Why Non Land Supply Constraints Mean a Rush to Release Land will Pop the Housing Bubble

A constant theme of this blog has been that a rush now to liberalise planning with an unplanned release of large amounts of land will only worsen the housing bubble leading it to be popped sooner and at a higher rate and with greater negative consequences.

Let me explain with a simple model that Hotelling would have been proud of. Imagine a busy beach with too few ice cream sellers.  Those making ice cream make super profits.  This attracts investment to the market, investors borrow to manufacture ice cream.  Ice cream production expands, but to sell ice cream you need ice cream vans and plots to sell ice cream from.  The local authority releases more licences to sell ice cream from, as a result vendors borrow more to sell more ice cream and sell the plots, at speculative prices, but there is no more ice cream vans produced.  These additional plots can’t sell.  The prices at which they are traded can’t be realized.  Borrowers default.  The price of ice cream declines with a new glut of ice cream and plots to sell ice cream.   As people release the market is reaching its peak the existing owners of plots sell their land leading to a glut.   Replace plots for ice cream with housing land, and ice cream vans with bricks, the full planning permission pipeline etc. and you have the housing market. If there are other supply constraints and the market is near its top removing just one supply constraints will always hasten a bubble towards its minsky moment.   If you are going to remove a supply side constraint remove them all, over the long term, and in a coordinated manner.

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