Wednesday, June 17, 2009

Mark Thoma Points us to Robert Shiller on Unlearned Lessons

Did the false belief that land suitable for building houses was becoming scarce help to drive the housing bubble?:

.Unlearned lessons from the housing bubble, by Robert J Shiller, Project Syndicate: There is a lot of misunderstanding about home prices. Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates.

That misunderstanding encouraged people to buy homes for their investment value – and thus was a major cause of the real estate bubbles around the world whose collapse fuelled the current economic crisis. This misunderstanding may also contribute to an increase in home prices again, after the crisis ends. Indeed, some people are already starting to salivate at the speculative possibilities of buying homes in currently depressed markets.

But we do not really have a land shortage. Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land. ...

I think Shiller is largely right but for two things.

First, there are a small number of places on earth for which there is no close substitute: Santa Barbara, Aspen, Paris come to mind. Rich people will always outbid the rest of the world for these places, whose fundamentals are more similar to those of Monet paintings than real estate. But these are a very small number of places indeed, and we can argue about what they are.

Second, I think Shiller underestimates the power of NIMBYIsm to prevent housing construction. He should visit places like Mumbai and Johannesburg, where regulations limiting residential density have driven values well beyond what middle-income people in those places can afford. I agree that land shortages are an artificial, rather than a natural, phenomenon. But it remains a powerful phenomenon nevertheless.


Austin Kelly said...

Shiller's counterargument to your second, and perhaps your first point, is that cities can be replicated. Some mid sized town 200 miles away can grow into the next Mumbai or Jo'burg if Mumbai or Jo'Burg get too expensive. Probably places like Aspen can get replicated too. A lot of people buying investment property in Idaho certainly seemed to think so.

workhard said...

True.. there is abundant land everywhere and one should utilize it effeciently rather than hiking the prices exponentially

Idaho Real Estate

Austin home search said...

While I agree, I don't think we should count on turning in our large, valuable tracks of forest land and other precious natural places into urban landscape. I think we should just start building up instead of outward, it just makes more sense for city planning and environmental concerns.

adrin said...

Yeah, its true that the prices of houses and apartments are increasing rapidly, but we should not even think to utilize the natural land into urban land. We should utilize the places which we really have and reconstruct it again so that there should be more apartments to utilize.

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Anonymous said...

Professor is hiding a truth behind his anology,There might be more land in the surrounding area of most expensive cities but most of developers need solid ground to complete their project and their assumption to start any project is based on higher value than market prices.

You can develope any piece of land close to Bombay(mumbai)and Vancouver,Bc. but the value of that land would be what it is for example:

A well reputed developer suppose to construct 5 infinity towers in surrey (close to Vancouver)begining 2005.They have completed tower 1 around 2007 while Tower 2 was in between completion when developer went bankrupt. After many attempt from mayor of surrey, a Vancouver based developer took over that project but most of the buyers chosed to withdraw their deposit.Please note that tower 3,4,and 5 never went on sale.In contrast to surrounding area there were two project in Vancouver went under recievership both of them were completed successfully because most of buyers were sticking around despite downturn and the rest of units were sold later.Does anyone know that Dubai presale contract holder left their deposit with developers and their cars on airports.

Bombay is star studed city of india and a bussiness district for world,Vancouver is the best place on earth.Who is going to switch over their best choice for something else.Even homeless people like to live in bombay rather than in any alternate city where they can easily find a shelter to sleep.Same thing in Vancouver lots of people don't want to leave hasting street for shelter.