Elasticity of Supply: Why Housing is Unaffordable

Summary

This video explains why housing prices in dynamic cities are rising, focusing on the economic concept of supply elasticity. As demand for housing in cities like San Francisco increases, the supply remains inelastic due to factors like limited land, zoning laws, and bureaucratic delays. When supply can't meet demand, prices soar as potential buyers outbid each other. Existing homeowners benefit from rising property values and often resist new development. However, some cities are beginning to reform their housing laws to allow more construction, which could help moderate prices.

Takeaways

• 🏠 Housing prices in dynamic cities, like San Francisco, are rising due to supply and demand factors, not greed or conspiracy.
• 📊 As demand for housing increases in these cities, the demand curve shifts to the right, leading to higher prices.
• 📈 The elasticity of housing supply determines how much prices increase when demand rises. Elastic supply results in smaller price hikes, while inelastic supply leads to significant price increases.
• 🚧 Many cities have an inelastic housing supply due to natural and artificial constraints, like limited land and restrictive zoning laws.
• 🌊 Cities like San Francisco, surrounded by water, have limited land for expansion, contributing to the inelastic housing supply.
• 🏗️ Zoning laws, building permit delays, and opposition from existing residents prevent new housing from being built easily in many cities.
• 💰 The high demand for housing forces potential buyers to compete by bidding up prices, resulting in higher housing costs.
• 🚫 Existing residents often oppose new construction to protect their property values, which makes housing reforms difficult.
• 🌍 Some cities, like Auckland, have relaxed zoning laws, leading to an increase in housing supply and moderated prices.
• 🔑 The key to moderating housing prices lies in creating a more elastic supply of housing through changes in laws and regulations.

Q & A

What is the concept of 'elasticity of supply' as explained in the video?

The elasticity of supply refers to how easily producers can increase the quantity of a good in response to an increase in demand. If supply is elastic, producers can increase production easily, leading to only small price increases. If supply is inelastic, production cannot be easily increased, resulting in significant price rises.

Why is housing supply in many cities inelastic according to the video?

Housing supply in many cities is inelastic due to a combination of natural and regulatory factors. Natural factors include limited land, as many cities are surrounded by water. Regulatory factors include zoning laws, building height restrictions, and a bureaucratic permitting process, all of which make it difficult to expand housing supply.

How do zoning laws impact the elasticity of housing supply?

Zoning laws can limit housing supply by restricting the types of buildings that can be constructed in certain areas. For example, in cities like San Francisco, it is often illegal or expensive to build taller buildings or convert single-family homes into duplexes or multi-family units, contributing to an inelastic housing supply.

What happens when demand for housing increases in cities with inelastic supply?

When demand for housing increases in cities with inelastic supply, the quantity of available housing rises only slightly, but prices increase significantly. This is because there is little room to expand housing supply quickly, so people compete for the limited housing by bidding up prices.

Who benefits from the inelasticity of housing supply, and why?

Existing property owners benefit from inelastic housing supply because limited new construction increases the value of their properties. This gives them an incentive to oppose new development, as it preserves or increases their property value.

Why do potential new residents suffer in cities with inelastic housing supply?

Potential new residents suffer because they are priced out of the housing market due to high competition for the limited available homes. They may be forced to live farther from the city, face longer commutes, or be unable to live near good job opportunities.

What is the relationship between housing demand and prices when supply is inelastic?

When supply is inelastic, an increase in demand for housing results in a much larger increase in prices rather than a significant increase in the quantity of housing. This is because new housing cannot be built quickly enough to meet the demand, so prices rise sharply as people compete for the limited housing.

How did Auckland, New Zealand, address its housing supply problem, and what was the outcome?

Auckland liberalized its zoning laws in 2016, allowing upzoning in many parts of the city. As a result, the number of new houses increased significantly, and housing prices moderated, showing that increasing supply elasticity can help stabilize housing costs.

What are some of the bureaucratic challenges builders face in cities like San Francisco?

Builders in cities like San Francisco face long delays in getting building permits, with the process taking an average of 627 days. Even after obtaining a permit, projects can be vetoed by environmental agencies, planning commissions, historical preservation groups, or existing residents through lawsuits and protests, adding to the difficulty of increasing housing supply.

Why is reforming housing supply regulations difficult in many cities?

Reforming housing supply regulations is difficult because existing property owners have a vested interest in maintaining the inelastic supply, as it increases the value of their properties. These property owners often oppose new development, which makes it politically challenging to pass reforms that would allow for more housing.