The Supply of Housing Has Become LESS Elastic

We are now well into another housing boom but as shown by Aasteveit, Albuquerque and Anundsen this boom is in some ways worse than the previous 1996-2006 boom because the supply response has been lower. The first figure, for example, shows that since the trough in 2012 house prices have risen a little bit faster in this boom than in the 1996-2006 boom and they have risen much faster relative to income (HPI is housing price index).

Over the same time, however, the number of new building permits and housing starts has been lower than in the previous boom (top two panels of figure 2 below). If prices have gone up as much as before but quantity has not, it follows that the elasticity of housing supply has fallen. Occasionally it’s suggested that there is an “overhang” of housing from the previous boom but that is not true. If anything, as shown in the bottom left panel, there is a decline in the housing stock relative to population.

The authors suggest that one reason why the elasticity of housing supply has fallen is that developers are fearful of being hit in another bust. I find that implausible. Developers don’t hold onto their stock for very long and often sell even before completion so they worry at most about a year or so forward. A better explanation is that housing supply remains especially constrained in the coastal cities by regulation and limited land capacity and those constraints are becoming more binding over time–in other words, the previous boom filled the infill. It may also be the case that fear of the bust is increasing regulation as people worry even more about downward fluctuations in the price of their primary asset.

Either way, housing continues to eat the world.