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.