(part 2 of a 2 part article)
Last week’s article covered why there is negligible population growth pressure in spite of the common misconception of a housing “shortage”, and ended with the question: why can’t we just build more housing to increase supply and thus reduce demand? The problem is that the supply and demand analogy breaks down when dealing with housing construction.
If we made more Ferraris, will the cost of Priuses go down? Of course not, they are two different market segments. Likewise, the housing market is segmented like cars, but there are two significant differences.
First buildings are fixed and therefore it matters where they are located. They are impacted by a lot of external factors that are unique to their location, such as proximity to the beach in our case. That factor is driven by the fixed amount of land (beach) at that location, regardless of how many units are built on the land in that location. Santa Monica will always be more expensive than Lancaster. So, location sets a fundamental (very high and rising) land cost, regardless of how many units are built there and regardless if the units are market rate or affordable. A land seller always sets their price based on how much can be built there, so when upzoning happens, land values happily rise to the new inflated level making affordability even more unreachable.
Second, to continue the car analogy let’s consider Henry Ford’s genius, the assembly line. Among…
