Thomas Sowell Explains the Economics of Urban Containment (Smart Growth)

Economist Thomas Sowell, who has taught at Cornell University and UCLA and has worked at the Urban Institute and the Hoover Institution at Stanford University summarizes the economics of the housing market in a recent article:

"Anyone who has taken Economics 1 knows that preventing the supply from rising to meet the demand means that prices are going to rise. Housing is no exception."

Sowell's cites the high prices houses for sale in the San Francisco Bay area suburb of Palo Alto. Three catch his eye:

About the first house, he says: “The house is for sale at $1,498,000. It is a 1,010 square foot (94 square meters, added by author) bungalow with two bedrooms, one bath and a garage. Although the announcement does not mention it, this bungalow is located near a commuter railroad line, with trains passing regularly throughout the day."

The second house has 1,200 square feet (111 square meters) and was listed for $1.3 million. Intense competition for the house drove the sale price to $1.7 million.

The third, with 1,292 square feet (120 square meters) and built in 1895 is on the market for $2.3 million.

Sowell continues: "There are people who claim that astronomical housing prices in places like Palo Alto and San Francisco are due to a scarcity of land. But there is enough vacant land ("open space") on the other side of the 280 Freeway that goes past Palo Alto to build another Palo Alto or two -- except for laws and policies that make that impossible. As in San Francisco and other parts of the country where housing prices skyrocketed after building homes was prohibited or severely restricted, this began in Palo Alto in the 1970s."

As in Palo Alto, outrageous price increases began in the San Francisco Bay Area in the 1970s, and were the predictable outcome of urban containment policies (smart growth policies) that rationed land for development.

House prices are three times as high relative to incomes in the Bay Area than they were before urban containment regulation began in the early 1970s. Among New World (US, Canada, Australia and New Zealand) major metropolitan areas, only Vancouver has higher house prices relative to incomes.

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The commodity isn't housing

The commodity isn't housing -- it's land; and it NEVER expands in supply to meet market demands...

It's just "there" - supply is superabundant if allowed

Non-urban land is superabundant. Everywhere that there are no prohibitions on development of it for housing and urban uses, urban land remains cheap and housing median multiples remain anchored at around 3 regardless of how much more space the average household consumes. The real cost of urban land actually falls.

But urban growth containment, usually regulatory and usually intentional, always causes land prices to inflate faster than living space per household can be "traded down". This is why in the UK, where they imposed growth boundaries on their cities in 1947, urban land costs are now 200 to 700 times higher than benchmark US cities that remain non-constrained at their boundaries. This means 1/5 the average living space, still at double the price once the structure (often lower quality) is included.

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