Arrested Development: Theory and Evidence of Supply‐Side Speculation in the Housing Market

Abstract

This paper studies the role of disagreement in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to frictions that make renting less efficient than owner‐occupancy. As a result, undeveloped land facilitates construction and intensifies the speculation that causes booms and busts in house prices. This observation challenges the standard intuition that in cities where construction is easier, house price booms are smaller. It can also explain why the largest house price booms in the United States between 2000 and 2006 occurred in areas with elastic housing supply.

A Review of Volume 5 of the Handbook of Regional and Urban Economics, Parts III and IV

“…Nathanson and Zwick (), discussed at length in GN, emphasize heterogeneous beliefs, with builders as the most optimistic agents. That model specifically allows for short‐selling, and the authors note that home builders were commonly short‐sold during the price boom, providing some support for the importance of heterogeneous expectations.…”

“…The discussion of Nathanson and Zwick () suggests that future work impose “cross‐market” asset pricing restrictions. As discussed in the “Introduction” section, short sellers or no, home builder stocks did not turn down until the market for homes started to weaken, and primary and secondary mortgage insurance did not show rising cost for more than a year after homebuilder shares started to decline.…”

No-Bubble Condition: Model-Free Tests in Housing Markets

“…The price-rent ratio in Singapore showed similar run-ups in prices relative to fundamentals in the mid-1990s. Such price increases, in particular relative to fundamentals, are often interpreted as signs of housing bubbles in the academic literature (see, e.g., Case and Shiller (2003), Himmelberg, Mayer, and Sinai (2005), Caballero and Krishnamurthy (2006), Wheaton and Nechayev (2008), Schneider (2009), Glaeser, Gottlieb, andGyourko (2010), Mayer (2011), Galí (2014, Nathanson and Zwick (2014)).…”

Real Estate Industry as an Urban Growth Machine: A Review of the Political Economy and Political Ecology of Urban Space Production in Mexico City

“…It should be noted that, since urban speculation is cyclical, current expansion of the built environment in Mexico has responded to different reasons, not all precisely the same or in the same condition as in the aftermath of the Mexican economic crisis of 1994 [23]. Current urban speculation can be noticed by the fact that price increases have been occurring in a time frame in which regulatory and economic conditions-including public investment and mortgages-have encouraged the construction of new buildings and urban infrastructure quickly [24]; the latter an anticyclical economic measure implemented in the face of the impacts of the 2008 global financial crisis.…”

“…This second type of market is particularly supported by the possibility of increasing housing supply in centric locations, either in current high valued urban areas or those subject to gentrification. For those settlements where land availability is scarce, like in Mexico City, urban speculation has been based on the expectation of a development barrier in the near future, which generates price increases on land [24]; the later encouraging both real estate speculation through vertical urbanization in centric areas, and urban sprawl [26].…”