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Monday, October 06, 2008

The Effects of an Idée Fixe

Sometimes, when you get a bee in your bonnet, you can't get it out. Here Randall O'toole, who works to lighten the burden of land-use regulation, blames the real esate bubble on... excessive land use regulation! "The key to making a housing bubble," he writes, "is to give cities control over development of rural areas."

O'Toole's explanation is nonsensical. Regulation that takes land out of use makes it more expensive , sure, just as would sinking some portion of the land beneath the sea. But this new price is not "a bubble price" -- it correctly reflects the new scarcity of land. (Yes, in the case of regulation, land has been made needlessly scarce -- unless the regulation is needed of course! -- but that makes no difference to the subsequent price analysis.) O'Toole actually seems to have re-defined the word 'bubble' to suit his agenda -- he writes, "But in the early 1960s, Hawaii and California passed laws allowing cities to regulate rural development. Oregon and Vermont followed in the 1970s. These states all experienced housing bubbles in the 1970s, with median prices reaching four times median-family incomes." Well, how does that make these "bubble" prices, as opposed to high prices that genuinely reflect the new, legally created scarcity of buildable land?

Land use regulation makes real estate prices go up -- and stay up. Not go up and crash. What is needed to explain what we have just seen is some story as to how prices got well above their post-regulation equilibrium value.

UPDATE: Think of it this way: Only a change can explain a change. You can't, for instance, explain a sudden surge in the price of oil by saying, "Well, it's useful for heating homes," because it has been for a long time now. Similarly, O'Toole's explanation can at most account for a rise in prices when regulation is enacted -- it can't account for why these bubbles pop. (Nor, of course, can it account for the huge real estate bubble of the 1920s, when, as O'Toole admits, there was almost no land use regulation.) Per O'Toole, these "bubbles" should last until the regulation is rescinded.

7 comments:

  1. You know, your post reminds me of a quote from the game Sid Meier's Alpha Centauri, and when I first saw it, I just knew it would make you pop a blood vessel.

    "In the last century, fossil fuels reached their extreme prices because of their inherent utility."

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  2. But what if the artificial scarcity produced by land-use controls pushes home buyers into areas with less-severe controls, raising prices there? Wouldn't that contribute to a bubble?

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  3. It would certainly contribute to higher prices -- but sustainably higher prices.

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  4. Land use controls do lead to higher prices. They don't create bubbles. I agree with Gene, land use restrictions create higher prices, and cet. par., those prices will remain higher post regulation. It's not only the scarcity of land that's involved, the market wants assurances, eg, that a rendering plant will not spring up in a residential neighborhood. I think land use regulations are a natural market outgrowth. Participants want regulation.

    I think Sheldon makes an important point. There are feedback effects in the real estate market. Although I understand real estate to be essentially local, I have local examples that are impacted by places as far away as California. We have land use regulations in west-central Florida, but I've seen many people bring their NY and California dollars into the market for vacant wasteland in Polk county and eastern Hillsborough. I suppose land use rules elsewhere helped create the poster child bubble in Lee County Florida. Back in urban California and the greater NYC area, land use regulation has helped to drive up prices. These people think Florida is cheap, the locals thought it bubblicious, and the locals were proven right.

    I think it often forgotten that technology plays the biggest role in determining the amount of developable land. Highways made the NY burbs possible. Lucie and Ricky didn't move to Westport before easy access to NY and Cesar Romero's shows. Florida could not have happened pre cheap central air conditioning. I suppose this is true for central California too.

    I think the necessary precondition for a bubble in real estate is cheap credit. This was the case in the 1980s, our bubble and the next one that the Fed and Treasury is trying desperately to create at this very moment.

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