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.

Outlines

00:00

🏠 Understanding Housing Prices through Supply Elasticity

This paragraph introduces the concept of rising housing prices, focusing on whether it's due to greed or economic forces. The answer lies in the elasticity of supply, which determines how much housing supply can increase when demand rises. In dynamic cities like Silicon Valley, demand is high, and this affects the price. If supply is elastic, more housing can be produced, leading to a moderate price increase. If inelastic, it's harder to produce more housing, leading to a sharp rise in prices. The paragraph sets the stage for exploring how supply elasticity shapes housing markets in major cities.

05:02

🏗️ Challenges of Expanding Housing Supply

This paragraph delves into why many cities have inelastic housing supplies. It identifies natural constraints like water bodies and limited land, but also emphasizes man-made issues like zoning laws and bureaucratic processes. Using San Francisco as an example, the paragraph explains how height restrictions and lengthy permit processes prevent builders from meeting increased housing demand. The result is a significant price rise due to limited new housing. These factors contribute to the inelastic nature of housing supply in high-demand cities.

📊 Supply and Demand in Action

This section illustrates the impact of rising demand for housing in a thriving city. With a restricted housing supply due to inelasticity, only a few new homes are built. As demand grows, potential buyers compete for limited housing by bidding up prices, leaving only the highest bidders able to purchase homes. This competition drives prices even higher. The paragraph highlights how existing homeowners benefit from increased property values and the barriers to construction posed by those who resist new development. The key takeaway is that potential residents, who cannot afford to outbid others, are harmed and pushed out of the housing market.

🔧 Efforts to Increase Housing Supply

Here, the paragraph shifts to some positive developments. It discusses how cities like Auckland, New Zealand, have begun liberalizing housing laws, allowing for more construction through upzoning. This led to a surge in new houses and a stabilization of housing prices. Even traditionally restrictive cities like San Francisco are beginning to allow more flexible housing developments. The paragraph underscores the importance of an elastic housing supply for moderating housing prices and making housing more accessible.

📚 Recap and Further Learning

The conclusion emphasizes the importance of understanding the elasticity of supply in explaining why housing prices rise in many cities. It encourages viewers to test their understanding of the topic with practice questions and additional resources, like lesson plans and videos. The paragraph ends by suggesting viewers continue learning through more microeconomic concepts.

Keywords

💡Elasticity of Supply

Elasticity of supply measures how much the quantity of a good can be increased when there is a rise in demand. In the video, it plays a central role in explaining why housing prices in certain cities rise dramatically. If the supply of housing is elastic, builders can respond to increased demand by constructing more homes, leading to smaller price increases. However, if the supply is inelastic, as in many cities, the limited ability to build leads to steep price increases.

💡Inelastic Supply

An inelastic supply refers to a situation where the quantity of a good, like housing, cannot easily increase in response to higher demand. The video illustrates how many cities face inelastic housing supplies due to natural and regulatory factors, such as geographical constraints and zoning laws. This limited ability to expand housing leads to significant increases in prices when demand rises.

💡Zoning Laws

Zoning laws are regulations that dictate how land in certain areas can be used, including restrictions on the type and size of buildings. The video highlights how strict zoning laws in cities like San Francisco prevent the construction of taller buildings or the conversion of single-family homes into multi-unit housing. These laws contribute to the inelastic supply of housing and drive up property prices.

💡Demand Curve

The demand curve is a graphical representation showing the relationship between the price of a good and the quantity demanded. In the context of the video, as more people want to live in cities with limited housing, the demand curve shifts to the right, meaning people are willing to pay more for available homes. The video explains how this shift, combined with inelastic supply, causes housing prices to rise significantly.

💡Equilibrium Price

The equilibrium price is where the quantity of a good demanded equals the quantity supplied. The video explains that when demand increases in cities with inelastic housing supplies, the equilibrium price rises because supply cannot expand enough to meet the demand. This leads to higher prices for the limited housing available.

💡Bureaucracy

Bureaucracy refers to the complex administrative procedures and regulations that builders must navigate to obtain building permits. The video points out that in cities like San Francisco, this process is slow and adds significant costs, further constraining the supply of housing. Builders face delays of hundreds of days, which increases costs and limits the number of new homes built.

💡Upzoning

Upzoning is the process of changing zoning laws to allow for higher-density construction, such as converting single-family homes into duplexes or building taller buildings. The video uses Auckland, New Zealand, as an example of a city that has successfully implemented upzoning, which led to a significant increase in the housing supply and a moderation of housing prices.

💡Natural Constraints

Natural constraints refer to geographical limitations, such as bodies of water or mountains, that restrict the availability of land for new construction. The video discusses how cities like San Francisco, which are surrounded by water, face a limited land supply, making it difficult to build more housing and contributing to the inelastic supply.

💡NIMBYism

NIMBYism, or 'Not In My Backyard,' refers to opposition from current residents to new development in their neighborhoods, often due to concerns about changes to the local environment or property values. The video highlights how existing property owners benefit from rising home prices and therefore have an incentive to block new construction, which exacerbates the housing supply shortage.

💡Housing Prices

Housing prices refer to the cost of buying or renting homes, which the video explains have been rising in many cities due to the inelastic supply of housing. As more people move to dynamic cities with limited housing options, competition among buyers drives up prices. The video explains how factors like zoning laws, natural constraints, and bureaucratic delays contribute to this upward pressure on prices.

Highlights

Elasticity of supply is a key concept in understanding why housing prices are high in certain cities.

Many industries, such as tech and entertainment, are concentrating in a few dynamic cities, increasing demand for housing.

An increase in demand leads to a higher quantity of housing sold at higher prices, but the impact depends on whether the supply is elastic or inelastic.

If housing supply is elastic, the quantity of housing can increase significantly, leading to only a small rise in prices.

If housing supply is inelastic, the quantity of housing increases only slightly, but prices rise dramatically.

Many cities have inelastic housing supplies due to natural constraints (limited land) and human-imposed regulations (zoning laws).

San Francisco is used as an example of an inelastic housing market due to being surrounded by water and having strict zoning laws.

Building permits in some cities can take a long time to process, further adding to the inelasticity of housing supply.

In San Francisco, it takes an average of 627 days to receive a building permit, contributing to the high cost of housing.

Multiple entities, such as environmental agencies and resident groups, can veto housing projects, slowing down new construction.

Inelastic housing supply leads to intense competition among potential buyers, driving prices higher.

Existing property owners often oppose new housing developments to protect their property values, making reform difficult.

The people most harmed by high housing prices are potential residents who cannot afford to move into dynamic cities.

Some cities, like Auckland, New Zealand, have liberalized their zoning laws, allowing for more housing development and stabilizing prices.

There are signs of progress in cities like San Francisco, where some zoning laws are starting to change to allow for more duplexes and fourplexes.

Transcripts

- [Alex] Why is this house selling for more than $2.5 million?

Or this apartment,

renting for almost $3,000 a month?

Is it greed? Conspiracy?

No.

Just a powerful economic concept, the elasticity of supply.

Sounds complex, but it's actually quite simple.

In the United States and around the world,

many industries and jobs

have been concentrating in a few dynamic cities,

like tech in Silicon Valley, entertainment in LA,

and pharmaceuticals in Boston.

So more and more people --

they want to live in these dynamic cities,

and that increases the demand for housing.

And remember, what happens with an increase in demand?

The demand curve shifts to the right,

and buyers are willing to buy more at any given price.

This leads to a new equilibrium,

with a higher quantity sold at a higher price.

But which increase will be larger?

The quantity change, or the price change?

That depends upon

whether the supply is elastic or inelastic.

If the supply is elastic,

meaning that producers can easily produce more housing,

then the quantity supplied will increase a lot,

and the price will only increase a little.

But if the supply is inelastic --

that means it's not easy to produce more housing,

and our supply curve looks more like this.

In this case,

the quantity supplied only increases a little,

but the price goes up a lot.

That happens when housing suppliers

can't easily expand their production

in response to the higher price.

Now, unfortunately, many cities have inelastic housing supplies.

So as people flock to these cities, we see higher and higher prices,

with little increase in the quantity of housing.

Why?

Well, first, there are natural problems.

Many of the in-demand cities --

they're surrounded by beautiful water.

Nice, but that means a limited supply of land.

But we compound natural problems with unnatural ones.

In many cities,

zoning laws and other regulations

prevent builders from creating more housing.

Take San Francisco, for example --

it's surrounded by water, so there's limited land.

But if you can't build out, how about building up?

There's plenty of land in the sky.

San Francisco's zoning laws, however,

have made it impossible or very expensive

to build taller buildings in many parts of the city.

Even changing single-family homes to duplexes or fourplexes

has typically been prohibited.

And that's not all.

Suppose a builder does find a plot of land to use.

Well, next, they need a building permit.

And the process for filing for building permits --

they can be hard to understand.

City officials can leave applicants hanging for years.

In San Francisco,

it takes an average of 627 days

to receive a building permit for a new house.

That delay adds a lot to the costs for builders.

And if a builder does get a building permit, it's not over.

Many people can still veto the project:

environmental agencies,

planning commissions,

historic preservation societies,

and groups of existing residents.

They can slow things down with lawsuits, protests,

and bureaucratic objections.

So now that we better understand

why the supply of housing is inelastic,

let's revisit our supply and demand graph

and illustrate what happens in the housing market

with an increase in demand.

Suppose a city is thriving,

and the demand to live in that city increases.

The demand curve shifts to the right.

To keep it simple,

say that ten people want to move into the city.

Builders see the increase in demand,

and they try to build more,

but they're stopped

by water, height restrictions,

zoning laws, bureaucracy, lawsuits.

That's our inelastic supply of housing.

So imagine, somehow a builder finds a way to construct one home,

increasing the quantity supplied a little.

But ten people want to move in!

So who gets the new home?

Well, the potential new residents --

they compete to get the new home by bidding up the price.

The price for the new home goes up.

First, one person drops out,

and then the price goes up some more,

and another person drops out.

The price keeps going higher and higher and higher

until just one person is left,

and the high bidder wins the new home.

Notice that it's not the owners of housing

jacking up the price --

it's the buyers who must bid higher to out-compete one another,

given the limited supply.

An inelastic supply of housing --

it does mean higher property values for existing residents.

So existing property owners --

they have an incentive to block new construction.

And that's one reason why reform is difficult.

And who's harmed?

Well, lots of people,

but most especially the potential residents

who are bid out of the market.

They'll have to live further away, with longer commutes,

or they may not even be able to live near good jobs at all.

And notice that the people who are harmed --

they don't get a vote.

By definition,

the potential residents --

they don't live in the city that priced them out of a home.

It's not all bad news, however.

Slowly, some cities are starting to change.

In 2016, Auckland, New Zealand --

they liberalized their laws

to allow upzoning in much of the city.

And the number of new houses skyrocketed,

and housing prices moderated.

The rest of New Zealand is now following suit.

Even San Francisco is starting to allow

new duplexes and fourplexes.

So let's hear it for a more elastic supply of housing.

[cheering]

Okay. There you have it.

If you want to understand why housing prices are rising,

you must first understand the elasticity of supply

and what makes housing supply

in many parts of the world inelastic.

Now, you can test your understanding of elasticity

by checking out our practice questions.

We also have test banks and lesson plans

for Economics teachers.

Or, if you're ready for more microeconomics,

click for the next video.

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