It predicts movement in policies. As neighborhoods get wealthier, they trend toward regulatory capture. Zoning laws get more onerous, building codes get more restrictive (ever wonder why you don't see 25 story condominium complexes for example?) and the cost of entering the neighborhood is artificially inflated as a result.
They correlate, but it itself is not the cause in the sense that income levels directly cause housing prices to go up. What they do enable though, is as folks become wealthier they tend to also spend more time lobbying for these types of city regulations to preserve their home values. They spend more time on this as the income bracket goes up. Couple this with the fact that wealthier home owners tend to be older, they often have more time relative to others in many respects to lobby consistently for the status quo.
The issue I have with the report is it takes none of that into account, and instead takes the correlation (that income rising === higher home prices) without looking more closely at what happens as the income trend goes up.
>It predicts movement in policies. As neighborhoods get wealthier, they trend toward regulatory capture. Zoning laws get more onerous, building codes get more restrictive (ever wonder why you don't see 25 story condominium complexes for example?)
This. Once people are rich enough to have no real problems the setback of someone else's shed on someone else's land and the spacing of outlets in the walls of other people's houses suddenly start looking like things worth caring about, all of which drives down the efficiency by which dollars can be converted into use of land.
>and the cost of entering the neighborhood is artificially inflated as a result.
Worse, it's a feedback loop. High cost of entry means only more of the same will enter
>This. Once people are rich enough to have no real problems the setback of someone else's shed on someone else's land and the spacing of outlets in the walls of other people's houses suddenly start looking like things worth caring about.
Worse yet, the seeming backbone of the US real estate market is that homes are your biggest investment. They're seen as both a place to live and an asset that is a portion of your net worth.
For it to be both, means owners will always incentivize the asset increasing in value and as we see, the result is most home owners will fight zoning de-regulation tooth and nail. Its worth noting that this is true regardless of which political party is in power locally, assuming we're talking about the US.
As a result land use reforms are some of the hardest to get through legislatures in the US. For example, it took years for California to pass a law that simply allows people to rent secondary dwellings on their property, and this was heralded as a big deal because it usurped local regulations banning such practices. Keep in mind, this does relatively little to move the needle on real estate pressures (there's only so many places that have excess capacity of this nature to begin with and there aren't a ton of incentives to create more, as the law is still limited in a variety of ways). This took many years to get through, and its a very very very small reform!
I am both a land owner (I have a niche farming operation, but don't live on that land) and a home owner, and I find this obsessive behavior among other land/home owners to be misguided at best and appalling at worst.
The simple truth is it can be either an asset or a commons good, but it really can't be both. Thats a major part of the issue to begin with, and why I'm an advocate for the Land Value Tax
Productivity goes up → income goes up → real estate prices go up -> existing home owners and realtor organizations (at minimum) lobby for regulations to keep those prices up -> stricter zoning laws and build approval processes get passed -> demand isn't met as housing supply is artificially constrained to protect existing owners over new entrants, including new housing styles that maximize land usage (e.g., multi story condominiums or dense town house projects)
What should happen is:
Productivity goes up → income goes up → real estate prices go up temporarily -> new builds to meet current and future demand go up (as you would see in any other type of marketplace) -> housing prices come down as there is always going to be incentives to maximize land value in desirable places in a myriad of ways, and doesn't always mean building cookie cutter single family homes as we often see now (due to the aforementioned regulatory constraints that zoning regulations impose)
There is an artificial cap on how it works, and its done through zoning laws and other build regulations that make it anywhere from onerous to illegal to build housing in a maximally efficient way, all in service to protect existing owners home values as much as possible, at the expense of anything else.
This is why I will always advocate for a land value tax. Because it acts as a forcing function: you either pay the tax (which gets higher as time goes on) or you maximize the value of the land (which usually means selling off parcels to meet the tax obligation / lower future obligations, and/or building something to utilize the land, of which the most straightforward is often more housing, and denser the better as it increases utilization)
No, seriously. I am a landlord. How do I set rent? I ask myself: "How much do people around here earn?" And I set my price at ~30% of that.
I am currently selling a house. How do I set my price? I ask myself: "What salary would someone moving to this area likely be making?" And I set my price accordingly.
Literally none of the zoning laws are necessary. This method is how price is set in 100% of real estate transactions in 100% of localities, regardless of any other regulations.
FWIW I'm also an LVT zealot. Have you read Progress & Poverty yet?
Setting rental rates at 30% of median or average income for the area is the wrong way to think about it.
Setting rental rates at 30% of "What the average renter makes" is more reasonable.
This is the issue. There is no "what the market can bear". It is all "that's the way it is".
Every year there is a new excuse why prices go up (covid, fires, elections) but the numbers don't seem to align.
Also, I am not talking about SF or Bay area...the bad math has spread across the country.
Edit: And yes...my area has many vacant homes and even more commercial buildings. They are building high rise towers which people purchase and leave vacant. They buy houses that used to be rentals and tear down the entire neighborhood and leave it that way for years...further pushing out the rentals.
It is sad to watch the town I love destroy itself from the inside.
I would have been part of a development project that had it been approved[0], would have been involved in selling a high rise of condos, and the question that kept coming up for me is: "how hasn't someone undercut this market yet?" which is why I pursued it.
Because for instance, you'll rent at 30%, but if there was honest market pressure (and lets face it, there isn't) why wouldn't someone else rent at 28%? Or 25%? etc.
Zoning has real hidden costs, as do all the review stages etc.
Whats funny is how stable all this has been for landlords, builders (to some degree) and realtors. If an area is desirable to live in, you would see economies of scale trickle in - like I mentioned in other comments, why do you think we don't see 25 story condos in desirable areas? Thats zoning in action. You literally can't build it even if you had all the money in the world, because the local laws won't allow it[1]
>Progress & Poverty
The Georgism book? I have read it, been some time since I have and should really revisit it.
[0]: fellow local citizenry ultimately rejected my proposal - I knew it was likely but I had to try. Thats why I have a niche business on that plot now.
[1]: and I have some first hand experience here, its what I originally wanted to do with an aforementioned plot of land that is now a niche little farm growing speciality apple varieties
> Because for instance, you'll rent at 30%, but if there was honest market pressure (and lets face it, there isn't) why wouldn't someone else rent at 28%? Or 25%? etc.
They do! And then like all other markets, equilibrium is found, and that equilibrium point is what moves up as incomes move up.
They don’t though not really. We didn’t allow housing to have the same elastic market fluctuations all other markets do.
Yes, there can be minor variations in prices (especially with renting) but the fact of the matter is unlike any other market there is artificial scarcity up and down the chain with real estate
> there is artificial scarcity up and down the chain with real estate
Which, according to this analysis, does not actually significantly affect prices relative to other factors.
I understand your theory and I intuitively don't find it "wrong" per se, but you're staring at an analysis that shows you otherwise. Your critique of it not factoring in things like policy is explicitly wrong: all of those factors are fully accounted for in the ultimate supply elasticity.
So if policy is accounted for (it is), and your theory doesn't hold, it's time to either come up with a different critique of the study or acknowledge it as clear evidence against your theory.
No, those policies only matter, definitionally, in so far as they actually affect the elasticity of supply. The elasticity of supply is what they measured and found it does not matter, ergo those policies (and all related hypothetical supply-elasticity-affecting forces) effectively do not matter relative to other factors (well, one factor in particular: income).
This is discussed elsewhere but "market prices" are a distribution of bids and asks. A buyer or seller can be on the high or low end of that distribution, which does not change the fact that the distribution itself moves up as local incomes go up.
They correlate, but it itself is not the cause in the sense that income levels directly cause housing prices to go up. What they do enable though, is as folks become wealthier they tend to also spend more time lobbying for these types of city regulations to preserve their home values. They spend more time on this as the income bracket goes up. Couple this with the fact that wealthier home owners tend to be older, they often have more time relative to others in many respects to lobby consistently for the status quo.
The issue I have with the report is it takes none of that into account, and instead takes the correlation (that income rising === higher home prices) without looking more closely at what happens as the income trend goes up.