5 ms·

I want to give some push-back regarding the often-heard phrase that governments should stop restricting supply. I'll be using the situation in the Netherlands t

by fleddr 4y ago

I want to give some push-back regarding the often-heard phrase that governments should stop restricting supply. I'll be using the situation in the Netherlands to explore some complexities. These may not apply everywhere, but it serves to illustrate that the situation is far more complex than "stupid zoning". First, the reason the Netherlands is in a similar situation as Canada (400K home prices, very tight supply) is not because the government has restricted (much) of anything. It's because in the aftermath of the 2008 financial crisis, very few homes got built. All the way up to 2014. Builders build homes, not governments. Builders do not build homes without a buyer, and nobody buys in a crisis. Hence, a 6 year deficit in supply in comparison to implied demand from population growth. Even in our tiny country this adds up to hundreds of thousands of homes not built. Not because of zoning. The deficit would be there with or without zoning. This is the true reason for the restricted supply. Second, low interest rates are the multiplier as they expand lending capacity. These two factors combined, not continuing to build in an economic downturn and low interest rates, is what I believe is responsible for the housing situation in many parts of the world. And when you think about this, it totally makes sense. The entire world faced the financial crisis and its impact, yet zoning is very local and diverse. And there's of course secondary factors to add insult to injury. Homes are more expensive to build due to more expensive materials, more environmental regulation, and a shortage of workers that have increasing wages. Don't get me wrong, zoning can be a factor in restricting supply, but there's far more going on.

plantain 4y ago
>Builders build homes, not governments. Why? Why did the government just watch this crisis develop? Why not... build some homes?
- ch4s3 4y ago
  I can’t speak for other places, but the last time governments in the US tried building a bunch of housing it turned out very poorly. They went all in on Le Corbusier’s “Towers in the Park” nonsense and they ended up as run down ghettoes set far back from the streets by a bunch of dead or overgrown brush. Chicago in particular designed theirs without children or young people in mind and ended up creating incubators for street crime. I know some places in Northern Europe have managed to build nice and mixed income public housing, but the US failed miserably.
maximilianroos 4y ago
I don't know about the Netherlands. But in many US cities — in particular SF & LA: 1) It's extremely difficult to get approval for new housing 2) There's a large backlog of developers attempting to build new housing ...which should convince anyone that regulation is the binding constraint, not a lack of willingness to build.
- fleddr 4y ago
  Fair enough, but I already acknowledged zoning to be a (local) factor. My point was that it doesn't explain unaffordable homes in vast parts of the world. You've taken the most notorious large city in terms of zoning but that does not represent the entirety of the issue of homes being absurdly expensive across the board. Which is not a SF issue, it's a widespread issue. Zoning doesn't explain the wider issue.
  - carom 4y ago
    400k for a house is about the cost of construction (~2k sqft).
    - fleddr 4y ago
      In the Netherlands, 400K would typically be the value of the land + construction combined. The land is often owned by the municipality, then to a developer, and this is the municipality's #1 revenue stream. Regardless, 400K is unaffordable to the vast majority of people.
Grimburger 4y ago
This a confusing comment, looking at the stats there was more homes built from 2008-2014 than from 2014-2020. https://tradingeconomics.com/netherlands/building-permits https://tradingeconomics.com/netherlands/building-permits What you are saying seems more anecdotal than evidential. Also looking at other sources it says that the wait time for a new build has blown out to 2 years: > Why has this shortage taken place? There are a couple of reasons. Fewer building permits are being issued, as a result of stricter environmental regulations, which aim to mitigate the nitrogen crisis. Then there is the mere problem of time: from the moment a building permit is issued, it takes about two years for a house to be ready. https://dutchreview.com/news/housing-shortage-will-continue-well-into-2021/ https://dutchreview.com/news/housing-shortage-will-continue-... This sounds entirely like a zoning and supply issue, not a "builders won't build" issue.
- asdff 4y ago
  Much of Amsterdam for instance is severely restricted in terms of growth. You have a height limit in a city and also ordinances preserving agricultural land that's only 3 miles out from the dead center of Amsterdam. You can't keep a city stuck in time and expect it not to inevitably become a playground for the rich who can afford to outcompete everyone else for the limited supply, and what do you know Amsterdam is one of the most expensive cities in Europe today.
mdasen 4y ago
The problem is that restricting purchasing is a tiny stop-gap. It might be a useful stop-gap depending on the circumstances, but it won't actually solve the problem. It's like having a hole in your boat, tossing two bucket-fulls of water out, and then calling it a day. The boat is better off, but the water is still coming in and eventually the problem will be back and will keep getting worse. So Canada has shed a small portion of demand. That might lower prices over the short-term. However, it's not going to fix a growing population and an increasing percentage of people that want to live in major cities where opportunity is. They've shed some demand, but there's going to be plenty of demand as the Canadian population keeps growing and the percentage of Canadians who want to live in cities increases. Let's say demand is going up 1% per year and foreign demand is 5% of the market. Well, you dumped 5% of the demand, but 6 years from now the market will be worse off than it is today. Many countries stopped building as many residential units as they needed after the 2008 crisis. However, many cities restricted building a lot when the market was really hot and labor/materials were cheap (2012-2019). A lot of homes would have been built if governments didn't restrict it. I can't speak to the Netherlands in particular, but in the UK, Ireland, and America, residents fight against new housing being built near them for many reasons: traffic, parking, shadows, not wanting "those people" living near them (which is usually just thinly veiled racism), etc. At the same time, these cities have built a lot of new commercial development bringing lots of jobs and people with good salaries to those cities. San Francisco has been building office space at a 5:1 to 10:1 ratio with housing - only 1 home for every 5-10 new jobs. You really can't blame not building on the 2008 crisis. That doesn't explain the incredible number of units that weren't built as housing markets went crazy after that. Plus, the pause in building in most places started a long time before the 2008 mortgage crisis. LA built around 150,000-250,000 units every decade 1940 through 1990. Since 1990, we've seen around 75,000 units per decade: http://www.betterinstitutions.com/blog/2021/3/25/what-housing-boom-an-updated-chart-of-housing-units-built-each-year-in-the-city-of-los-angeles http://www.betterinstitutions.com/blog/2021/3/25/what-housin.... This is a pretty familiar story in a lot of areas. I'm not really sure what you mean by "low interest rates are the multiplier as they expand lending capacity." Low interest rates would allow builders to borrow at low cost and create new units cheaper. Low rates do mean that people can afford to spend more on a home, but most countries don't have fixed mortgages the way the US does so borrowers would need to anticipate rates going up. It's not just zoning, but an attitude of being against new development unless it will benefit you personally. For so many owners, there's no reason to want new housing in their area - they lament traffic, parking competition, and they are actively hoping for prices to rise due to lack of supply. Restricting who can buy (which would be a demand restriction) can be a stop-gap measure. However, it's not going to prevent the problem from returning. If the government can use the few years they'll get from this measure to make major changes, they can address the problem. However, it's not an easy thing to do. For example, in the United States around two-thirds of households own their home and it's often their life's savings. If you tell two-thirds of households "we're going to make housing cheaper - not for you since you already own, but for the young people you think are ruining the world and the immigrants you hate. Oh, and it's going to involve more traffic, less parking, and lower income people living in your expensive neighborhood," they're going to be quite angry. Zoning is local, but every locality has people that want the same thing: for their investment to go up. Housing construction costs are really cheap compared to the cost of housing - close to 10-15% of the cost in expensive cities. The issue isn't building the housing. The issue is getting things approved. In many locations, people have gotten really good at stalling projects and the longer a project is stalled, the more interest the project has to pay, the more labor time wasted, etc. Let's say you're a builder. You take out a loan and buy a piece of land for $1M. You want to put up 3 1,500 square foot units costing you $600,000 and will go for $850,000 each, but the neighbors want you to put up a 2,000 square foot single-family home costing you $1.3M ($1M for the land + 150/sq ft construction) and which would go for $1.5M. You'd much rather build the 3-unit place - you're looking at $750,000 in profit rather than $200,000 in profit because you're splitting the land cost among three units. You need to get a zoning variance. The board hears some bad comments from neighbors and doesn't deny your project, but says they'll come back to it next quarter. Next quarter, they ask about the design or parking or shadows and put it off another quarter. A year later, you're $50,000 in the hole on interest plus a lot more in the professional labor necessary to deal with these meetings. Then they want an environmental review. More money gone, more time gone and you still haven't gotten the first approval. At some point, they'll basically bankrupt the project on interest if they can string it out long enough. You relent, build the single-family which has now cost you $1.4M instead of $1.3M, sell it for $1.55M (a little higher), lost a bit of potential profit, and move on. If you could simply build housing in expensive cities, people would be doing it. Splitting a $1M plot of land between 5 units makes a lot of building projects very attractive. The problem is that you usually have to buy the land and then hope you can get an approval. If there's an existing structure that's worth $150/sq ft, you can still tear it down and rebuild if the land is worth so much. Let's say you have a 2,000 sq ft plot of land with a 2-story 3,000 sq ft building on it. Let's say the land is worth $1.5M and the building is worth $400,000 for a total of $1.9M purchase price. You tear down the building and build a 5-story building with 9,000 sq ft (1,800 per floor) at a cost of $1.4M. You're now in for $3.3M, but have 9,000 square feet of space. If you can sell 5 1,800 sq ft units for $912,000 a piece (20% lower per square foot than the single-family), you're at $4.6M netting you a pretty nice profit on the project. The issue is that we won't let people split the cost of land easily. We drag out the process. If we let people split the cost of the land easily, we'd be doing it a lot more. One of the reasons that people talk about zoning is that even expensive building costs usually pale in comparison to the cost of land in expensive cities. However, you often aren't allowed to build in a way that splits the cost of land without putting in a lot of time, money, and suffering a lot of uncertainty.
kelnos 4y ago
2008 was 15 years ago, though. Certainly the home-building industry recovered quite a long time ago. Yes, there are some wrinkles: building material cost was very high for much of the pandemic, and now interest rates have gone up (I don't know how interest rates in the Netherlands get affected by US rates, but I imagine they're not totally independent). But there's a huge period from 2009 to around 2020 where home building should have been quite economical. If home prices have risen during that time to levels people now find uncomfortable, then the only conclusion we can draw is that there has been a ton of demand, and thus many available buyers. So I don't get how you can argue that no one was building due to lack of buyers.
- fleddr 4y ago
  There's always implied demand as populations continue to grow. But this doesn't turn into an actual buyer during times of economic uncertainty. Thus, a deficit builds up. You will drag along this deficit into the future, it has a vast impact on supply and thus price. And this is about to happen again. The Netherlands needs about a million new homes built by 2030 to meet projected demand based on population growth. A logistically impossible task even in good economic conditions. Thus a deficit in supply will remain and even grow.
asdff 4y ago
Zoning is a huge factor, just look at Amsterdam. Restrictive limit along with legally preserved farmland just a few miles from the center of the city, its no wonder no one is building. There's nowhere that you are allowed to.
- fleddr 4y ago
  My point is to stop obsessing over Amsterdam, San Francisco, New York...whichever dense city that can never ever meet demand. Stop defining the housing problem based on the exceptions.
  - dublinben 4y ago
    Why can't Amsterdam (5000 people / km2) be as dense as San Francisco (7000/km2)? Why can't San Francisco be as dense as New York City (11000/km2)? Why can't New York City be as dense as Barcelona or Seoul (16000/km2)? These are the most productive cities, with the most opportunities, and more people want to move there. Why should they be forced to live in less desirable places?
    - fleddr 4y ago
      You're still doing it...obsessing over a tiny amount of places. "The Canada Mortgage and Housing Corporation — the national housing agency — said in a June report that close to 19 million housing units will be needed by 2030." Widen your view! These 19 million homes aren't going to be built in 1 or 2 cities.
      - asdff 4y ago
        People cite these cities because they are recognizable, but the hallmarks of the housing crisis are felt all over. Prices are rising even in cheap places like the midwest, because even in those places the rate of new construction is not high enough to meet demand, so prices rise as people bid on limited inventory.
        4y ago

by fleddr 4y ago

plantain 4y ago

>Builders build homes, not governments. Why? Why did the government just watch this crisis develop? Why not... build some homes?

ch4s3 4y ago
I can’t speak for other places, but the last time governments in the US tried building a bunch of housing it turned out very poorly. They went all in on Le Corbusier’s “Towers in the Park” nonsense and they ended up as run down ghettoes set far back from the streets by a bunch of dead or overgrown brush. Chicago in particular designed theirs without children or young people in mind and ended up creating incubators for street crime. I know some places in Northern Europe have managed to build nice and mixed income public housing, but the US failed miserably.

maximilianroos 4y ago

I don't know about the Netherlands. But in many US cities — in particular SF & LA: 1) It's extremely difficult to get approval for new housing 2) There's a large backlog of developers attempting to build new housing ...which should convince anyone that regulation is the binding constraint, not a lack of willingness to build.

fleddr 4y ago
Fair enough, but I already acknowledged zoning to be a (local) factor. My point was that it doesn't explain unaffordable homes in vast parts of the world. You've taken the most notorious large city in terms of zoning but that does not represent the entirety of the issue of homes being absurdly expensive across the board. Which is not a SF issue, it's a widespread issue. Zoning doesn't explain the wider issue.
- carom 4y ago
  400k for a house is about the cost of construction (~2k sqft).
  - fleddr 4y ago
    In the Netherlands, 400K would typically be the value of the land + construction combined. The land is often owned by the municipality, then to a developer, and this is the municipality's #1 revenue stream. Regardless, 400K is unaffordable to the vast majority of people.

Grimburger 4y ago

This a confusing comment, looking at the stats there was more homes built from 2008-2014 than from 2014-2020. https://tradingeconomics.com/netherlands/building-permits https://tradingeconomics.com/netherlands/building-permits What you are saying seems more anecdotal than evidential. Also looking at other sources it says that the wait time for a new build has blown out to 2 years: > Why has this shortage taken place? There are a couple of reasons. Fewer building permits are being issued, as a result of stricter environmental regulations, which aim to mitigate the nitrogen crisis. Then there is the mere problem of time: from the moment a building permit is issued, it takes about two years for a house to be ready. https://dutchreview.com/news/housing-shortage-will-continue-well-into-2021/ https://dutchreview.com/news/housing-shortage-will-continue-... This sounds entirely like a zoning and supply issue, not a "builders won't build" issue.

asdff 4y ago
Much of Amsterdam for instance is severely restricted in terms of growth. You have a height limit in a city and also ordinances preserving agricultural land that's only 3 miles out from the dead center of Amsterdam. You can't keep a city stuck in time and expect it not to inevitably become a playground for the rich who can afford to outcompete everyone else for the limited supply, and what do you know Amsterdam is one of the most expensive cities in Europe today.

mdasen 4y ago

The problem is that restricting purchasing is a tiny stop-gap. It might be a useful stop-gap depending on the circumstances, but it won't actually solve the problem. It's like having a hole in your boat, tossing two bucket-fulls of water out, and then calling it a day. The boat is better off, but the water is still coming in and eventually the problem will be back and will keep getting worse. So Canada has shed a small portion of demand. That might lower prices over the short-term. However, it's not going to fix a growing population and an increasing percentage of people that want to live in major cities where opportunity is. They've shed some demand, but there's going to be plenty of demand as the Canadian population keeps growing and the percentage of Canadians who want to live in cities increases. Let's say demand is going up 1% per year and foreign demand is 5% of the market. Well, you dumped 5% of the demand, but 6 years from now the market will be worse off than it is today. Many countries stopped building as many residential units as they needed after the 2008 crisis. However, many cities restricted building a lot when the market was really hot and labor/materials were cheap (2012-2019). A lot of homes would have been built if governments didn't restrict it. I can't speak to the Netherlands in particular, but in the UK, Ireland, and America, residents fight against new housing being built near them for many reasons: traffic, parking, shadows, not wanting "those people" living near them (which is usually just thinly veiled racism), etc. At the same time, these cities have built a lot of new commercial development bringing lots of jobs and people with good salaries to those cities. San Francisco has been building office space at a 5:1 to 10:1 ratio with housing - only 1 home for every 5-10 new jobs. You really can't blame not building on the 2008 crisis. That doesn't explain the incredible number of units that weren't built as housing markets went crazy after that. Plus, the pause in building in most places started a long time before the 2008 mortgage crisis. LA built around 150,000-250,000 units every decade 1940 through 1990. Since 1990, we've seen around 75,000 units per decade: http://www.betterinstitutions.com/blog/2021/3/25/what-housing-boom-an-updated-chart-of-housing-units-built-each-year-in-the-city-of-los-angeles http://www.betterinstitutions.com/blog/2021/3/25/what-housin.... This is a pretty familiar story in a lot of areas. I'm not really sure what you mean by "low interest rates are the multiplier as they expand lending capacity." Low interest rates would allow builders to borrow at low cost and create new units cheaper. Low rates do mean that people can afford to spend more on a home, but most countries don't have fixed mortgages the way the US does so borrowers would need to anticipate rates going up. It's not just zoning, but an attitude of being against new development unless it will benefit you personally. For so many owners, there's no reason to want new housing in their area - they lament traffic, parking competition, and they are actively hoping for prices to rise due to lack of supply. Restricting who can buy (which would be a demand restriction) can be a stop-gap measure. However, it's not going to prevent the problem from returning. If the government can use the few years they'll get from this measure to make major changes, they can address the problem. However, it's not an easy thing to do. For example, in the United States around two-thirds of households own their home and it's often their life's savings. If you tell two-thirds of households "we're going to make housing cheaper - not for you since you already own, but for the young people you think are ruining the world and the immigrants you hate. Oh, and it's going to involve more traffic, less parking, and lower income people living in your expensive neighborhood," they're going to be quite angry. Zoning is local, but every locality has people that want the same thing: for their investment to go up. Housing construction costs are really cheap compared to the cost of housing - close to 10-15% of the cost in expensive cities. The issue isn't building the housing. The issue is getting things approved. In many locations, people have gotten really good at stalling projects and the longer a project is stalled, the more interest the project has to pay, the more labor time wasted, etc. Let's say you're a builder. You take out a loan and buy a piece of land for $1M. You want to put up 3 1,500 square foot units costing you $600,000 and will go for $850,000 each, but the neighbors want you to put up a 2,000 square foot single-family home costing you $1.3M ($1M for the land + 150/sq ft construction) and which would go for $1.5M. You'd much rather build the 3-unit place - you're looking at $750,000 in profit rather than $200,000 in profit because you're splitting the land cost among three units. You need to get a zoning variance. The board hears some bad comments from neighbors and doesn't deny your project, but says they'll come back to it next quarter. Next quarter, they ask about the design or parking or shadows and put it off another quarter. A year later, you're $50,000 in the hole on interest plus a lot more in the professional labor necessary to deal with these meetings. Then they want an environmental review. More money gone, more time gone and you still haven't gotten the first approval. At some point, they'll basically bankrupt the project on interest if they can string it out long enough. You relent, build the single-family which has now cost you $1.4M instead of $1.3M, sell it for $1.55M (a little higher), lost a bit of potential profit, and move on. If you could simply build housing in expensive cities, people would be doing it. Splitting a $1M plot of land between 5 units makes a lot of building projects very attractive. The problem is that you usually have to buy the land and then hope you can get an approval. If there's an existing structure that's worth $150/sq ft, you can still tear it down and rebuild if the land is worth so much. Let's say you have a 2,000 sq ft plot of land with a 2-story 3,000 sq ft building on it. Let's say the land is worth $1.5M and the building is worth $400,000 for a total of $1.9M purchase price. You tear down the building and build a 5-story building with 9,000 sq ft (1,800 per floor) at a cost of $1.4M. You're now in for $3.3M, but have 9,000 square feet of space. If you can sell 5 1,800 sq ft units for $912,000 a piece (20% lower per square foot than the single-family), you're at $4.6M netting you a pretty nice profit on the project. The issue is that we won't let people split the cost of land easily. We drag out the process. If we let people split the cost of the land easily, we'd be doing it a lot more. One of the reasons that people talk about zoning is that even expensive building costs usually pale in comparison to the cost of land in expensive cities. However, you often aren't allowed to build in a way that splits the cost of land without putting in a lot of time, money, and suffering a lot of uncertainty.

kelnos 4y ago

2008 was 15 years ago, though. Certainly the home-building industry recovered quite a long time ago. Yes, there are some wrinkles: building material cost was very high for much of the pandemic, and now interest rates have gone up (I don't know how interest rates in the Netherlands get affected by US rates, but I imagine they're not totally independent). But there's a huge period from 2009 to around 2020 where home building should have been quite economical. If home prices have risen during that time to levels people now find uncomfortable, then the only conclusion we can draw is that there has been a ton of demand, and thus many available buyers. So I don't get how you can argue that no one was building due to lack of buyers.

fleddr 4y ago
There's always implied demand as populations continue to grow. But this doesn't turn into an actual buyer during times of economic uncertainty. Thus, a deficit builds up. You will drag along this deficit into the future, it has a vast impact on supply and thus price. And this is about to happen again. The Netherlands needs about a million new homes built by 2030 to meet projected demand based on population growth. A logistically impossible task even in good economic conditions. Thus a deficit in supply will remain and even grow.

asdff 4y ago

Zoning is a huge factor, just look at Amsterdam. Restrictive limit along with legally preserved farmland just a few miles from the center of the city, its no wonder no one is building. There's nowhere that you are allowed to.

fleddr 4y ago
My point is to stop obsessing over Amsterdam, San Francisco, New York...whichever dense city that can never ever meet demand. Stop defining the housing problem based on the exceptions.
- dublinben 4y ago
  Why can't Amsterdam (5000 people / km2) be as dense as San Francisco (7000/km2)? Why can't San Francisco be as dense as New York City (11000/km2)? Why can't New York City be as dense as Barcelona or Seoul (16000/km2)? These are the most productive cities, with the most opportunities, and more people want to move there. Why should they be forced to live in less desirable places?
  - fleddr 4y ago
    You're still doing it...obsessing over a tiny amount of places. "The Canada Mortgage and Housing Corporation — the national housing agency — said in a June report that close to 19 million housing units will be needed by 2030." Widen your view! These 19 million homes aren't going to be built in 1 or 2 cities.
    - asdff 4y ago
      People cite these cities because they are recognizable, but the hallmarks of the housing crisis are felt all over. Prices are rising even in cheap places like the midwest, because even in those places the rate of new construction is not high enough to meet demand, so prices rise as people bid on limited inventory.
      - 4y ago