Understanding Gentrification and Upzoning – The Double kinked Veblen Good Demand Curve

I have been speculating whether an explanation for all of the arguments about whether upzoning causes or cure high house prices is the shape of the demand curve.

It is widely accepted that luxury goods including luxury houses are Veblen Goods that is for high prices they dont obey the law of demand, the higher the price the greater the demand. In other words the supply curve kinks backwards. Oddly though I never see this discussed more broadly in studies of urban housing markets. There is a disconnect between micro and macro price Take Leica cameras 3000 dollars plus premium against camera of similar specs, trade on a brand mystique of usability and optics, largely eroded now that they are basically rebadged Panasonic Cameras. Imagine however a change of tactics and they decided to produce as many cameras as Panasonic did once upon a time (the sales of digital cameras has fallen by 75% in 10 years) then they would no longer have such an exclusive cachet, increasing supply would push down the price.

This is what I think is going on with high density apartments in high value parts of cities. They have a short fall of luxury (or even relatively posh) new houses, they are basically old cities. New apartments release a pent up demand. Prices go up, though not necessarily across a housing market area through filtering/fishtank effects.

Next look at the supply curve, generally fairly flat and gently pointing upwards, it will intersect the demand curve just once, at what might be a socially sub optimal point. The aim of policy should be to make it curve upwards as sharply as possible so that it intersects multiple times, not all of these combinations might maximise returns, which is the point of inclusive zoning of affordable housing, to ensure that affordable rent and intermediate missing middle housing gets built.

One thought on “Understanding Gentrification and Upzoning – The Double kinked Veblen Good Demand Curve

  1. This explains why the Government’s belief that setting high “housing requirements” for parts of London with high house prices – Prime Central London – is out of touch with reality. The only types of housing that get built have high prices. Building g more of them does not seem to affect the price.

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