Wednesday, 9 September 2020

"A housing supply absorption rate equation"

From an excellent article here.

The most important bit is this:

... radical town planning policy changes have been proposed around the world. By allowing higher-density housing [or the same density on larger areas], proponents of these policies expect that the rate of new housing supply will increase enormously, reducing housing prices...

When demand growth is high, you sell more. This makes sense. You sell into a boom and withhold sales during a bust. This is important because one argument for relaxing density restrictions is that new supply would occur at such a rapid rate that prices would fall. But falling prices reduce supply. There is hence a built-in ratchet effect in housing supply dynamics.

Nailed it!


benj said...

Confirmed by the 10 to 1, as per Neal Hudson.

Regarding density, like all things economic, it should be a question of balance.

But "The density that achieves this is where the marginal development cost of extra density equals the marginal dwelling price. Every landowner does this instantly. There is no time in the model. It just happens."

The trouble with this is that the income maximising incentives for an individual plot owner do not align with those of wealth/welfare maximising incentives of society.

If you look at page 28, you see how efficiency decreases while building costs per m2 goes up with building height.

On top of which there are external costs to high rise and welfare costs for those that live in them.

Point being, from a societal POV, you'd want to balance the benefits of agglomeration with the increased costs of high rise buildings.

As it happens, I read an report into building in Dublin, where they came to the conclusion that anything above 6 stories wasn't of any benefit (except presumably to the landowner owner wishing permission for a tower block).

L fairfax said...

This is where tax changes could help. Farmers still sell food when prices are low - because a) it costs to store it and b) they have on going costs.
If after x months land with planning permission was already getting council tax then it would encourage developers to not withhold sales in a bust.

Mark Wadsworth said...

B, yes. Agreed on 6-storey rule. You should be able to get out of a building within a minute in case a fire breaks out.

LF, exactly. See my earlier post. The flipside of imposing LVT (or Council Tax) once planning is granted is that all the taxes on development which DETER development should be reduced or scrapped.

Robin Smith said...

Is it an "excellent article" because it conforms to your belief system?