Wednesday, March 10, 2021

Housing Bubble-ology: is this time different?


Famed Bubble-ologist Robert Shiller called "bubble" on the housing market in 2006 based, in part, on graphs like the one above, showing the relative prices of owning relative to renting.  We know from Chapter 9 that, in long-run equilibrium, a mobile asset has to be indifferent as to where it is used, otherwise it will move.  Here, think of the mobile asset as either people, who can rent or own, or houses and apartments that can be rented or sold.  

In the graph above, the current housing price of owning is 25% higher than the equivalent price of renting, the highest it has been since 2006.  However, what is different this time is that supply is really limited.  Due to the increase in demand for housing driven by the pandemic (people spending more time at home want bigger, nicer homes), houses are in short supply.  And zoning restrictions prevent supply from expanding so in the short run, so the only thing that can adjust is price. 

I would expect price to keep rising until the adjustments described in Chapter 9 occur (supply expands or people move to other cheaper locations, or go back to smaller houses and apartments after the pandemic).  

DISCLAIMER:  Of course, if I really knew, I wouldn't be teaching school and I probably wouldn't tell you.  

UPDATE:  Cities with lower price-to-rent ratios experience higher price growth


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