Smart Growth and the Housing "Bubble"

The other day, I wrote fairly tongue-in-cheek about dentists, their investment choices, and the housing "bubble".  In that article I linked to several much weightier analyses, if you are interested in the topic.  The Commons Blog has chimed in today with an interesting point about "smart growth" policies (which I have derided in many other posts):

But few reporters have bothered to ask why some markets have a bubble while
other fast-growing markets do not. The usual answer is that the bubbles are on
the coast because everyone is moving there, but many fast-growing regions in the
West and South do not appear to have a bubble.

The answer appears to be that "smart growth" and other growth-management
policies restrict housing supply. Since housing is an inelastic good, a small
restriction on supply leads to rapid increases in prices. This brings
speculators into the market -- and a large percentage of homes today are being
purchased with no-down-payment, interest-only loans by people who don't plan to
live in the homes; in other words, speculators.

A list of regions that are suffering bubbles reveals that a very high
percentage have implemented some form of growth management such as urban-growth
boundaries, greenbelts, or restrictions on building permits.

More on smart growth and housing bubbles here.  More smart growth resources via Cato.



  1. Mr. Econotarian:

    Zoning laws also put perverse upward force on housing prices by encouraging larger houses. This has been a gradual process, as price per square foot of house has declined despite price per median house rising, because houses have become huge (while families have become smaller).

    BTW, I just spend 6 months waiting to get a building permit...for a house in an existing development.

  2. Half Sigma:

    I've been blogging about this for a long time. Here's a link to my old post:

  3. Kurt:

    One way to quantify the cost of 'smart growth' is to measure the disconnect between building costs and sales prices. If there are no growth/building restrictions then over the long term sales prices should not be higher than construction+land costs.

    This paper has a fairly rigorous (but interesting) analysis estimating that in Manhattan only 50% of purchase price represents construction cost; presumably the remaining 50% is various regulatory costs and rents. I suspect that neighboring homeowners, who in Manhattan are very efficiently organized to oppose new construction, will enjoy some benefits as higher asset prices on their own property (by restricting new supply). They devote time and energy to lobbying against new buildings and in return enjoy price appreciation (just another method of artificial supply restrictions)

  4. Wayne:

    Interesting opinion on the housing bubble: