Global Housing Watch

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Housing Construction: The Current State, Policy Implication, and the Future

Global Housing Watch Newsletter: May 2017

 

In this issue of the Global Housing Watch newsletter, Jordan Rappaport talks about housing supply—specifically the construction of multifamily, and single-family homes in the United States. Rappaport is a senior economist at the Federal Reserve Bank of Kansas City.

Disclaimer: The views expressed in this Q&A are those of the author, and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

 

JR

Jordan Rappaport

 

View from the top…

Hites Ahir: Since the Great Recession, what has happened to multifamily home construction at the national level?

Jordan Rappaport: Construction of multifamily homes, like that of single-family homes, collapsed with the onset of the housing crisis in 2006. Since then, multifamily home construction has surged. Multifamily starts over the most recent six months were up about 10 percent from their mid-2000s peak and, other than a spike in mid-2015, were at their highest level since the mid-1980s.

 

Hites Ahir: How does it compare with single-family home construction?

Jordan Rappaport: Single-family construction has also rebounded from its trough. But its level remains very low by historical standards (Figure 1). For example, starts over the most recent six months were about one-third below their level in 2000, just prior to the single-family construction boom. By another measure, the ratio of single-family starts to the number of U.S. households, they are currently at their lowest level since at least 1957, the earliest date for which data are available.

Figure 1

Fig1

 

Hites Ahir: So multifamily starts followed a “v” shaped recovery, while single-family starts followed an almost “u” shaped recovery (Figure 1). What explains this divergence?

 Jordan Rappaport: Both supply and demand components contributed to the difference. With respect to supply, there was a large overhang of unoccupied single-family homes coming out of the Great Recession, due to overbuilding and foreclosures. With respect to demand, there was a large relative shift from single-family to multifamily. Partly this shift reflected households downsizing into rental apartments after losing their house to foreclosure. In addition, as I’ve documented in a previous article, the demand shift partly reflected young adults, ages 25-39, swinging back towards living in apartments following their swing towards living in single-family homes during the housing boom.

 

View from the bottom…

 Hites Ahir: Your new paper is  Crowdedness, Centralized Employment, and Multifamily Home Construction. In this paper, you look at multifamily and single-family home construction at the local level—metropolitan areas. What does it show?

Jordan Rappaport: As always, there is considerable variation. Both the multifamily and single-family permitting rates during 2013-15, measured as average annual permits of each type divided by the number of housing units of each type in 2010, were close to zero in many metro areas, and quite strong in others (Figure 2). Multifamily permitting was highest in Austin (TX), where it averaged more than 5 percent per year. Four other metros had multifamily permitting rates above 4 percent. Single-family permitting during 2013-15 was by far the highest in Myrtle Beach (SC), not shown in the figure, where permitting during 2013-15 averaged 3.5 percent per year.  Five other metros had permitting rates close to 2.5 percent. As shown in the figure, multifamily permitting and single-family permitting were positively correlated, primarily reflecting that population growth was the most important factor driving both.

Figure 2

Fig2

 

Hites Ahir: What are the characteristics that account for the variation in the recent strength of multifamily construction?

Jordan Rappaport: Three key characteristics account for a large share of the variation in recent multifamily permitting across metros as well as a large share of the variations in recent single-family permitting, and population growth.

Multifamily permitting during 2013-15 was positively correlated with population in 2010, but with relatively small magnitude:  a tripling of metro population increases the predicted multifamily permitting rate by about 0.3 percentage point.

Multifamily permitting was also related to the internal distribution of population density within metros.  Population density varies hugely within metros. Most of the land area in most metros is actually agricultural or unsettled, reflecting that metros are delineated as the combination of entire U.S. counties. Even within the non-rural portion of metros, population density in 2010 across census tracts—geographic units that typically encompass from 1,000 to 8,000 residents—on average varied by multiplicative factor of 60. I capture this variation with three variables. The first is median density, which is the tract density above and below which half a metro’s population live. The second is the increase in population density from the median to the 95th percentile, the density below which 95 percent of a metro’s population live. The third is the increase in population density from the 95th to the 99th percentiles. Multifamily permitting during 2013-15 was negatively correlated with median population density and with the increase in density from the median to the 95th percentile but positively correlated with the increase in density from the 95th to 99th percentiles. The negative correlations with median density and the increase in density from the median to the 95th percentile also hold for single-family permitting during 2013-15 and for population growth from 2010-15.

Multifamily permitting, as well as single-family permitting and population growth, was positively correlated with the share of a metro’s employment in 2000 that was located in its central business district (CBD), which I define to encompass the traditional “downtown” of the largest city in the metro as well as nearby census tracts with dense employment.

 

 Hites Ahir: What are the underlying forces that may be driving the relationships?

Jordan Rappaport: The relationships appear to be picking up differences in metropolitan productivity, consumption amenities, and the availability of land for development.

The positive correlations of multifamily permitting with population and the share of employment in the central business district probably reflect, in part, differences in metro productivity. Considerable research has documented a positive relationship between productivity and metro size. Some recent research also finds that a considerable portion of the higher productivity of larger metros reflects the higher productivity of firms located in the CBD itself. Locating in a high-productivity metro can increase profitability, attracting firms and jobs. The resulting competition to find workers bids up wages, attracting workers to the metro. The resulting population growth, in turn, spurs multifamily, and single-family construction.

The positive correlation of multifamily permitting with metro size probably also partly reflects differences in consumption amenities, as does the positive correlation of multifamily permitting with the increase in population density from the 95th to the 99th percentiles. Consumption amenities are characteristics that make a metro a more enjoyable place to live. Larger metros typically offer residents a more diverse set of consumption choices such as restaurants, live performance venues, and professional sports teams. In addition, exogenous attributes such as nice weather partly account for why some metros are larger than others. Of course, larger metros also suffer from an important consumption disamenity, worse traffic congestion. Steeper increases in density from the 95th to 99th percentiles constitute population spikes, which often have nearby clusters of urban consumption amenities such as pedestrian access to varied restaurants, cafes, bars, and small retailers. An apparent increase in the preferences of young professionals to live near such urban amenities seems to be driving nearby multifamily construction, primarily by attracting residents from elsewhere in the same metro.

The negative correlations of multifamily permitting, single-family permitting, and population growth with median population density and the increase in population density from the median to the 95th percentile probably reflect the role of land available for development, especially within the interior portion of a metro. Higher median density and a larger increase in density within the more settled portion of metro are likely to be positively related to average land prices in the intermediate-distance suburbs and the increase in land prices moving from these intermediate suburbs towards the center of a metro. The higher land prices and associated higher housing prices dampen metro population growth, in turn dampening multifamily, and single-family construction.

 

Hites Ahir: Where single-family and multifamily home construction is strong, are you able to say anything on the strength of multifamily and single-family home construction in the city vs. the suburb?

Jordan Rappaport: Several of the correlations hold for both the city and suburban portions of metros. For example, multifamily construction and single-family construction in both the city and suburbs were positively correlated with the CBD employment share. So more centralized employment was related to construction throughout a metro area rather than just near the CBD. Similarly, multifamily and single-family construction in both the city and suburbs were negatively correlated with median metropolitan population density, and with the increase in metropolitan density from the median to the 95th percentile. In contrast, only multifamily permitting in the city portion of metros was positively correlated with the increase in population density from the 95th to 99th percentile, suggesting that the relationship between population spikes and multifamily construction was limited to nearby locations.

 

Hites Ahir: The Large Unmet Demand for Housing—is another article that you just published. How does it relate to the findings in Crowdedness, Centralized Employment, and Multifamily Home Construction?

Jordan Rappaport: The article argues that the current low level of single-family construction reflects supply constraints rather than weak demand. The resulting limited availability of new single-family homes for sale is causing many homeowners to remain in their current home rather than upgrade to a newly-constructed one. This depresses the availability of existing single-family homes for sale, causing many other homeowners to stay put, and so further depressing the availability of homes for sale. As a result, the current number of existing single-family homes available for sale relative to the number of U.S. households is at its lowest since at least 1982, the earliest date for which data are available (Figure 3).

With so few single-family homes available for sale, many renters are staying put in apartments, pushing the apartment vacancy rate to its lowest in several decades. The Census Bureau defines a household as an occupied housing unit, and so with few vacant homes, and apartments to move into, household formation is being significantly depressed. Possible reasons for the current low level of single-family construction include a shortage of construction workers, and limited financing to smaller builders for speculative construction. I also think that in some more crowded metros, suburbanization may have reached its geographic limit. Consistent with this hypothesis, single-family construction in some larger metros has been shifting from the suburban portion to the city portion.

Figure 3

Fig3

 

Policy implication and the future…

 Hites Ahir: What are the policy implications of your findings?

Jordan Rappaport: One implication is that metropolitan policies that support centralized employment, such as efficient commuting transport links, may help attract firms and residents from elsewhere in the country, and boost population growth and residential construction throughout the metropolitan area. Another implication is that policies that promote urban amenities, whether in the city or suburbs, may attract residents from elsewhere in the metro and, possibly, from other metros, boosting nearby multifamily development. In contrast, policies that seek to encourage multifamily development close to CBDs based on cutting commuting time may prove unsuccessful if they don’t also take into account the sufficiency of nearby urban amenities.

Looking forward, the leading edge of the baby boom turns 75 in 2021, the age at which downsizing to multifamily homes typically picks up. Public policy may be able to help shape amenities that appeal to such downsizers—for example, through zoning policies that support the development of neighborhoods that mix multifamily housing, urban amenities, assisted-living arrangements, and proximity to where seniors’ children and grandchildren live.

 

 Hites Ahir: In the long run, how is technological innovation likely to affect multifamily home construction?

Jordan Rappaport: The development of self-driving cars may dramatically impact metro land use, including boosting multifamily construction, via three channels. First, the availability of inexpensive ride-hailing services employing self-driving cars will probably cause many city residents to forego owning a car, thereby greatly relaxing tenants’ demand for attached parking. Not providing parking significantly cuts the cost of multifamily construction, and frees up land for other uses. Second, relaxed parking demand will similarly free up a large portion of the land in central business districts, thereby facilitating increasingly centralized metropolitan employment, and reinforcing demand for multifamily housing in cities. Third, self-driving cars promise to make time spent commuting more pleasurable and productive, thereby boosting demand for single-family construction in relatively distant suburbs. All three channels decrease the broadly-construed costs of metro size, and so should boost population growth of larger metropolitan areas relative to smaller ones.

 

 Hites Ahir: In the future, do you think that we are likely to see less single-family home construction in the cities?

Jordan Rappaport: In some cities, single-family construction is already extremely low. For example, it accounted for less than 2 percent of housing permits during 2013-15 in municipal Boston and municipal San Francisco. But in many other large cities, single-family construction remains significant. For example it accounted for about 30 percent of housing permits in municipal Houston and 20 percent of housing units in municipal Philadelphia. Especially high land prices in Boston and San Francisco, probably driven by their especially high urban amenities, may account for much of the difference. The increased attraction of urban amenities may drive up the price of land the city portion of a number of other metros, crowding out single-family construction.

Global Housing Watch Newsletter: May 2017

 

In this issue of the Global Housing Watch newsletter, Jordan Rappaport talks about housing supply—specifically the construction of multifamily, and single-family homes in the United States. Rappaport is a senior economist at the Federal Reserve Bank of Kansas City.

Disclaimer: The views expressed in this Q&A are those of the author,

Read the full article…

Posted by at 6:04 PM

Labels: Housing

Housing Market in Luxembourg

The latest IMF’s report on Luxembourg says: “Against the backdrop of an expanding population, low interest rates and binding supply side constraints, residential real estate price-to-income ratios in Luxembourg have become elevated by historical and global standards (Figure 6). After a marginal decline in 2009, nominal home prices have since increased 30 percent (or 22 percent in real terms), a period over which real disposable income of the local population has been flat, though GDP and employment growth continued.

Supply bottlenecks make housing less affordable to residents. Analysis based on an empirical model of real house prices suggests that real house prices were overvalued before the global financial crisis because house prices were growing significantly faster than a trend (explained by population growth). Since then, their evolution has become more aligned with real GDP and population growth, in spite of the flat disposable income of the resident population while the low interest rate environment has improved their borrowing capacity. This analysis suggests that supply has only partially adjusted to the rapid growth of demand.”

Fig6

 

The latest IMF’s report on Luxembourg says: “Against the backdrop of an expanding population, low interest rates and binding supply side constraints, residential real estate price-to-income ratios in Luxembourg have become elevated by historical and global standards (Figure 6). After a marginal decline in 2009, nominal home prices have since increased 30 percent (or 22 percent in real terms), a period over which real disposable income of the local population has been flat,

Read the full article…

Posted by at 2:03 PM

Labels: Housing

Macroprudential Policy in New Zealand

A new IMF report on New Zealand says that “New Zealand’s mainly LVR-related housing market-specific macroprudential measures would appear to have had some moderating influence on mortgage lending, expected and actual house price growth, and the quality of loan composition. In addition, they have also helped to contain household leverage. However, they do not seem to have prevented a continuous deterioration of borrower households’ vulnerability against debt servicing capacity risks, such as higher interest rates or income shocks.”

T1

 

Fig1

 

Fig2

 

Also, see a separate IMF report on New Zealand’s financial sector, which also discusses the housing market.

A new IMF report on New Zealand says that “New Zealand’s mainly LVR-related housing market-specific macroprudential measures would appear to have had some moderating influence on mortgage lending, expected and actual house price growth, and the quality of loan composition. In addition, they have also helped to contain household leverage. However, they do not seem to have prevented a continuous deterioration of borrower households’ vulnerability against debt servicing capacity risks, such as higher interest rates or income shocks.”

Read the full article…

Posted by at 10:51 AM

Labels: Housing

House Prices in Malaysia

“Risks associated with the housing market appear to be receding. House price growth has moderated, following several years of elevated growth, and risks are circumscribed by ongoing supply constraints, increases in public sector wages, and, from a more structural perspective, Malaysia’s relatively young labor force and urbanizing population. The risk of a sharp decline in house prices should nevertheless be carefully monitored. If rapid house price growth resumes, LTV caps on second and first mortgages could be considered”, says IMF’s latest report on Malaysia.

 

Malaysia_1

“Risks associated with the housing market appear to be receding. House price growth has moderated, following several years of elevated growth, and risks are circumscribed by ongoing supply constraints, increases in public sector wages, and, from a more structural perspective, Malaysia’s relatively young labor force and urbanizing population. The risk of a sharp decline in house prices should nevertheless be carefully monitored. If rapid house price growth resumes, LTV caps on second and first mortgages could be considered”,

Read the full article…

Posted by at 1:32 PM

Labels: Housing

Understanding Housing Supply: Views from Joseph Gyourko

Global Housing Watch Newsletter: April 2017

Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance and Business Economics, & Public Policy at The Wharton School. In this interview, Gyourko talks about housing supply, how regulations and zoning affects housing supply and affordability, housing supply in China and the US, and more.

 

Fig1

Joseph Gyourko

 

Before, When, and After the Great Recession Hit…

Hites Ahir: Before the Great Recession hit, you co-authored a paper in 2005 titled: “Why Is Manhattan So Expensive:  Regulation and the Rise in House Prices”. It is one of your most cited papers. What did you find?

Joseph Gyourko:  Ed Glaeser, Raven Saks (now Molloy) and I concluded that it was the interaction of strong latent demand for markets such as Manhattan combined with restrictive or inelastic supply that largely accounts for relatively high house prices in those places.  Strong demand itself is not enough.  Dallas has very strong demand, as population has grown substantially over many decades; yet, its constant quality house prices have not risen much at all in real terms.  What is different about Dallas is plentiful building whenever prices rise enough for developers to supply new homes and make a normal profit.  In Manhattan, local authorities are able to impose sufficiently high costs on new development (or simply limit it outright), so that higher demand results in higher prices without much increase in the number of housing units.  Note that higher demand is essential, not just regulatory constraints on new supply.  A market could dramatically limit the ability of builders to build, and it would not matter for price unless demand were strong enough to bid up house values.

 

Hites Ahir: When the Great Recession hit in 2008, you co-authored another paper titled: “Housing supply and housing bubbles”. It is also one of the your most cited papers. What did you find in this paper?

Joseph Gyourko:  In this paper, Ed Glaeser, Albert Saiz and I formally incorporated the supply side of housing markets into a model that allowed for price bubbles.  One key conclusion was that markets with more elastic supplies should have fewer and shorter bubbles than markets with inelastic supply sides.  That bubbles could arise in elastically-supplied markets provided insight into what might have happened in the so-called ‘sand state’ markets of Las Vegas and Phoenix, which the data show do allow plentiful building over time.  That paper also showed that the welfare consequences of overbuilding are larger in these same markets—largely because so much product can be supplied in these markets.  Overoptimistic mispricing of homes in inelastically supplied markets such as San Francisco does not generate much new housing, so fewer real resources are misallocated.

 

Hites Ahir: After the Great Recession hit, much of the discussion and research focused on the irrational and speculative behavior of lenders and borrowers. There was no discussion on the impact of regulations on housing supply. Why?

Joseph Gyourko:  I think the reason is that demand for housing had fallen so substantially after the global financial crisis, that home builders were no longer constrained by even the most severe local restrictions on building.  This change in focus makes good sense to me, as the problem was insufficient demand, not excessive supply side restrictions.  As noted above in my answer to your first question, it is the interaction of strong demand with inelastic supply that leads to high prices and affordability problems.  Supply restrictions themselves lose their policy relevance in the face of weak demand.  The missed opportunity from a policy perspective, I believe, was not understanding that they would become relevant again as soon as demand recovered sufficiently.  Demand recovered first in our supply-constrained coastal markets.  I believe we should have tried to loosen restrictions in the most constrained markets such as the Bay Area and New York during the downturn, but that time is past.

 

“Not In MY Back Yard” and Regulations

Hites Ahir: Residents in certain cities tend to oppose new housing construction, while in other cities, there doesn’t seem to be any opposition. What could explain this?

Joseph Gyourko:  That is a great question, to which we do not know the answer.  Some smart Ph.D. student in economics is going to become famous for answering it, and she will deserve the fame because the causes are not obvious.  In one sense, we see more restrictions in larger coastal markets on both side of the United States.  That coastal trait is common, but these cities come from very different states, with different tax climates and attitudes toward government.  Their business sectors differ appreciably, too.  Political leanings and industry mixes vary widely across elastically supplied markets in the interior of the country, too.  As noted, it is not obvious what the driving force is.  What we do know is that prior to 1970, differences in local regulation and in house prices themselves, were not nearly as wide as they are today.  Something changed in the 1970s, with California coastal cities initially imposing binding constraints on new residential development.  Other cities on both coasts followed over the next decade.

 

Hites Ahir: Are you in favor of no zoning and no regulations?

Joseph Gyourko:  No.  I am a traditional housing and urban economist in this regard.  New construction imposes real costs on its immediate neighbors and the broader community.  Pollution is one, with congestion (on the roads, schools, etc.) being another.  It is economically efficient to internalize these negative externalities by ‘taxing’ the developer in some way so the full costs of development are priced and paid for by the builder.  What I am not in favor of is excessive regulation that imposes costs much higher than could be justified by spillovers.  That results in too little development and creates affordability problems for the poor and the middle class.  In the ‘Why Is Manhattan So Expensive’ paper you asked about in the first question, we found that what we term the ‘regulatory tax’ was roughly twice as high as the true negative externalities generated by new development in that market.

 

Hites Ahir: Is there a city or a country that gets zoning and regulations right?

Joseph Gyourko:  Yes, most American housing markets, especially those not located along our east and west coasts get it right.  In forthcoming work, Ed Glaeser and I conclude that most housing markets in the interior of the country function so that the price of housing is no more than the sum of its true production costs (the free market price of land plus the cost of putting up the structure) plus a normal entrepreneurial profit for the homebuilder.  That is what we teach should happen in our introductory microeconomics courses—namely, that price paid by consumers in the market should equal the real resource cost of producing the good (housing in this case).  These well-functioning housing markets exist in a broad swath of the country outside of the Amtrak Corridor in the Northeast (Washington, D.C. to Boston) and the major West Coast markets from Seattle all the way down to San Diego.  The bulk of the population lives in these well-functioning markets, by the way.  They just are not focused on by the media.

 

Hites Ahir: You have also looked at areas where it is relatively easy to build housing vs. not relatively easy to build (due to regulations). What can policymakers do in the latter areas—where regulations have effectively capped the supply of housing?

Joseph Gyourko:  The simple answer is to undo the regulations that are inefficiently constraining new housing unit production.  Unfortunately, that does not happen.  One reason is that political support for limitations on new housing supply is strong once the restrictions are in place.  The Washington, DC, market in which you live tends to be fairly restrictive.  Ask your colleagues who own homes if they would vote for politicians who eliminated restrictions that resulted in a substantial increase in housing production that, in turn, lowered the value of their own homes at the same time.  And, that is what substantial new supply would do (all else constant)—lead to a fall in house values.

There is a case for national or federal intervention, too, but I doubt that is going to happen either.  The economists Enrico Moretti and Chang-Tai Hsieh argue that aggregate national productivity is harmed because some of our most productive metropolitan areas are too small because they do not allow sufficient new home production.  While I might quibble with the size of their estimated impact on productivity, I agree with their basic point.  In that case, it would make sense for the federal government to compensate (say) San Francisco homeowners for the fall in their house values from increased production in the Bay Area—if that is what it takes to get them to allow more local housing production.  The political problem with that solution, of course, is that it requires the median taxpayer in the country (who lives in a low cost housing market without binding supply constraints) to compensate residents of markets that have imposed their own supply restrictions.  I will not be holding my breath waiting for this outcome to materialize, which means that I think we are going to be living with these restrictions for some time.

 

Housing Supply in the U.S.

Hites Ahir: “Economic Implications of Housing Supply”—is your new paper with Edward Glaeser. The paper says: “The older, richer buyers in America’s most regulated areas have experienced significant increases in housing equity. The rest of America has experienced little growth in housing wealth over the past 30 years.” Can you talk about that a little?

Joseph Gyourko:  Sure. The point we are making is straight out of an intermediate microeconomics class.  The answer to the question of who benefits from higher prices that result from binding restrictions on the supply of new housing is the owners at the time the restrictions were imposed.  Restrictions began to be imposed in many west coast markets in the 1970s, with east coast markets in the northeast following the next decade.  Thus, it is the people who owned in those markets at those times who enjoyed the most appreciation in their homes.  Those people tend to be senior citizens today, and even if they do not earn relatively high incomes, they are wealthy because of the real capital gains on their homes.

 

Hites Ahir: There are reports of U.S. cities where housing is becoming unaffordable. Is this mostly due to the fact that these markets have inelastic housing supply? So the adjustment is on prices and not on quantity? Or would you say that credit is too tight? Or a combination of the two?

Joseph Gyourko:  It is the combination of strong demand with inelastic housing supply that is critical.  Our coastal markets with the most inelastic supplies also happen to be very attractive places with highly productive business sectors.  Thus, many people want to live and work in these markets.  This strong and growing demand results in home prices being bid up in the absence of sufficient new homes to house everyone who wants to live and work in one of these markets.  Everyone has to live somewhere, so we get affordability problems for the middle class, not just the poor, in these places.  Finally, I think credit supply problems are a relatively minor factor in the affordability issues facing teachers and police in markets such as the Bay Area.

 

Hites Ahir: What is the impact of building restrictions and zoning on housing affordability?

Joseph Gyourko:  If they limit supply sufficiently relative to demand, then the existing housing units will be rationed by price.  Richer households will be able to bid more to live in their preferred markets, so we get the sorting of the rich into the higher priced coastal markets.  This is the phenomenon described in my Superstar Cities paper with Todd Sinai and Chris Mayer.  The data on sorting by the rich increasingly supports that thesis over time.

 

Hites Ahir: In normal times, how much do house prices deviate from average, where supply is elastic vs. where supply is inelastic?

Joseph Gyourko:  There is not necessarily a ‘normal time’ for this difference.  The divergence in home prices between low cost, elastically supplied markets and high cost, inelastically supplied markets has been growing over time—since 1950, at least.  This can be an equilibrium phenomenon and does not necessarily indicate mispricing or the presence of a bubble in the expensive coastal markets.  If the supply constrained markets are attractive and productive, people will pay more to live in them; as this bidding process unfolds, the rich will sort disproportionately into these costly markets.  This can generate a spiral up in prices, and it can last a long time.  In 1950 for example, housing in the most expensive metropolitan areas was about twice as costly as in the average market.  At the turn of the century in 2000, the most expensive metros were at least four times more costly than the average market.  I expect that gap to widen over the coming decade.

 

Figure 1

Fig2

 

Housing Supply in China

Hites Ahir: You have also looked at China’s housing market. What is the current state of housing supply in China?

Joseph Gyourko:  There is a very large amount of homebuilding in China.  One reason is the very high growth rate of the country, including in terms of household income, which allows people to buy homes.  In addition, China has experienced what must be one of the great rural-to-urban migrations in the history of the world.  China’s National Bureau of Statistics reports that there were about 212,000,000 more people living within the urban boundary zones of its cities in 2010 than there were in 2000.  That is about two-thirds of the population of the United States.  Housing had to be built for those people.

 

Hites Ahir: Overall, China has been building a lot of homes, yet prices don’t seem to be affordable. Why?

Joseph Gyourko:  It is not entirely clear why, but basic microeconomics applies in China, not just America.  When I see high and rising prices, I immediately think that demand is growing faster than supply.  The in-migration to cities noted just above makes it clear that demand for urban housing has been quite strong.  That begs the question of whether there are binding limitations on supply.  Two coauthors (Professor Jing Wu of Tsinghua University and Professor Yongheng Deng of the National University of Singapore) and I have estimated the growth of supply versus demand in 35 major cities.  We find large differences across markets.  In the so-called Tier 1 cities of Beijing, Shanghai, Shenzhen and Guangzhou, growing demand appears to have outstripped supply.  In contrast, a number of internal markets appear to have substantially overbuilt even strong urban demand.  Among these cities are Chongqing, Chengdu, Guiyan and Harbin.

Beyond good old-fashioned supply and demand, there are unique features of the Chinese culture and economy that help explain very high prices.  Culturally, there is a strong preference for ownership, which boosts demand.  Shang-Jin Wei and Xiaobo Zhang have shown that housing is a status good that is useful in signaling in the marriage market, and that this can explain some of the variation in prices across markets.  Housing also is seen as a store of value by many Chinese, who either do not trust banks or do not want to earn the very low interest rates (negative in real terms over many years) paid on bank deposits.  I also think that many Chinese households believe their government will do everything it can to stop a major decline in house prices.  This strikes me as a form of moral hazard, and it makes me worry about the fundamental underpinnings of the housing market.

 

Hites Ahir: Are there any key parallels and differences between housing supply in China and the U.S.?

Joseph Gyourko:  I don’t really know enough to answer this question.  The institutional contexts are so different between the two countries.  In China, the local government owns all the land within its urban boundary zone.  Developers have to purchase the use rights (for up to 70 years for residential buildings) if they want to build a high rise and sell units to people.  Technically, this is a monopoly position for the government.  That could not be more different from the situation in the U.S., where homebuilders have to buy acres of land from private owners, with title changing hands.

That said, one similarity between the countries is that the quantity of new supply varies greatly across markets.  And, at least some of the growing price in our coastal markets and China’s Tier 1 cities appears due to supply simply not increasing fast enough to satisfy very strong demand for housing in those markets.  In that sense, it is a mistake to think about there being a single, national housing market in either country.  What exists is a series of connected, but very local markets, some of which are strong with others being weak.

 

Figure 2

Fig3

 

Hites Ahir: In collaboration with the National University of Singapore and the Tsinghua University, you created a land price index for major Chinese cities. What does the latest reading of the index show?

Joseph Gyourko:  We just finished updating the 35 city aggregate index for the first quarter of 2017.  Land prices continue to boom in these markets.  The constant quality real price index rose 14% from the last quarter of 2016, and is 37% higher than it was only one year ago in the first quarter of 2016.

 

Figure 3

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Wrap-up and Looking Ahead

Hites Ahir: How can we make “housing plentiful and affordable”?

Joseph Gyourko:  Allow more building.  In a well-functioning market with elastic supply, prices should be equal to fundamental production costs.  In most American markets, that is no more than $200,000-$250,000.

 

Hites Ahir: What kind of questions you would like future research on housing supply to address?

Joseph Gyourko:  I want to know the answer to your fourth question—why does the San Francisco market regulate so differently from other interior markets in California and the rest of the country.

I also think we need a crash course on Chinese housing markets.  That country is more than big enough that everyone around the globe will care if something goes really wrong with its housing markets.

Global Housing Watch Newsletter: April 2017

Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance and Business Economics, & Public Policy at The Wharton School. In this interview, Gyourko talks about housing supply, how regulations and zoning affects housing supply and affordability, housing supply in China and the US, and more.

 

Fig1

Joseph Gyourko

 

Read the full article…

Posted by at 6:00 PM

Labels: Housing

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