WHY ARE HOUSING PRICES SO HIGH?

So why are housing prices so high? It’s a question that everyone is asking, but few seem to have a good answer for.

Some blame greed, but that argument really doesn’t hold water. People haven’t suddenly become more greedy than they were a few decades ago. Another explanation is that money printing from the Federal Reserve is causing inflation, and that is certainly part of the problem. The Fed’s purchases of Mortgage-Backed Securities in particular may be inflating housing prices above what they would otherwise be. But with housing prices ballooning so quickly, inflation likely doesn’t account for the lion’s share of the price-hikes.

What does account for it is good-old supply and demand. Simply put, the primary reason housing prices are soaring is because the supply is being limited while the demand is growing.

With respect to supply, there are basically two ways to expand: up and out. On the one hand, cities can build taller, higher-density residences. On the other hand, they can build on new land at the outskirts of the city.

The problem is that both of these options are seriously unpopular. With respect to building up, many people are fiercely opposed to high-density developments in their local communities, and as a result, most municipalities have strict zoning laws that prevent or at least limit these kinds of initiatives.

If you suggest building out, however, you quickly encounter the wrath of environmentalists who are on a mission to mitigate urban sprawl, and the environmentalists have passed many land-use regulations, too. The Greenbelt in Ontario, for instance, is a 2,000,000 acre swath of land surrounding Toronto that is permanently protected from development because of environmental considerations.








Red tape is another huge barrier to housing development. Permits, building codes, and all sorts of other regulations make it far more expensive to build new homes than it needs to be, and those expenses make it that much harder to increase the supply of homes on the market.

The demand for housing is, of course, largely determined by population. Generally speaking, the more people there are in a country, the more demand there will be for housing. Population changes are in turn determined by two factors, the natural growth rate (accounting for births and deaths) and net migration (accounting for immigration and emigration).

In the US, which currently has a population of about 334 million, the natural growth rate and net migration rate are both positive, so they both contribute to the increasing demand for housing. Historically, the US population has grown by about 0.9 percent per year on average. It’s not a particularly high rate, but it’s enough to put some constant pressure on the demand side of the equation.


Patrick Carroll



Patrick Carroll has a degree in Chemical Engineering from the University of Waterloo and is an Editorial Fellow at the Foundation for Economic Education.