Brilliant article that applies equally here in Australia. Thank you for such a passionate and intelligent debunking of the supply crap. I think there is a parallel with renewable energy, as shown so well by Brett Christophers in The Price is Wrong, and I try to make the point in one of my Substack posts. The zero marginal cost issue for renewable energy - renewables tend to drive the bid price in market-based electricity systems towards zero - means that we can only get sufficient private investment in renewables with big government subsidies. So why don’t governments build renewables themselves? They should. Just as they should build and own housing.
Thank you for your kind comments! To answer your question. It’s all about making private capital wealthier. It’s about returns to capital. It’s about power. That’s it really.
The article is correct in its assertion that house prices will never fall due to the vested interests but it hand waves away the supply side explanations quite poorly.
Are you seriously suggesting that a 6% decrease in prices annually is not a lot? Even a 3% decrease over ten years is a 27% drop in prices.
The planning industry is not the sole source of the stifled supply but also building regs re light, parking spaces, minimum sizes of apartments etc.
The article implies that the building lobby wants planning permission to be loosened so that they can make more money off the increases in land prices. Does the author really believe that if planning permission was very easy to get, the uplift in land price would be the same upon receipt of planning permission? Such a 20% surge in value just from getting planning permission can surely only be explained by the fact that planning permission is scarce!
The difference in planning permission being granted but not acted upon could be explained by increasing construction costs and uncertainty, a construction firm will surely apply for planning for more projects than they could possibly begin to give themselves options.
Although you are bang on about the need for land taxes which would result in a fire sale of unused land, and lead to much much more optimal land use. Not that it would ever get through the politics of it for all the reasons outlined in the article.
Thanks for your engagement, feedback and critique. Its always helpful to sharpen arguments.
I did not say that a theoretically 6% annually is not a lot. I said that its not plausible or probable and, even if it were, compared it to current and recent inflation as an ineffective and inefficient way to reduce prices.
1. As already explained, if prices did fall by that amount, developers would just stop building. So its really just an academic argument.
2. The studies rely on ceteris paribus but we know that all things are not equal e.g. interest rates, population growth, household formation, construction inflation, speculation etc. So, there is no way such price reductions would be achievable.
3. Based on these abstract controlled studies, any small price reductions would require building 600,000 new homes in ten years (+30%) which is never going to happen (certainly not without affecting (2) or blowing our carbon budgets). So, this is a hugely inefficient and ineffective way to achieve a imperceptibly small theoretical increase in affordability.
4. Irish housing stock has increased by ~600,000 in two decades and prices have risen >150%. Thiis includes a massive bust in prices between 2008-2014.
5. Planning permissions are not scarce in Ireland - far from it (see data in post). The uplift in value is nothing to do with the scarcity of permissions, but the potential book value of the development authorised. If development can be deregulated (lower standards, higher density etc) the value goes up.
6. Construction costs and workforce capacity are certainly a factor but, as discussed in the post, the Letwin Report clearly found that the absorption rate (1) overides construction costs as the limiting factor for new housing supply.
7. Property development has always been an uncertain speculative activity. The risks are high but the potential upside is huge. This is priced in. Over-applying for permits as a hedge against uncertainty is hugely inefficient waste of public resources and a further reason why the market is a terrible way to provide homes for people.
8. Agree with you on the politics which is why what I suggest will never happen and the cricticisms of the status quo I outline in the post will always be shouted down and ignored.
Yes, this is exactly how an increase in supply would manifest.
Housing supply increases -> prices fall -> fewer developers can maintain a reasonable profit on fewer projects -> construction slows. This is in fact why markets work.
> Price declines only happen as an undesirable side-effect of deteriorating macroeconomic conditions, such as a recession and high unemployment, where there is a significant reduction in the capacity to pay.
This is untrue. Increases in supply cause prices to decline. You apparently agree with the causal chain I provided in my previous comment, so contradict yourself. Which do you believe?
You also say this,
> …there are no examples anywhere in the world where lower property prices have been engineered politically.
This is untrue. Please see Vienna. Rents are remarkably low, even on the private market, sitting between 25% to 28% of _after-tax_ income, vs. the typical 30% pre-tax income we pay in the US.
> …somebody needs to lose economically for somebody else to win.
Only someone that has never built anything would think this. Economic value is created because we create things. How do you think any homes were built if there was no one to steal from in the first place?
Let’s look to your comment above, now.
> Yep, thats exactly why markets don't work! Because the aim of public policy is to increase housing supply, as explained in the post.
Do you posit that markets (dispersed, uncoordinated private actors) are unable to provide adequate housing supply because… the government is incentivizing them to provide supply _too much_?
Thanks for your reply. I disagree with everything you say. See hyperlinks in the post which provide references to all sources.
On the first point, I didn’t say it. The assistant governor of the reserve bank of Australia said it. Vienna didn’t engineer price declines. It uses socialist ‘Red Vienna’ policies inherited from the 20th Century to never let prices rise. This is precisely the type we of non-market policies that the blog advocates for.
Everything I wrote there is a direct quote from what you wrote, and you address none of it. I will say, that the difference between depressing price increases via supply increases vs decreasing price via supply increases is largely trivial, though one may be harder in certain circumstances.
For the latter, Vienna is a great example — and crucially, the effects of their increasing supply extend substantially to the private market. Read their policy makers and developers—they understand the effect supply has on price. To see an example of the former, I again point you to Austin.
You argue as someone concerned with appearing correct, rather than someone that actually wishes to be correct.
I hope that the municipal politicians posting this to their Facebook use it to advocate for land value taxes (instead of doing what I know they will do, which is to be mad at new houses).
Brilliant article that applies equally here in Australia. Thank you for such a passionate and intelligent debunking of the supply crap. I think there is a parallel with renewable energy, as shown so well by Brett Christophers in The Price is Wrong, and I try to make the point in one of my Substack posts. The zero marginal cost issue for renewable energy - renewables tend to drive the bid price in market-based electricity systems towards zero - means that we can only get sufficient private investment in renewables with big government subsidies. So why don’t governments build renewables themselves? They should. Just as they should build and own housing.
Thank you for your kind comments! To answer your question. It’s all about making private capital wealthier. It’s about returns to capital. It’s about power. That’s it really.
Brilliant post. Home ownership rate is 65.7%, a good bit below 70% and the EU average.
Thank you! Updated the post.
The article is correct in its assertion that house prices will never fall due to the vested interests but it hand waves away the supply side explanations quite poorly.
Are you seriously suggesting that a 6% decrease in prices annually is not a lot? Even a 3% decrease over ten years is a 27% drop in prices.
The planning industry is not the sole source of the stifled supply but also building regs re light, parking spaces, minimum sizes of apartments etc.
The article implies that the building lobby wants planning permission to be loosened so that they can make more money off the increases in land prices. Does the author really believe that if planning permission was very easy to get, the uplift in land price would be the same upon receipt of planning permission? Such a 20% surge in value just from getting planning permission can surely only be explained by the fact that planning permission is scarce!
The difference in planning permission being granted but not acted upon could be explained by increasing construction costs and uncertainty, a construction firm will surely apply for planning for more projects than they could possibly begin to give themselves options.
Although you are bang on about the need for land taxes which would result in a fire sale of unused land, and lead to much much more optimal land use. Not that it would ever get through the politics of it for all the reasons outlined in the article.
Thanks for your engagement, feedback and critique. Its always helpful to sharpen arguments.
I did not say that a theoretically 6% annually is not a lot. I said that its not plausible or probable and, even if it were, compared it to current and recent inflation as an ineffective and inefficient way to reduce prices.
1. As already explained, if prices did fall by that amount, developers would just stop building. So its really just an academic argument.
2. The studies rely on ceteris paribus but we know that all things are not equal e.g. interest rates, population growth, household formation, construction inflation, speculation etc. So, there is no way such price reductions would be achievable.
3. Based on these abstract controlled studies, any small price reductions would require building 600,000 new homes in ten years (+30%) which is never going to happen (certainly not without affecting (2) or blowing our carbon budgets). So, this is a hugely inefficient and ineffective way to achieve a imperceptibly small theoretical increase in affordability.
4. Irish housing stock has increased by ~600,000 in two decades and prices have risen >150%. Thiis includes a massive bust in prices between 2008-2014.
5. Planning permissions are not scarce in Ireland - far from it (see data in post). The uplift in value is nothing to do with the scarcity of permissions, but the potential book value of the development authorised. If development can be deregulated (lower standards, higher density etc) the value goes up.
6. Construction costs and workforce capacity are certainly a factor but, as discussed in the post, the Letwin Report clearly found that the absorption rate (1) overides construction costs as the limiting factor for new housing supply.
7. Property development has always been an uncertain speculative activity. The risks are high but the potential upside is huge. This is priced in. Over-applying for permits as a hedge against uncertainty is hugely inefficient waste of public resources and a further reason why the market is a terrible way to provide homes for people.
8. Agree with you on the politics which is why what I suggest will never happen and the cricticisms of the status quo I outline in the post will always be shouted down and ignored.
Housing prices can fall. Please see Austin or Minnesota.
Yep and new house construction has also dramatically slowed.
Yes, this is exactly how an increase in supply would manifest.
Housing supply increases -> prices fall -> fewer developers can maintain a reasonable profit on fewer projects -> construction slows. This is in fact why markets work.
Yep, thats exactly why markets don't work! Because the aim of public policy is to increase housing supply, as explained in the post.
Here is what your post says,
> Price declines only happen as an undesirable side-effect of deteriorating macroeconomic conditions, such as a recession and high unemployment, where there is a significant reduction in the capacity to pay.
This is untrue. Increases in supply cause prices to decline. You apparently agree with the causal chain I provided in my previous comment, so contradict yourself. Which do you believe?
You also say this,
> …there are no examples anywhere in the world where lower property prices have been engineered politically.
This is untrue. Please see Vienna. Rents are remarkably low, even on the private market, sitting between 25% to 28% of _after-tax_ income, vs. the typical 30% pre-tax income we pay in the US.
> …somebody needs to lose economically for somebody else to win.
Only someone that has never built anything would think this. Economic value is created because we create things. How do you think any homes were built if there was no one to steal from in the first place?
Let’s look to your comment above, now.
> Yep, thats exactly why markets don't work! Because the aim of public policy is to increase housing supply, as explained in the post.
Do you posit that markets (dispersed, uncoordinated private actors) are unable to provide adequate housing supply because… the government is incentivizing them to provide supply _too much_?
Thanks for your reply. I disagree with everything you say. See hyperlinks in the post which provide references to all sources.
On the first point, I didn’t say it. The assistant governor of the reserve bank of Australia said it. Vienna didn’t engineer price declines. It uses socialist ‘Red Vienna’ policies inherited from the 20th Century to never let prices rise. This is precisely the type we of non-market policies that the blog advocates for.
Everything I wrote there is a direct quote from what you wrote, and you address none of it. I will say, that the difference between depressing price increases via supply increases vs decreasing price via supply increases is largely trivial, though one may be harder in certain circumstances.
For the latter, Vienna is a great example — and crucially, the effects of their increasing supply extend substantially to the private market. Read their policy makers and developers—they understand the effect supply has on price. To see an example of the former, I again point you to Austin.
You argue as someone concerned with appearing correct, rather than someone that actually wishes to be correct.
I hope that the municipal politicians posting this to their Facebook use it to advocate for land value taxes (instead of doing what I know they will do, which is to be mad at new houses).