Do they teach this to you guys in school? Many people religiously believe it.
Newtonian physics is a model approximating reality, but it breaks down if you analyze cases that can be safely ignored for many engineering purposes, like traveling at high speeds.
Supply and demand are worse. They’re concepts approximating certain trends in economic outcomes that almost always break down in real world situations.
For example: more supply can generate more demand. Demand can be inflexible with respect to supply. Supply and demand are unstable and can change unpredictably. In a monopoly situation price can be manipulated. Short term large supply can hamper long term.
It’s weird that people try to explain the world with supply and demand as if everyone else was an idiot who doesn’t understand simple truths, while in reality they are the ones who don’t appreciate the complexity of things like urban development.
Build a fifty lane wide highway in the wilds of Montana and it will carry about as many cars as the current freeway.
We see induced demand in highways because the thing highways provide is valued (land for private vehicle operation), but the price charged is almost always far far less, usually zero. So just like a Starbucks that started to offer free coffee, the result is going to be long lines.
If housing was being offered below value, then you would surely see induced demand in housing. Imagine for instance if a govt program committed to offering apartments of unlimited size for $0/month. People would absolutely decide they need a 5000 sqft apartment instead of a 2000 sqft apartment, just as today they decide they need to drive to a store 10 miles away, instead of walking to one around the corner.
There are other factors to consider like transportation and traffic, the quality of life of the inhabitants, business, tourism, future growth, climate resilience and so forth.
This isn’t a let’s cut down a bunch of trees and build a house out of low quality lumber in a week kinda situation.
It took 20 months to build the 380-meter Empire State Building, which is about 6 days per story, and it is not made of low-quality lumber. Nowadays we know how to build taller buildings than that, though it usually takes a little longer; 广州周大福中心 took 6 years to build (75 months) ending in 02016 and has 111 floors in 530 meters, thus requiring about three weeks per floor. Barcelona wouldn't even be able to do the paperwork to build a new building in 6 years.
You might object that skyscrapers are impractically expensive. They can be a bit expensive, but they don't have to be. 广州周大福中心 is half residential, consisting of just over 600 apartments and hotel rooms, so contains space for about 1200 residences, and was built on a budget of US$1.5 billion, about US$1.3 million per residence-equivalent. This is partly because the residences are large; the building's total floor area is 508k square meters, so we're talking about 400 square meters per residence-equivalent. If you'd carved it into 40-square-meter efficiency apartments it would hold 12700 of them and house 25000 people, at a cost of US$120k per apartment. Also, skyscrapers that aren't among the world's tallest buildings are generally cheaper per unit area.
Skyscrapers are not the only way to get high population density, just the least bad way. 广州市 has 2500 people per square kilometer and a per capita GDP of US$23k per year. Manhattan, where the Empire State Building is (but which has lost the ability to build) has 29000 people per square kilometer and a per capita GDP of US$550k per year. Giza has 45000 people per square kilometer, without many skyscrapers, and a per capita GDP of about US$7000 per year (nominal).
Note that 广州周大福中心 occupies a lot of 27k square meters. The hypothetical same-sized building of efficiency apartments would have a population density of a million people per square kilometer, 20 times Giza's and 6 times Imbaba, Giza's densest district. Even the actually existing luxury building has a population density of about 50k per square kilometer, probably denser than Giza.
Barcelona? Barcelona has 15000 people per square kilometer and a per capita GDP of US$103k per year. Barcelona's problem is not that there isn't space for all the people or that greater density would inevitably produce misery.
广州市 = Guangzhou
广州周大福中心 = Guangzhou Chow Tai Fook Center
Edit: and BTW I find it bizarre to use Chinese characters like this on an English language forum without providing an English translation. To most readers here, they're a meaningless string of unfamiliar characters.
((广州市, 广州周大福中心) => 广州市 < 2 ? 1 : 广州市 * 广州周大福中心(广州市 - 1, 广州周大福中心))(10, (广州市, 广州周大福中心) => 广州市 < 2 ? 1 : 广州市 * 广州周大福中心(广州市 - 1, 广州周大福中心))
For better or worse, perl is by default unwilling to parse them as Perl.
"we've tried not building any housing, and we're all out of ideas"
It does. Evidence: no large city in the US, Japan, or the Western Europe managed to lower housing prices long-term by increasing density.
Prices only go down if the city population goes down or stops growing.
Once the population growth returned, the prices went up as well. And no amount of new construction helped: https://www.globalpropertyguide.com/europe/austria/home-pric...
Again, perfectly fits my prediction and contradicts your model.
The idea that people involved in housing are some how uniquely greedy has a long history and it's just wrong.
People who own housing - homeowners & landowners - are able to be more greedy than others because they are part of a cartel. The debate over housing reform & housing supply is about whether or not enforcing that cartel should be a government function.
Can you expand on that claim?
Here is a free textbook that requires no more than highschool math: https://openstax.org/books/principles-economics-3e/pages/3-i...
The "law of supply and demand" is a statement about aggregate, not individual behavior. "supply satifies demand" is not a statement about an inidividual transaction in which a person's desires/needs/wants were satisfied, it is about the aggregate behavior within an economy.
I think of it as an order book where supply is the ask and demand is the bid. You can only argue that supply never meets demand if there's no liquidity, but that doesn't refute the "law".
> For example: more supply can generate more demand. Demand can be inflexible with respect to supply. Supply and demand are unstable and can change unpredictably. In a monopoly situation price can be manipulated. Short term large supply can hamper long term.
Any model that tries to predict human behaviour will be imperfect, we all know that.
There is hardly a monopoly of housing in Spain, if we keep the current disconnection between supply and demand, prices will for sure keep increasing. There is evidence that building more reduces prices. It's not the only condition needed to reduce prices, but it's an important one:
https://commonwealthbeacon.org/housing/study-says-boosting-h... https://www.upjohn.org/research-highlights/new-construction-...
I didn't any suggestion to "disregard" the "law of supply and demand". I saw a suggestion that whatever kind of "law" this is, it is a very different kind of thing than a law of physics, to which a comparison was being made.
> Any model that tries to predict human behaviour will be imperfect, we all know that.
Yet we can rarely even bound the actual scale of the imperfection, so discussing "laws" of economics as if they are in some way similar to the law of gravity seems a little silly.
OK. Can you provide me just one example of a large city that reduced the housing sale prices by building more dense units? Not by crashing its economy or otherwise decreasing the population.
If your model is correct, there should be at least _some_ examples.
> There is evidence that building more reduces prices.
There is none. Your studies are basically nonsense. Here's the strongest result:
> One study cited in her report found that the average new apartment building lowers nearby rents by 5 percent to 7 percent “relative to the trend rent growth otherwise would have followed”
Translation: the prices grew, but we managed to P-hack a small subset of data that shows at least _some_ effect. They could not find actual _decreases_ and had to resort to "would have beens".
There's an overview article (that also contains the links to the study mentioned in your link): https://furmancenter.org/files/Supply_Skepticism_-_Final.pdf - feel free to look for the evidence for the failure of the "just build more".
2019 - 978,763 2020 - 995,484 2021 - 964,177 2022 - 975,418 2023 - 979,882
For the same reason, the SF rents also dropped by 30% during the pandemic.
And if you look at the surrounding Travis County (in TX), the population (and prices) there grew.
It's a very good approximation and there are special cases that it doesn't work. But for a practical human life-scale reality almost all of daily use technology is based on these laws.
Does the supply/demand work in all situations? No, you need to have a at least some resemblance of a free market to let the market forces work.
The reasons we know that this law is working are not only empirical understanding (try selling your laptop on ebay and you'll empirically understand why) but there were at least 2 testing approaches that validated it:
1) Experimental validation via:
- Market simulation: Repeated trading rounds (Chamberlin, Smith) show prices converging to equilibrium when participants learn from prior outcomes. Public price data accelerates this process.
- Policy tests: Lab experiments confirm tax/price controls create predictable shortages (e.g., rent controls reducing housing availability).
2) Modeling approaches:
- Random coefficients logit models: Isolate price-quantity relationships by controlling for unobserved factors like brand loyalty.
- Industry analyses: Cement and airline markets demonstrate markup adjustments aligning with supply-demand predictions under competition.
- Instrumental variables: Cost shifters (e.g., raw material prices) validate causal price-quantity responses.
> It’s weird that people try to explain the world with supply and demand as if everyone else was an idiot who doesn’t understand simple truths about the world, while in reality they are the ones who doesn’t appreciate the complexity of things like urban development.
This is a strange argument. So basically the supply/demand curve works, but there are some consequences if you change the supply. Yes, they are. But if you want to have cheaper housing you will not save it if you don't build more even if there are other negatives from increased supply. And yes, urban development might be complicated, but the basics of "people need to live somewhere" is not. You might get favelas like in Brazil, but if your city grows and you don't build, because the people in the government and landlords get squeeze more profit from the market the problem will not be solved.
Well, up until 2008, that was common wisdom. Post-2008? Anyone still pushing that line won’t get far. In this case, that must be the free part of OP’s nickname speaking, right before the faler kicks in.
What you're describing here is jevon's paradox and it particularly works on unfulfilled markets with high price elasticity. Additionally the field of economics deals a lot of what you're describing in the contexts of monopolies/monopsonies.
But as a general rule of thumb, if something has an inelastic demand (as in housing) the law of supply and demand will always be the guiding concept to explain the shortage and high prices.
In supply and demand, you have these things called "supply curves," and "demand curves." The price is on the x axis, and the volume cleared in the marketplace is on the y axis. Changes in the situation move the curves around.
Aye, there's the rub. Changes in the situation do NOT move the gravity curves around in any scenario where Newtonian physics is a reasonable model to be using. So whatever kind of "law" this "law of supply and demand" actually is, it clearly is not like the laws of physics.
Here’s just a taste. Do please read and if you have a problem with the identification strategies, I would love to hear it.
- https://blocksandlots.com/wp-content/uploads/2020/02/Do-New-... - https://www.dropbox.com/s/oplls6utgf7z6ih/Pennington_JMP.pdf... - https://research.upjohn.org/up_workingpapers/316/ - https://research.upjohn.org/cgi/viewcontent.cgi?article=1325... - https://furmancenter.org/files/Supply_Skepticism_-_Final.pdf - https://www.sciencedirect.com/science/article/pii/S009411902... - http://andreas-mense.de/wp-content/uploads/2020/02/Mense-202...
Seriously, all of the cities are massively overbuilt. More so the smaller ones, but even Shanghai, Beijing, Shenzhen, Chongqing. AirBnB is not allowed. Huge numbers of units sit never used and off market. BTW that's with a SHRINKING population. Overbuild estimate is 50M units (150M people) with some 20M units unfinished. Prices are insane and comparable to NYC/London @ $10k/m2, when incomes are only 30% as high.
Why? Financialization. Yes, property values ONLY started falling WHEN builders stopped completing buildings. They were not places to live, they were investment vehicles. This is just as true in London, Vancouver, NYC, SF, Miami, etc.
A 1 bedroom in the inner ring might go for around $400/mo, and in the outer ring around $200-300/mo. Double those numbers for 2bdrm, and 3-4x those numbers for the inner ring of a T1 like Beijing, Shanghai, Shenzhen, etc.
By American standards, that might be affordable, but median household income in China is around $300-400/mo, and the urban median household income is around $500/mo.
As such, it can be fairly unaffordable, but buyers who were lucky can continue to demand high(ish) rents while coasting on asset value depending on when they acquired property - especially inner ring property.
> A property bubble generally involves asset values rising past what rents support.
Rent is often used as a proxy for spending, but that doesn't necessarily work in China.
In China, because incomes outside of a couple top tier white collar employers remain low, private rents can be fairly inaccessible for the bottom half, so employers such as large factories often provide subsidized dorms/apartments, but these factory cities tend to be isolated and self contained from the larger community.
Furthermore, despite significant reforms, China still has a corruption problem, and the easiest way to convert black money into white money is real estate, so in that situation, asset depreciation is acceptable because it can make previously non fungible black yuan into fungible yuan or USD sellable or mortgagable assets.
This problem has constantly manifested all over Asia, and has tripped various former high flying economies like Malaysia (1990s), Thailand (1990s), India (2010s), Vietnam (present), etc.
Maybe try to research the city of Barcelona, the available space for construction, the process of developing high-rise buildings, and then try to ask yourself what steps need to be taken to build 100k new flats in the city?
Consider the infrastructure, the cost, the timeframe, steps needed to ensure quality, and make sure that it doesn't become unliveable like american downtowns...
Then you could maybe think about what happens when rent prices drop, and whether a decrease in apartment prices that follow would have some effect on the number of mortgage defaults.
Maybe consider the political support you'd need for such a development and how you'd get it from the existing residents?
Finally try to do some napkin math and figure out how quickly these new units would be bought up as vacation houses by the rest of Europe and the rest of Spain moving from smaller towns to the newly available stock in the city. For bonus points you could try to estimate how much new housing was built in Barcelona in the last 20 years.
Maybe that'll help. I'm really not sure what you mean by "identification strategies", but thanks for all your research about just letting developers build denser housing. I'm sure if they just listened to your simple advice, the problem would have been solved long ago. NYC and SF are known for their affordable and high quality rentals.
> You might be simply struggling with some cognitive hurdle here
lol the arrogance is off the scale.
The exception is if everywhere in the country increases in size at the same time. For example, Japan has cheap rent at the most populous city at Earth (Tokyo). But one quarter of the whole country lives there.
If the US had something equivalent, with 80 million people in NYC, and plenty of high-rises and missing middle in every city that is currently mostly single-family-homes, then we could have cheap rents everywhere. But if just one city increases density alone, it seems it will just attract people from elsewhere in the country
I strongly recommend you find a good book and educate yourself. Grasping this stuff is the easiest way to understand the world better than most. It's also a source of lifelong frustration as you see how cluelessly the world is governed...
> For example: more supply can generate more demand. Demand can be inflexible with respect to supply. Supply and demand are unstable and can change unpredictably. In a monopoly situation price can be manipulated. Short term large supply can hamper long term.
Supply and demand do not "break down" in any of your examples. You literally wrote how supply and demand apply in each of your examples. It is simply wrong to say they "break down".
But that doesn't contradict supply and demand. And, for example, if the prices stay the same while both supply and demand increase, that still has a positive side. It means that the city is becoming attractive while still permitting more people to live in it for the same price.
This is actually surprisingly common, often the full range of hot to cold happens between 5-15% of actuation or 85-95% of actuation.
There is no point in actually trying to dial in the temperature using the handle. Just don't.
Btw. I'm talking about tankless heaters.
Although it is true that the problem of excessive bureaucracy is not exclusive to Europe and very common in the US too.
A world where bakers had to seek permission of other bakers to increase their daily bread production wouldn't be called a market, it would be called a cartel, and no one would be surprised to see bread prices rising through the roof if the cartel members were successful at enforcement.
Adam Smith was not aware of advertising. Suppliers can fabricate demand to manipulate the price. It's not a law, it's an assumption about human psychology and a wrong one.
In the case of Barcelona, supply is limited due to the geography of the area (sea/mountain) and the inner city is already extremely dense.
Really? Try selling pork sausages to Saudi market. There are many failed startups with huge marketing budgets failed, because there were not enough demand for their products.
To disprove supply/demand means that no matter the price of the pickles the number of pickles sold wouldn't change.
The MIT Press had a book in the 90s called "Philosophies of Manufacture" that gathered together writings, pamphlets, letters and more that flowed around as the industrial revolution ramped up in the USA. It is filled with the actual industrialists and/or capitalists fretting about how there would not be enough demand for their products, and openly formulating plans to increase demand via new means (which today we would call advertising and marketing). This is not some idea flowing from progressive politics, it originates with the capital class itself.
Probably the real problem is the not enough regulation against investment focused property dealings when the population suffers with this essential (next to food, water, health) immediate and everyday human need. Those not letting the money do what it is for and not spend it but want to park it as long as possible drawing out increasing amount from the circulation laying dormant in property where it is not even not doing anything useful (but the fake value increase generated by parking itself) but suffocate the remaining part of society and economy sucking away money from other places dearly needed. Pulling back functional economy a lot.
Law makers usually have high stakes in property ownership or are influenced very heavily by those with lots of wealth to be parked for the eternity and there are not enough regulations against speculative investments in this essential and everyday human need, distorting it, ruining it for the population really need it for its real purpose: shelter.
Normally I'd say let people do what they want and after they drove the cities into ground with creating unlivable situations, take away its essence and charm and attractiveness as places where people live and strive then it will reborn on the ashes made by excessive tourism and investments, have a natural cycle of birth and death, but those could take several generations and we all live only a single one, it is difficult to watch the cities ruined by the greedy and the selfish while having a coffee with a 'this is fine' look.
I am tired of this zealotry toward free market absolutism, thougtlessly reciting econ 101's tenets as a mantra. Free stuff is good actually, some industries just work better and more efficiently as a centralized common: electricity, water, rail, healthcare... That's an empirical fact. I believe housing too could be on the list.
There is more to the economy than rational agents systematically looking for what's best at the lowest prices and lawful entrepreneurs tirelessly striving to improve the utility of their customers.
Aggressive city planning, outdated unchanging zoning, backlogs, rapid growth of heritage building, NIMBY protectionism supported by municipal gov, extreme tenant laws disincentivizing renting half empty properties, etc etc. The only solutions they’ve tried are rent control and extremely slow gov investment in housing which have done nothing to help (rent control historically reduces supply making the problem worse). They’ve tried everything except liberalizing the market and letting people build.
We don’t need to wait for huge gov spending programs to solve a problem when there’s already a mountain of capital waiting to build the second the gov lets them do it.
Not a fact. Easily demonstrated by falsification by examples of each of those where they have failed because of centralization. Infrastructure is deviously hard to get right. Edit: we can find examples of decentralized infrastructure that works great (internet, Apps, banking).
Healthcare in particular must always fail because there's an unreasonably infinite cost for and ideal service. There's no good answer to what price (what resource limitations) we should put on fixing little Jimmy's cancer. Governments struggle to make compromises in healthcare, and plenty of citizens are super unhappy with any compromises made. Of course a free market can't fix that problem either. Disclosure: I'm not a free market zealot.
Too many people want to define sides and then get idealist about "their side"; how tiresome. Perhaps you are similar to the free market zealots?
> I believe housing too could be on the
Be careful of what you wish for. Government housing is rarely brought out as an example of success? Maybe Singapore. "Too much government" is a common reason for housing (market) failure. Supply availability is mostly constrained by regulations. Demand is driven by desirability. House prices are driven by mortgage availability in developed countries. House unavailablity is often because of governmental choices over regulations and interest rates. Governments obviously mostly fail to get those right. What makes you believe a government can get socialised housing right?
We don't have infinite resources. Neither government provided services nor free markets solve that. Anyone answering with either of those solutions is the same.
You might find this article interesting: https://washingtonmonthly.com/2020/08/30/libertarians-took-c...
By "empirical fact", I meant that our socialized healthcare system here in France seems to do a better job than America's in two key metrics: cost (we dedicate a lesser part of our income to healthcare than Americans, through taxes) and life expectancy (ours is slightly higher).
The one caveat I would concede is that we have less access to experimental treatments for rare diseases, but we eventually get most of them. And at a better bargain than Americans too.
For electricity, we had a very cheap, clean grid thanks to our nuclear reactors. It started going downhill the instant Europe asked us to "liberalize" our national monopoly. "Private companies" began reselling electricity for a premium. These are essentially useless parasites. Price got up, all else equal.
As for housing, I know we already have more vacant homes than homeless people (from our national statistics agency). So the issue is only one of repartition. I don't care about any rationalization or gesturing about "market forces" or whatever. We ought to distribute housing to those that lack it.
I'll read your article, thanks.
This isn't an appropriate answer because it can't be applied to the whole of society. You can't spend an unlimited amount of money on everyone and suggesting shows a certain amount of naivete.
Every medical systems grades treatments based on life extensible compared to cost. If it's over the limit you can't have it. You need to do the most good for the most people and you don't have unlimited funds.
We certainly do: because they have unlimited demand for healthcare so there needs to be a budget. I've had indirect experience with the New Zealand healthcare system avoiding treatments due to cost. Cost is often not given as the reason, instead waiting lists and other palatable reasons are given. NZ spends 11% of GDP on healthcare.
Health NZ’s cost pressure uplift is 6.2% across all of Health NZ's operating budget
It is unrealistically idealistic to pretend we can afford infinite cost pressures.
The wealthy pay the majority of the taxation base so they mostly fund public healthcare. People that have chosen unhealthy lifestyles are often the recipients (e.g. my poor friend with COPS from smoking). Not just the unlucky.
> all get a shot at chemotherapy
Great example. New Zealand does fund cheap chemotherapy options. There are expensive chemotherapy options that are not available through Pharmac (our public healthcare drugs purchaser). For expensive drugs you need to pay yourself either directly or indirectly via private health insurance policies (e.g. I noted a policy that covered up to $600000 for unfunded chemotherapy drugs).
Two drugs that our health care system won't pay for due to expense:
* Eribulin can be a useful option after ‘standard’ breast-cancer chemotherapy has failed.
* Atezolizumab (Tecentriq®) useful for women with locally advanced or metastatic triple-negative breast cancer that cannot be treated surgically and whose tumors are positive for a protein called PD-L1
https://sweetlouise.org.nz/drugs-not-funded-in-nz/
I have private insurance (through a non-profit provider). The unlucky collectively get the benefit from that, and I sincerely hope I never need to benefit from it.
I believe the wealthy paying for the majority is fair, after all their are made wealthy by the labor of the working class. Why should Amazon get to destroy the backs of its delivery persons and then have the workers foot the healtcare bill themselves?
"People that have chosen unhealthy lifestyles". There we go, it always boils down to basic empathy. As if people rationally chose to destroy their health. What's the point of living in a society if it's everyone for themselves? I want to know that someone will always have my back whatever sad situation I fall into.
My point still stands, we pay less and live longer than in America. Something true for every country with socialized healthcare.
> we pay less and live longer than in America
It's a common myth that this is due to healthcare costs: but the implied cause/effect is a lie.
Americans die younger due to a variety of preventable factors (the term lifestyle factors is commonly misused and societal factors is likely better). The ambulance and doctors don't fix those factors. For example "Two years difference in life expectancy probably comes from the fact that firearms are so available in the United States,". The maternal mortality rate in the US is considerably higher than the rate in other wealthy countries such as the UK. The infant mortality rate in the United States is also grim.
Based on self-reported illnesses and biological markers of disease, US residents are much less healthy than their English counterparts and these differences exist at all points of the [socioeconomic] distribution.
It isn't just childhood upbringing, because the statistics for immigrants trend towards the American mean.
I'm ignoring your strawman implications: you don't know me or what I believe or how much empathy I have.
I guess the point I'm trying to make is that we all want more healthcare. How do we choose how much to spend? My strawman is that I think you are saying we should spend more (especially on the poor). And specifically I'm guessing you think that we should make anyone wealthier than you pay more and more. There is no limit to how much is fair to pay for things we can't easily value like our time and our lives.
https://pubmed.ncbi.nlm.nih.gov/16670412/
https://www.ahajournals.org/doi/10.1161/CIRCULATIONAHA.117.0...
https://www.npr.org/sections/health-shots/2023/03/25/1164819...
There isn't a free market in housing in any large American city. They all have overly zealous zoning policies that restrict density, driving up prices.
The entire process from urban planning to construction completion can take 10-12 years, including about 5-6 years for general urban development planning and 2 years for partial planning and urban development projects.
source: https://www.bbvaresearch.com/wp-content/uploads/2024/11/Low-...
So may be if you solve the supply first, then you won't need to try to regulate the pricing. The law of supply and demand is like the Newton's laws of physics, it works.
But in Europe, the bureaucrats try to solve the problems created by regulation with even more regulation. It'll end badly when the far left/right use this to win the elections and who knows what will happen.