Amid all the talk of housing bubbles in the media lately, it’s nice to see the Christian Science Monitor pick up on the impact of regulation on housing prices. So when will the bubble burst?
Harvard University economist Edward Glaeser reserves judgment. “It could happen,” he says. “But I don’t know.” His relative calm stems from research with two other economists indicating that the main reason house prices have flown aloft in the past 20 or 30 years, particularly on the two coasts, is the increasing difficulty in getting regulatory approval to build new homes. That situation won’t change anytime soon. Last week, the Census Bureau reported the July annual rate of housing starts as barely exceeding 2 million. That sounds like a lot, but the rate of growth in overall housing has fallen. In a sample of 120 metropolitan areas, the housing stock expanded 40 percent in the 1950s. In the 1990s, it rose only 14 percent. Further, housing growth in that decade was just about 7 percent in San Francisco, New York, and Los Angeles, notes Mr. Glaeser. Cities have changed from “urban growth machines to homeowners’ cooperatives,” he notes. Developers probably are less able to “bribe” or otherwise get city officials to grant them zoning changes or permits for unpopular new housing. More affluent, more educated residents use their political clout to block such developments, which could damage their own house values or the beauty and convenience of their district. In what Princeton University economist Paul Krugman has called the “flatland” (the Midwest), it is easier for builders to turn farms into housing than in the “zoned zone” (heavily zoned areas on the coasts), where it is generally hard to obtain land to build on. So home prices are far lower in flatland. Nonetheless, the “man-made scarcity” of new and old housing has been spreading, Glaeser finds. That said, what else can homebuyers do but bid home prices up? “Bubbles in housing would have a lot of trouble existing if it weren’t for limits on residential construction,” Glaeser adds.
For more on Glaeser’s work, see here and here.