This 2006 Liberty article by Randal O'Toole is absolutely fascinating! Its a must read if you ever wondered why housing prices in the US ever got so high and so out of reach for the average American citizen, and why housing inflation is related to the current economic collapse of the world economies :
Liberty
February 2006
Volume 20,
Number 2
Why Do Houses Cost So Much?
by Randal O'Toole
For decades, planners have worked at raising the price of housing. When prices go down, they may take the rest of the economy with them.
Housing prices have soared in most of the developed world over the past five years. Increased spending on homes and spending out of loans against the increased equity in homes have kept the world economy afloat despite slow growth in Europe, stagnation in Japan, and the dot-com and telecommunications crashes in the United States.
But the increased prices have also brought speculators into housing markets, creating numerous housing bubbles. When these bubbles deflate, it could result in a deep recession. "The whole world economy is at risk," claims The Economist, which estimates that "two-thirds (by economic weight) of the world . . . has a potential housing bubble." "It is not going to be pretty," concludes the magazine.....
http://www.libertyunbound.com/archive/2006_02/otoole-houses.html
Thanks for posting this. Although the article you reference makes a few leaps of logic in my opinion, I agree with its spirit. This is a subject I've thought a lot about and I think one of the main reasons why homes cost so much is because they are financed by banks. They are also built by a labor intensive process and sold with a commission. Therefore it is in the interest of all who produce, sell, and finance homes to keep the prices as high as possible. This is all supported very well on a cultural level. Homes are one of the few marketed products in which you get less product for more money as time goes by - certainly true in the Bay Area, CA.
ReplyDeleteUntil there is a change in the NIMBYism toward new development, changes in pricing, selling and financing, and design and construction of homes, I don't see the situation changing dramatically anytime soon. There are sellers which cut down the commission, and prefab designs which cut down construction costs but these are niche players at this time. It's really too bad, as the cost of homes has made the American dream out of reach so many. Even though prices have come down some, we are in the midst of a financial wake left by the drivers of the home market.
Thanks for responding to this post. While in the Bay Area, I think part of the problem is simply supply and demand. San Francisco has the most the second highest population density of any city in America and probably the most diverse. And its population continues to grow.
ReplyDeleteBut I think in at least 50% of the cost of housing in the Bay are is probably due to speculation. I also never liked the idea of government assessing the value of your property (How do they know how valuable your property is until its sold?). That's why I've always believed in replacing property tax, at least for home owners, with a simple sales tax payed by the new purchaser of the property. This would also allow you to improve the value of your property without having to pay increased taxes.
Still, I think there are technological solutions to the problem of the high cost of housing in the Bay area in other high priced metropolitan regions in the US.
One long term solution is to dramatically increase public access to high speed (350 kph) and regular connecting train rail service which would allow people to live a few hundred kilometers away from where they work. People could then live in small towns and suburban regions with substantially lower real estate prices. This would also promote economic growth in small town regions and of course would be environmentally beneficial.
Fortunately, it looks like the state and Federal governments are now willing to invest huge sums of money in a new era of high speed rail. And that may be good for jobs and for more affordable housing, IMO.