Has there really been a housing boom?


The answer is no. There has been a boom all right, but it has been a land price boom. This is not semantics - the fact there was no housing boom has a stark implication: society does not need to move resources away from construction in the long-run as has been suggested or assumed time and again (see for example this related discussion). We - meaning most of the western world - have not been building too much.

Development is generally severely constrained by the planning system,  so the returns to developing land to the landlord are way above normal. Unless the price of housing falls below construction costs (impossible in Europe, extremely unlikely in most of the metropolitan US), landowners that offer their land for development will keep enjoying a pure windfall gain, albeit one that is smaller the lower
house prices go. The point is that whether the windfall gain is small or large is irrelevant; in both cases there's profit to be made (and societal gains to be reaped) by developing the land. Keep in mind that agricultural land (the alternative use) is next to worthless - in the UK it's £7k/hectare on average, and this is probably amongst the most expensive in the world - while land carrying planning permission is worth more than 15 times that.

The reason you don't see development now is that landowners are holding back for higher prices in the future - it is fundamentally a short-term thing. If expectations about future prices adjust, there will be a renewed supply of land offered up for development. Unless land prices reach zero, no resources should move away from construction in the long-run.

Henry George's thinking on optimal taxation is also related to this observation.



by datacharmer | Wednesday, November 04, 2009
  | | Has there really been a housing boom? @bluematterblogtwitter

9 comments:

  1. James Says:

    You seem to be equivocating. The standard argument is that there was a boom (i.e. bubble) in home PRICES. You slyly change the term "housing boom" to mean a CONSTRUCTION boom.

    You state that there was a land price boom, but then say that agricultural land "is next to worthless". That seems contradictory. If it really was a LAND boom, then agricultural land should have risen as well.

    Instead, the boom was a boom in housing demand, especially single-family home demand. Since housing is relatively fixed in the short run, this resulted in a boom in housing prices. (Construction did boom, but not enough to offset the boom in demand.)

    We can see that in the U.S. there was a boom in new single-family home sales even though there was not a boom in population growth.

    What can cause a boom in housing demand when there isn't a boom in population growth? A global savings glut could certainly do it, i.e. too much credit chasing too few assets.

  2. Robert Johnson Says:

    James, a global savings glut will decrease the cost of borrowing which could increase the consumption of housing (by essentially reducing the cost of financing housing). However, that doesn't explain why the boom happened in housing rather than in any other sector of the economy.

    I think it may be a valid point to say that the boom was in real property, as opposed to either construction or housing. After all, commercial property has also peaked and collapsed. Looked at this way, the land boom argument makes some sense.

    What's the difference between agricultural land and the land your house stands on? Convertibility.

  3. donna Says:

    I think the real boom was the baby boomer housing boom. Everyone who wanted a big suburban house simply had one, and the market stopped. As boomers move to smaller houses now and the genXers mostly want more urban settings, the suburban big house market stops growing. My genXer friends who are buying are all getting condos or houses closer to the city centers. Only boomer friends have any interest in buying farther out...

  4. James Says:

    Robert,

    The boom happened in housing (and other developed real estate) instead of other sectors of the economy because there's nothing people buy with a greater debt-to-equity ratio than real estate. The fact that 20% down payments are effectively a thing of the past just makes real estate more volatile, as small changes in interest rates can cause large changes in prices.

    James
    The Bubble Meter Blog

  5. James Says: This comment has been removed by the author.
  6. James Says:

    I should also point out that housing is more vulnerable to animal spirits than other real estate because it's something shoeshine boys can buy.

  7. Robert Johnson Says:

    James,

    Touche! Very good point about why cheap credit could spur a housing boom.

    You may have seen this already: http://www.calculatedriskblog.com/2009/11/residential-investment-components-in-q3.html

    I wonder why home improvements didn't spike more?

  8. Shane Says:

    This is a remarkable insight. Construction costs in the west never got way out of hand. The cost of land (actual and expected) did.


    >1/2 a million dollars for a half-built house: http://bit.ly/aV5vO

  9. Robert Johnson Says:

    Shane - brilliant!