In this recent episode of Econ Talk with Russ Roberts, Bryan Caplan discusses his publication about housing. One topic that is often discussed when tackling the issue of increased housing expenses is the community’s reaction to the relationship between building more inventory and prices.
Bryan Caplan: So, I am a public choice economist. I’m right here in the building–Center for the Study of Public Choice. There’s a very common view in public choice that it’s actually interest groups and not public opinion that really drives policy. One of the main things that I’ve been saying in my career is actually democracies pay a lot of attention to public opinion. It’s just that public opinion is so different from what economists assume it would be that they just have to start looking around for other possibilities. It can’t really be that normal people want to strangle the housing industry. Why would they? Can’t really be, for example, the tenants think that it’s bad to build stuff.
Yet, a lot of what I say in this book is, I go over actual empirical public opinion. And what economists assume people would have to think, is this wrong. People do believe just the craziest things. It really is true that it’s normal for tenants in the United States to oppose new construction. And, if you’re wondering, like: Why would tenants oppose new construction? Obviously they are the beneficiaries of new construction. They are the ones that are going to enjoy the lower prices. And the answer is: most people, first of all–most people deny that allowing more construction will just cause housing prices to go down.
So, first thing is: Basically if you just survey the U.S. public on what would happen if you allow a lot more construction, you roughly have one third saying prices will go down, one third saying no effect, one third saying prices will go up. So, if that’s what people think, then it’s no wonder that they don’t favor more construction because it actually might even make the problem of high housing prices worse.
How could that be? More inventory should lead to lower prices. Why don’t they see it?
A while ago, I was part of a group designated to come up with some answers to housing costs, and I was surprised to hear a real estate peer deny the tie-in with more buildings and lower costs. Those of us who work in the market daily are sensitive to the weight shift between the buy and sell sides and how that influences pricing. More houses means better prices for buyers. And if all the numbers are aggregated, that is what they would show.
However, this individual was voicing what she saw in her corner of the city. New construction is expensive, and thus, the rental projects are often centered in the hottest parts of town. Those areas are the ones with shops, restaurants, and fun entertainment. Single-family housing occurs in the fringes, where large swaths of land are easily converted into single-family plots. When there is a steady increase in the number of new people going to the metro, they will gravitate toward these projects. They are safe choices.
If all the lovely new stuff is gobbled up by more affluent newcomers, the low-to-mid-range properties simply remain in the same market stratosphere. There is no price break in this layer of the market. As a result, these city residents witnessed a lot of public effort to enhance and renew infrastructure for these new projects while still not being able to afford the move-up nor receive a price break from the increased inventory.
If one could say that every real estate market segment in a metro experienced new construction, then it would follow that all residents would experience downward pressure in real estate prices. But if you build up a whole bunch of luxury downtown condos, don’t be surprised if large groups of consumers do not tie a building boom to lower housing costs.
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