supply shortage. Unless you want to argue that property rights should have no value, then this is a weird argument.
No one would think it unreasonable that if you gave a landowner the rights to use adjacent public space to build extra housing that their property rights would have a higher value. Yet when we change the orientation of neighbouring rights from “beside” to “above” apparently these rights should be worth zero.
We know rights to airspace and higher density are valuable because they can be traded in some markets. They are a distinct property right. Planning is a tool to allocate them.
There are no "true" property rights to land that go from earth to the heavens. With property rights, you get what you are given.
Strangely Ed Glaeser’s approach to housing implies that property rights to land should be worth zero. He says, in essence, housing supply would be effectively unconstrained without planning and land values would fall to zero.
He is careful not to say it this way because it sounds stupid. He instead says that the cost of housing will be pushed down to construction cost. Hence, the land component of home prices will be zero.
This is unusual, to say the least. It implies that if you removed all planning controls (build anything anywhere) that land would become valueless. If this were true, announcing such as policy would crush land value to zero immediately as expectations get factored in. Who would want to own an asset whose value is rapidly trending towards zero?
How you can affect housing prices with “supply”
On the Jolly Swagman podcast I thought I understood you to be saying that housing supply is not the main issue. But then you also mentioned flooding the market with new stock would help and also that artificial drip feeding impacted prices?
— πΏππππππππ π³πππππππππ’ (@PrDemography) August 19, 2020
The physical number of homes does not change prices much. It was, therefore, confusing to some when I said we could flood the market with supply to reduce prices. If we think about property price crashes, we can see what flooding the supply-side of the housing asset trading market can do. This effect has nothing to do with the total quantity of dwellings. In fact, such price declines are usually accompanied by crashing housing construction.
If this institution demonstrated its ability to back up its sales with new housing, this credibility would lead the market to accept that price and operate within the corridor. It would realign market expectations on prices and capital gains.
How many new dwellings would need to be built to back up that promise and demonstrate its credibility? Probably not as many as you would think. Yes, there would be waiting lists at first as home production ramped up to back up those sales. But even then there would still be an effect. Pay $500,000 or wait a while on the waiting list and pay $310,000?
I would guess that building about 30,000 thousand dwellings per year for the first few years in Australia would make the CHB credible. Maybe 60,000 per year in the UK.
Now, I do not think this is the best “solution” to high housing prices. I think the best affordable housing system is Singapore's proven model.
What thinking about this option does is show that we do intervene in important asset markets, like money, when we think a different price would be socially more desirable. It also shows how difficult it would be to get prices down via supply-side interventions.
This report, entitled Help to Build, is apparently a plan to support housing supply, yet it proposes only demand-side interventions. In effect, it concedes that housing supply responds to demand and that we just need more demand to get the supply. If this is true, then it cannot be true that planning changes will result in voluntarily faster supply at the same level of demand.
Likewise, suppliers are unwilling to ramp up output unless they think there will be a prolonged period of high demand since they do not want to start up only to have to switch off shortly after.
This is a long post, so I will stop. Post your questions in the comments.
Cameron, you say:
ReplyDeleteThere is a hidden assumption at play to make the leap from “different property rights have different values” to a supply shortage. Unless you want to argue that property rights should have no value, then this is a weird argument.
These rights only have value because they are scarce. Just like taxi licences or import quotas. Do you think it is "a weird argument" that there is a shortage of taxis?
I'll answer this properly with a post. The short answer is that if planning permit must be "attached" to scarce locations, surely the interests of those who own the scarce locations are to not get so many permits that the value of their location falls.
DeleteCentral banks promises are seen as credible usually because they can costlessly buy new financial assets with newly created cash.
ReplyDeleteNew houses are one of the most costly goods to produce in the entire economy - there is no way such a promise would be seen as credible...
I mostly agree. You'd need a lot to be credible. The puzzle is that many who lobby for remiving planning controls think that something similar will happen voluntarily as private landowners flood the market to reach a new lower price equilibrium. As I said, this is problematic.
Delete"The scale would have to be very large, but this is exactly the large scale change in supply many expect to happen automatically from rezoning. So why not guarantee that it happens with a public competitor to these private housing suppliers?"
I like to use the Singapore Housing Development Board example. They have built around 90% of new dwellings over the past 50 years defending their low price housing. I'd be totally fine with that!
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