Miguel Keeler on the Facebook group City Builders asked this question and I answered. I lightly edited my response to include come comments in [brackets] about free movement. 

I’ve been thinking a lot about the demand for housing the area.

You know what one radical solution just might help? Not allowing any more companies to move in such as Google, and the proposed fifth tower for Amazon, ect. These companies are going to have hundreds or even thousands of people move here (even though there is a housing shortage and they know it) to jack up the prices even more for rents and homes/condos in the city pushing the people/families making a salary or $25k-$75k/year out of the area that are struggling…meanwhile people that make $80k+ are pouring in, creating even more demand for an already slim housing market.<

So why not limit the jobs being created here and let the housing be build first, can’t have people without housing and vise-versa. You know how when a city stops producing housing, rents and home prices go up as more jobs and people come in…why not try and do the opposite for a little while, create more housing and hault jobs being created (we can’t even house the homeless). I know it’s “illigal” to do…but wouldn’t help people working in retail, coffee shops, ect, stay here? Sure it might seem like a stupid idea, but as far as I can tell, no one has tried it before, and it just might work. Think about it, and let me know what you think.

——————————–

Thanks for asking. If we know that price, in the simplest terms, is a quantitative measure of how demand is meeting the need for supply, then falling demand, whether induced or not, would result in lower prices. In theory, if some actor in the economy (or rather outside the economy) could simply dial down demand, then it is true, price would drop as supply, if it was left alone, “caught up” to demand. Then that economy would achieve equilibrium.

However, this discounts the fact that producers of housing would see the end of rising demand as a signal to hold back production of housing. A builder or investor would note that the market was about to face a surplus if production continued. Capital would redirect itself elsewhere. Money would either go to another market or it would invest in something else.

Also, housing production does not induce demand for more housing. Demand for housing is created by a complex web of utility needs when an economy grows. Jobs make a place appealing, or an appealing place draws people which creates jobs. The more jobs and more appeal an area has then more people want to live there AND people that live there begin to resent new people, and then zoning gets used to plan and “manage” growth. [I’d add here, too, that the notion of free movement and choosing where to live is part of what people consider to be basic “rights” in our country. The idea that we’d mandate where people live is, up till now, been something that would be intolerable].

But there are limits to what can be done about growth and demand. When I lived in Santa Barbara County years ago, the regime there put hard limits on building permits. What resulted was not a drop in demand but just a steady increase in prices as more people kept coming. Zoning and other limits to supply end up being used to “make it stop.” It won’t. All that limits to housing production do is make life worse for everyone by creating inflation in the economy, a condition of rising demand, inadequate supply, and thus an inventive by incumbents (single-family homeowners) to keep a lid on supply — the value of their asset keeps climbing.

Dialing up supply isn’t a perfect solution either. Putting a bayonet into the back of builders and saying, “Build!” wouldn’t be beneficial either in an economy that is seeing inadequate production. But if we were going to inventive and even subsidize something, it should be the production of housing. Capital is going to resist going into production of a thing that is getting over produced (and that’s what we want for housing, massive over production) unless there is a cushion. If units are vacant or undersold, we’d have to pick up that slack in the form of taxation or loss in value of property of both.

What keeps us locked in a cycle of limited supply is a combination of the way capital works (money tends to move rapidly toward production of things that are scarce, and away from things that are in surplus) and the headlock current property owners have on the regulatory system that produces housing.

If we eliminated the angry single-family homeowner guarding their cave, we’d still have a dynamic of rapid production in times of scarcity, a possible glut which would be bad for the industry but good for consumers, and then slow production and rising prices. Government can help the cycle along and help people who get caught up in the gears of this system.

Your question and the idea of induced demand — the idea that by creating more jobs and housing we draw in more people and that’s bad — reminds me of an old Burt and I routine about the farmer who’s wife is having a baby. The doctor is working on delivering the baby and the farmer is holding up the lantern. The first baby makes it out. And then the doctor says, “There’s another one!” The farmer is aghast and blows out the lantern. “Why’d you blow out the light?” the doctor asked. “It’s drawnin’ them!”

Supply and demand is really simple. But it’s application in the real world defies that simplicity. I think of the economy like the weather, a natural force we can always be learning more and more about, sometimes control, but ultimately must be prepared for so that people don’t get hurt. There is no such things as too much housing. If there is too much of it, people benefit with lower prices. And if we grow in a dense, efficient way, we make the most of a scarce resources, land and defy the notion that, “they aren’t making anymore.” Trying to tame the economy with mandates and limits never works, unless we look at it like a windmill and work with it.

I turn to another Bert and I routine (sadly I can’t find the audio for the one I mentioned) to answer the question, “Will we ever get to the place where everyone gets exactly what they want and need in an economy with no winners and losers?” Well, the answer is, “You can’t get there from here.”