A paper by economists Edward L. Glaeser, Joseph Gyourko, Raven Saks called, simply enough, [Why Have Housing Prices Gone Up? [NBER]](http://www.nber.org/digest/sep05/w11129.html)

If you believe in the power of the supply side of the equation, then Glaeser & Co. are for you. Here’s an abstract:

Abstract: Since 1950, housing prices have risen regularly by almost two percent per year. Between 1950 and 1970, this increase reflects rising housing quality and construction costs. Since 1970, this increase reflects the increasing difficulty of obtaining regulatory approval for building new homes. In this paper, we present a simple model of regulatory approval that suggests a number of explanations for this change including changing judicial tastes, decreasing ability to bribe regulators, rising incomes and greater tastes for amenities, and improvements in the ability of homeowners to organize and influence local decisions. Our preliminary evidence suggests that there was a significant increase in the ability of local residents to block new projects and a change of cities from urban growth machines to homeowners’ cooperatives.

[Joint Center for Housing Studies of Harvard University released their rental market report [BW]](http://www.businessweek.com/the_thread/hotproperty/archives/2006/03/fewer_apartment.html?campaign_id=rss_blog_hotproperty) which found that the nation is losing approximately 200,000 rental housing units each year due to demolition.

“We are taking one step forward and two steps back as gentrification in some neighborhoods and continued deterioration in others leads to the removal of vitally needed lower-cost rental housing,” notes Nicolas P. Retsinas, director of the Joint Center.

This is an interesting dilemma as cities are faced with lower tax revenues as the condo market cools yet cities wish to incentivise developments to keep the treasury full. The loss of much of this housing may affect the market in the long run as buyers realize the texture of the city has changed rapidly. I recently wrote a research paper called [The Gentrification of Manhattan [Miller Samuel]](https://www.millersamuel.com/articles/gallery-view.php?ViewNode=1140660983gyzNW) available in the [Stamford Review](http://www.stamfordreview.com) that discusses this very dilemma.

[Here’s a non-technical summary of the Harvard paper [pdf]](http://www.nber.org/digest/sep05/w11129.html)
[Edward L. Glaeser: An Economist Who Looks At Supply Side Of The Housing Equation [Matrix]](http://matrix.millersamuel.com/?p=457)
[America’s Rental Housing [JCHS]](http://www.jchs.harvard.edu/publications/rental/rh06_americas_rental_housing.pdf)
[Gentrification: Too Much Of A Good Thing? [Matrix]](http://matrix.millersamuel.com/?p=433)


One Response to “No Natural Rule Of Housing Market Order: Manmade Scarcity Drives Up Prices”

  1. jf says:

    I believe more in the power of Demand, also man-made, to affect price.

    Without Demand, supply scarcity (or abundance)is irrelevant to price. Supply needs Demand to affect price. Demand, on the other hand, is capable of affecting price on its own, regardless of supply. Demand is the straw, if you will, that stirs the price drink.

    In fact, if demand is strong enough, abundant supply may have little effect on a price increase, at least in the short run.

    Take the case of “panic demand”, which occurs every winter on the eve of a heavy snow fall. The price of snow shovels can be increased, regardless of the supply on hand. The strong demand created by fear, coupled with the “perception” that the supply may run out, allows acceptance of the price increase. I suspect the phenomenon is not restricted to snow shovels.

    JG Sellsiusrealestate.com

    JF Sellsiusrealestate.com