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Abstract housing

I was thinking about supply/demand curves and housing again. A standard picture: imagine a demand curve sloping down (-45 degree line, maybe), and a vertical line on the left, reflect legally capped housing. Equilibrium is low quantity, high price. Now, imagine that there's a small loosening -- Somerville allows another 5000 units on top of the existing 70,000 people, say; the vertical line moves right a bit, the equilibrium quantity increases, and price decreases -- but is still pretty high compared to a hypothetical 45 degree supply line.

I've seen a lot of people claim that housing somehow isn't affected by supply and demand, that developers only build luxury housing, but if you can follow my mental picture, you see that's what we'd expect from only small increases. Worse, if demand is itself increasing -- the demand curve moving to the right -- then price can increase anyway. It'd increase even more if the supply line hadn't shifted right.

But there's a complication. Such graphs are ideally about some identical commodity, which housing is not: it varies in size, price, location, amenities. But, I think we can think about not the price of units, but the price per square foot (or meter). A specific unit can be expensive because it costs a lot, or because it costs less but gives little space; both are expensive compared to renting a Rust Belt mansion for less than a Boston 1BR. Even more abstractly, there are other amenities: a tight (expensive) market will likely have year-to-year leases, deep deposits, and hostility to pets; a cheap one will be more month-month and loose about things.

That said, okay, increasing the supply slightly only decreases the price per area slightly. We could still expect big expensive and smaller cheaper units to be built; the claim is that that's not true. I don't know how true that is... but I do know that one end of the tradeoff curve, cheap apartments that are very small ("microapartments", "SRO") and have no parking space, is outright illegal to build in almost all the US. And a friend argued that simply building a 600 square foot box in Boston already puts you into "luxury" price ranges, that's just how expensive it is here. (I know that a couple of Back Bay parking spaces, probably consuming an area of about 660 square feet, sold for $600,000 -- that's not even an actual box, let alone a habitable one with plumbing and wiring.)

Meanwhile we do have current evidence that supply and demand works: some luxury markets have gotten saturated, with units not renting out, or being discounted, and Japanese housing prices haven't soared the way US ones have; it's much easier to build there.

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Damien Sullivan
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