Here's another factor: extreme price inelasticity. We saw inelasticity in the 1970s oil shocks. Supply was only reduced by about 5%, but that caused 4x price surges, putting elasticity (E) at:
-ln(0.95) / ln(4) = 0.037
If E < 1, then reducing the quantity supplied by X% will increase prices by more than X%, with no other change to the innate desirability (demand curve) of it. With housing, E << 1. It's probably in the same range as oil: 0.02 to 0.04. This means that things can simultaneously destroy value, but drive up prices enough to increase the value of the total stock.
Let's say that an earthquake hits Manhattan or San Francisco, destroying 5% of all housing. Ignore the (highly unpredictable) short-term effect on prices; there will probably be deals in the immediate aftermath due to panic selling. Assume zero effect on the local job market (that's not true, but it's actually close enough that it won't affect the conclusion). Six months out, rents (and, although not by as much, property prices) will be much higher because of the reduced supply. Let's say that prices double. Wealth was destroyed. It's unambiguously a bad, value-destroying, thing when 5% of the housing stock falls into ruin. However, the bulk price of the total housing stock has gone up by 90%.
That's what 95% of these housing pundits don't get. They look at a spiking housing market and think, "Wow, people really want to live here, this place is doing well." They think that increasing desirability (local job market) is the primary cause of the housing price increase, and that the NIMBY corruption is just a supporting actor, and it's not so. At one time, Luanda was the most expensive city in terms of real estate. Angola is not a wealthy country (GDP per capita around $7,000) and it's consistently in the bottom fourth for the HDI. Moscow sometimes edges out New York and San Francisco for real estate prices, and neither weather nor the job market explain that.
Half a century ago, NIMBYism was more explicitly racist than 2014-style classism and it did immense damage to American cities. Just ask Detroit, Baltimore, Newark, or even Pittsburgh. NIMBY policies benefit a small number of wealth-destroying rentiers, but inelasticity makes a system more brittle. It means that price impulses magnify (rather than dampening) and cause undesirable feedback effect. The term "shock" is accurate, and it can bring a city to its knees in a short amount of time.
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Here's another factor: extreme price inelasticity. We saw inelasticity in the 1970s oil shocks. Supply was only reduced by about 5%, but that caused 4x price surges, putting elasticity (E) at:
If E < 1, then reducing the quantity supplied by X% will increase prices by more than X%, with no other change to the innate desirability (demand curve) of it. With housing, E << 1. It's probably in the same range as oil: 0.02 to 0.04. This means that things can simultaneously destroy value, but drive up prices enough to increase the value of the total stock.Let's say that an earthquake hits Manhattan or San Francisco, destroying 5% of all housing. Ignore the (highly unpredictable) short-term effect on prices; there will probably be deals in the immediate aftermath due to panic selling. Assume zero effect on the local job market (that's not true, but it's actually close enough that it won't affect the conclusion). Six months out, rents (and, although not by as much, property prices) will be much higher because of the reduced supply. Let's say that prices double. Wealth was destroyed. It's unambiguously a bad, value-destroying, thing when 5% of the housing stock falls into ruin. However, the bulk price of the total housing stock has gone up by 90%.
That's what 95% of these housing pundits don't get. They look at a spiking housing market and think, "Wow, people really want to live here, this place is doing well." They think that increasing desirability (local job market) is the primary cause of the housing price increase, and that the NIMBY corruption is just a supporting actor, and it's not so. At one time, Luanda was the most expensive city in terms of real estate. Angola is not a wealthy country (GDP per capita around $7,000) and it's consistently in the bottom fourth for the HDI. Moscow sometimes edges out New York and San Francisco for real estate prices, and neither weather nor the job market explain that.
Half a century ago, NIMBYism was more explicitly racist than 2014-style classism and it did immense damage to American cities. Just ask Detroit, Baltimore, Newark, or even Pittsburgh. NIMBY policies benefit a small number of wealth-destroying rentiers, but inelasticity makes a system more brittle. It means that price impulses magnify (rather than dampening) and cause undesirable feedback effect. The term "shock" is accurate, and it can bring a city to its knees in a short amount of time.