> The problem is that there's a limited amount of supply of real estate. Everyone wants real estate, so market participants bid up the price until supply and demand match.
In most developed countries, real estate prices are artificially inflated by restrictions on the construction of new housing stock.
This is far from a simple case of supply and demand.
Keep in mind that at least in the US, many people own homes -- many times with a mortgage, which essentially makes it a leveraged bet, so small swings affect them more. (If you spend $200k on a $200k home and its price drops to $190k, you've suffered a 5% loss -- ho-hum. If you have $10k equity in your $200k home and its price drops to $190k, you've been wiped out -- suffered a 100% loss.)
Many people were "sold" on a mortgage by someone promising them that "it's an investment that will always go up." Because most people are rather ignorant about finance, and a home purchase is the largest single transaction they will ever make, a US politician seriously proposing what seems to be the trend of this discussion -- that house prices should go down -- would provoke an enormous political firestorm from the vast number of people with money on the table, at least as big as the current gun control debate.
In an ideal world, we'd implement the policy backed by the soundest argument and the best evidence. I'm not taking a position on what the best policy is at the moment. I just want to note that, if it turns out the best policy is one that calls for substantial deflation of housing prices, politics would likely kill it quickly.
Sorry for the double reply, but I think the above paragraphs say something substantially different from my other reply to the parent and really belong in their own comment.
> real estate prices are artificially inflated by restrictions on the construction of new housing stock.
How do you explain the housing crisis? The backlog of unsold homes that developed in many parts of the country says to me that prices didn't fall far enough. That is, due to the way market participants act, housing prices are "sticky" like wages. Sellers (mainly banks) apparently would rather let a house sit vacant and unsold than set sale prices at levels that would allow the market to clear (and take big capital losses).
I'd say that it's clear evidence that real estate prices are inflated -- not by zoning regulations, but by perverse incentives produced by the way real estate lenders keep their account books.
This falls in line with the picture that, due to the loan bundling practices that were encouraged by US government agencies Fannie Mae and Freddie Mac, the owners of most housing loans weren't the same as their originators and hence, this created an incentive for the originators to make loans to people who couldn't pay them in the long run. Which increased demand in the housing market due to allowing these borrowers to enter (their shaky financial status would have been excluded them if they hadn't had access to the questionable loans), which caused prices to rise. Eventually a lot of those borrowers (predictably) went bankrupt and exited the market, dumping the extra supply (now-vacant houses) on the banks (which obviously promptly put them on the market, since being homeowners is out-of-scope of most banks' business plans -- they'd much rather be the creditors of homeowners, a role they're much better set up to play).
But prices couldn't fall again and return us to the status quo ante, because not enough sellers were willing to go with Option A: Sell for whatever buyers are offering, and take an immediate capital loss in their books.
The banks were more willing to go with the alternative, Option B -- tolerating the damage over time of the taxes and expenses involved in owning a vacant house for many months or years. Although the costs of Option B would, over a sufficiently long period, dwarf those of Option A, the short-term incentives of upper management -- encouraged by short-term thinking common among investors and, indeed, endemic in the financial industry as a whole -- made Option B more attractive due to its better short-term results.
It's still a case of supply and demand, just that the supply of build able real estate isn't just about dirt. It's dirt with a road,sewage, power and legal status allowing dwellings.
The point still stands - even a radical readjustment in planning policies could maybe double land supply - but a type of moores law with land will never happen.
> a type of moores law with land will never happen.
Never say "never." It's easy to imagine a future where interplanetary travel is routine, and habitable places are common (either due to the human race getting lucky in terms of there being an abundance of vacant Earth-like planets within easy range of future space drives, or due to the human race being diligent in the development of technology to live on hostile worlds or asteroids).
In such a future, I could readily imagine the human race expanding geometrically -- such expansion would end when we reached the edge of the galaxy, but that would still give tens of thousands of years of unlimited geometric expansion, assuming our ships are self-sufficient and can penetrate any within-galaxy area void of habitable planets, and also assuming our space drives won't allow faster-than-light travel (I think the galaxy is ~100,000 light years in diameter).
Should we count on things turning out that way? It seems irresponsible to assume so at this point. But it also seems like we shouldn't discount this scenario entirely, either -- and discounting this possibility is exactly what you're doing when you say "a type of moores law with land will never happen."
In most developed countries, real estate prices are artificially inflated by restrictions on the construction of new housing stock.
This is far from a simple case of supply and demand.