9
$\begingroup$

Common economic thinking dictates that an increase in price should lead to an increase in supply, and that an increase in supply should then lead to a decrease in price. According to Maarten van Poelgeest, former alderman of Amsterdam, the opposite is happening in Amsterdam and other popular cities. He is quoted in an article in De Groene Amsterdammer as saying:

‘Hoe meer er gebouwd wordt, hoe aantrekkelijker de stad wordt. Er komen meer voorzieningen, er komt meer reuring. Nieuw aanbod maakt de vraag dus juist weer groter – en de huizenprijzen hoger.’

Which means:

’The more there is built, the more attractive the city becomes. There will be more facilities, there is more bustle. New supply therefore makes the demand even larger – and house prices higher.’

The reasoning by Maarten van Poelgeest appears plausible, but is there any evidence that this is actually happening? Is there evidence that an increase in housing supply leads to an increase in house prices, due to housing in the area becoming more attractive?

I'm looking for an answer based on empirical evidence from trends in the past up to the present, in order to present the claim/hypothesis by Maarten van Poelgeest up to the best available measurements.


NB: I am emphatically not asking just for a correlation. A correlation between increase in supply and increase in price can easily be explained by the reverse of the causation I'm asking for here. I'm aware that causation is harder to provide evidence for but it should not be impossible.

$\endgroup$
1
$\begingroup$

This is an interesting question.

Firstly, I think it would be better to look at rents than housing supply. Rents are the aspect of home ownership that is 'consumed' whereas there is an investment element to home ownership.

Housing, as an investment class, is characterised by low vacancy and low yields. The reason for the low vacancy is that future demand is well known (for the most part). Population growth tends to be a pretty stable, and causal, driver of demand.

Housing prices, on the other hand, tend to be more of a function of how much people can borrow, and, as a result, are influenced hugely by macroeconomic conditions. Low-interest rates, like we are seeing in much of the world, allow people to borrow more money.

$\endgroup$
  • $\begingroup$ I do not have time to add sources today, but I will add some sources discussing the Australian experience, which looks to be similar. $\endgroup$ – Jamzy Oct 17 '17 at 6:09
  • $\begingroup$ Rents are subject to rent control in many cities, including most of the market segment in Amsterdam, so the "natural market rent" may be only readily available for a subsegment of the market. $\endgroup$ – gerrit Oct 17 '17 at 9:29
  • $\begingroup$ Data on rents is usually related to a new tenant in a unit, and not actual rents paid by existing tenants. If you can confirm this for data being used, then regulatory limitations on rent increases for existing tenants in their current homes will not impact the quality of the market price signal in the data ... $\endgroup$ – nathanwww Mar 10 '18 at 18:31
0
$\begingroup$

Increased supply will reduce the cost of housing (best measured by rents), all else equal.

The 'all else equal' is important. Other things can be going on (like rising population and incomes) that increase the cost of housing even as increased supply tends to reduce it.

You could make an argument about induced demand. There may be latent demand to live in a city. The increased supply induces those who could not live in the city before to move there, driving up the cost of housing. Conceptually you can separate increased supply (reducing the cost of housing) and the subsequent increase in population (increasing the cost of housing).

Empirically, I expect there to be many cases where the cost of housing has increased with rising supply. This is because of effects other than the direct effect of increased supply decreasing the cost of housing.

$\endgroup$
0
$\begingroup$

This could happen in fairly special conditions.

I'm not sure that there would be much value in trying to state the conditions in a mathematical theoretical statement for a situation like that in Amsterdam.

In other situations, the existence of positive externalities and network effects, a la Silicon Valley, can be stated concisely in a way that is relevant. But even if you can establish a mathematical theoretical statement expressing something to the effect of "once it's sufficiently up and coming with hipness, then prices may continue to rise even if supply increases faster than the number of incoming residents", it's hard to see what use that would be.

Some fairly practical possible explanations which don't require anything complicated: maybe a lack of alternative investments caused people to invest more in their houses, driving up prices (demand being comprised in units of monetary instruments and not number of residents); perhaps the average newcomer was quite wealthy compared to previous residents (some of whom may cash in and move to cheaper suburbs); a low interest rate environment could result in the monthly rental rate of property being equivalent to a higher price.

$\endgroup$
-2
$\begingroup$

Housing is something subject to socio-economic events and policy, which may produce a variety of outcome. So this is not a simple "supply and demands" issue.

First, somebody must afford the house, i.e. enough business and job activities to sustain house purchase. You can build tons of house in the middle of nowhere, but without a job nearby, nobody going to buy it.

Second, a land is scarce, you cannot keep building houses/apartment on already used up land.

Third, housing price can be speculated by subject to currency inflation.

Fourth, there is housing ownership tax and policies to curb speculation.

Fifth, Speculation on demands

So you will see: - Hong Kong: expensive houses with builders monopoly, favourism and price fixing in place. - Germany: only scarce city center are expensive, suburban housing price is still stable. Little room for speculation.

$\endgroup$
  • $\begingroup$ I don't understand what you are talking about and what it has to do with my question. (NB: I did not downvote) $\endgroup$ – gerrit Jun 6 '17 at 16:21
  • $\begingroup$ In case you are wondering where the downvotes come from: you do not buttress any of your claims with facts or evidence and most of them are at least questionable, in particular the German case - there is ample room for speculation, not just in the city center. $\endgroup$ – Taufi Jun 7 '17 at 18:47

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.