Have any cities (with a good economy) managed to prevent rapid increases in real estate costs?

Question

Cities like London, Paris or Tel Aviv experience frequent complaints about the cost of real estate. Some blame speculators, others blame rich oligarchs from abroad, others say not enough new buildings are being constructed, etc. There are numerous proposals on how to resolve the issue: rent controls, high taxes on vacant properties, allowing squatters to settle in empty buildings, removing restrictions on height - all of them with significant trade-offs and from what I see few end up reducing the pressure on the market.

Have any well-off cities managed to keep real estate prices on a reasonable level? If so, how did they achieve it?

Answer 1

In Paris at least, the question could be reframed slightly. There have been periods of “housing crisis” (especially after the second World War) but not a continuous long-term increase in real estate prices (relative to everything else).

Specifically, between the 1960s and the early 2000s, prices (corrected for inflation) went up and down and never really got wildly out of sync with income. Growth and unemployment also had ups and downs but Paris was already a rich city with a flourishing economy. At the end of the 1990s, it was still conceivable that someone could buy real estate in Paris itself with income derived from an (upper) middle-class job (it was by no means open to everybody but still a perspective for many without being independently wealthy).

By contrast, since 2000, real estate prices have increased almost three-fold in Paris proper, two-fold in the broader Paris region relative to income. In fact they have also increased quite a bit in France in general (i.e. the increase is felt in large provincial cities too) but not as much. At the same time, the proportion of wealth that's inherited has also increased a lot, bringing France back to levels last seen in the 1930s (around 55%), after several decades where it was down to 20-30%.

All this suggests the complaints do not result only from the dynamics of the real estate market in a narrow sense but also from broader changes in the economy and the feeling that even a good job is not enough to own your own home or build up some wealth.

Answer 2

This is both a broad and interesting question. According to Property Price Index 2017, London is indeed one of the most expensive when it comes to property prices and the most expensive in Europe.

Unfortunately, high prices have several root causes, making it hard to tackle this phenomenon (source):

• Growing demand - [...] demand for housing has been rising at a faster rate than the supply.
• Constraints on the building of houses - difficulty to find new land around greater London, preserving “greenbelt land”, existing homeowners have a vested interest in keeping the supply as low as possible in their area, lack of Social Housing
• strong demand for home ownership
• Speculation
• Low Interest rates

There are several methods that can be used to cap the prices, most of them having some drawbacks (source):

• higher interest rates - would have significant impact on reducing housing affordability, but might clash with controlling inflation and economic growth
• mortgage regulation - limiting the availability of mortgages through regulation. However, mortgage lending is already quite scarce.

The same article emphasizes that none of these measures attack the actual problem: disequilibrium of supply and demand. This article dives into details about demand growing faster than supply.

Other methods that can be used are:

• price ceiling - e.g.

Apartment price control in Finland:

According to professors Niko Määttänen and Ari Hyytinen, price ceilings on Helsinki City Hitas apartments are economically highly inefficient. They cause queuing, and discriminate against the handicapped, single parents, elderly, and others not able to queue for days. They cause inefficient allocation, as apartments are not bought by those willing to pay the most for them—and those who get an apartment are unwilling to leave it, even when their family or work situation changes, since they can't sell it at what they feel the market price should be. These inefficiencies increase apartment shortage and raise the market price of other apartments.

Rent control in New York City

The government put in price controls, so soldiers and their families could pay the rent and keep their homes. However, this increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none were left for late-comers. Price ceilings create shortages when producers are allowed to abdicate market share or go unsubsidized.

• Land value tax should work for lowering the rent, according to Wikipedia:

At sufficiently high levels, land value tax would cause real estate prices to fall by removing land rents that would otherwise become 'capitalized" into the price of real estate

However, this kind of taxation is not very widespread:

Land value taxation is currently implemented throughout Denmark,7 Estonia, Lithuania,[8] Russia, Hong Kong, Singapore, and Taiwan; it has also been applied in subregions of Australia, Mexico (Mexicali), and the United States (e.g., Pennsylvania).

Keeping real estate prices at reasonable prices - e.g. Bucharest, Romania, place 48 in Europe's price to income ratio.

This is clearly not a "well-off city", but it can be used as a reference to what lead to reasonable prices for rents and housing:

• fewer constraints on building houses - most of the constructors built with few restrictions. This was a benefit for the consumers, but this rendered town planning almost useless and also reduced the green space
• already existing high home ownership - according to this article (Romanian), house ownership is more than 95% in Romania. So, supply should compensate only for the latecomers
• much stricter mortgage regulation - higher advanced value, lower warranty values, lower accepted debt/income value and other regulations lead to lower loaning
• less State interference - the Romanian Government ran a program called The First House which allowed banks to have less risk and lower the advance to only 5%. The programs conditions changed and the advance is more than 15% now, making loans harder to get.
• context - due to high ownership as opposed to renting and the fact that most of the owners are private individuals, in most cases they do not afford to keep the houses empty (due to fixed costs), so they lower the price to get a client faster).

Note: one comment talks about "socialism experiments". Romania has been under the Iron Curtain and thus had a communist regime until the end of 1989. House construction and prices were centrally controlled and almost everyone had a place to stay. Some argue that this was a "success". However, they forget that the largest houses and flats went to politicians, State Security members and informers.

Anyway, this was possible because supply and demand were quite balanced.

Conclusion: I don't think there is a sustainable way to prevent rising prices for real estate, as long as supply does not follow the demand.

Answer 3

Tokyo, Japan is one of the rare exceptions to this rule.

One of the primary reasons for this is that it has weak land use regulation, which allows for very high density real estate development, allowing more people to be housed on the same amount of land.

Politically, part of this is that land use regulation is handled at the national and regional level, rather than at the local level, which makes the interests of people considering moving to a locality in low housing prices, in addition to the interest of people who already own property there who have an economic interest in real estate price appreciation, more balanced. Regulating land use at a higher level means that regulators have a political interest in considering everyone's need, rather than only their local electoral base's interests.

In addition to a lack of direct regulation of density, Tokyo allows uses such as the following ones under its land use regulations, these allow:

• housing to lack parking (in a city that overall has very good public transit and intercity transit options, and is walkable and capable of being navigated by bike in lots of places, and in which there are a variety of strong deterrents to owning a car relative to the U.S. with European style expensive registration fees, difficult to obtain driver's licenses, and expensive gasoline, as well as limited supplies of parking due to land use policies);

• boarding houses in which rental residents share a kitchen and bathroom similar to a hostel (a fairly common source of housing for younger people, including minors studying a high schools or colleges far from home and people just starting out their working lives);

• housing without its own bathing facilities instead relying on residents using neighborhood bathhouses that are independent from the housing provider;

• residences with small minimum square footage;

• ultra tiny temporary residential facilities called pod hotels; and

• short term residential facilities called "love hotels" that can make the reduced privacy of living very close to your neighbors with thin walls tolerable.

A couple of other factors are not regulatory precisely, but are embedded practices that make a significant difference.

One is that many large Japanese businesses and some medium sized ones either offer lifetime employment or at least, have what I call "neo-feudal" practices in the sense that your business is not only your employer but provides employee benefits that account for a significant portion of your consumption, most notably, employer provided housing for many younger employees.

Another factor impacting land use is the way that Japanese cemeteries are operated. Basically, in an urban Japanese cemetery, you can't buy a burial plot or cremains storage shrine. Instead, you can only rent such spaces, and generally speaking, you can't pre-pay. If your next of kin doesn't pay the modest rental bill for the burial plot or public cremains storage box, the facility disposes of the remains as trash to make room for the remains of someone else whose family cares enough to pay the modest annual rental bill (and the bill gets bigger as you have more generations of remains to care for because there are more plots and current generations tend to be smaller than previous generations). This prevents land from being gobbled up by cemeteries in a way that is basically inalienable for residential development.

Yet another factor which both provides political motivations and influences the economics of housing, is that Japan, while it has significant income and asset inequality, like every capitalist country, has less income inequality than most Western countries do, which in turn, skews the incentives in the housing construction market less strongly towards the highest end housing.

Finally, housing demand in Tokyo is growing less intensely than many major cities due to a combination of factors:

• Japan as a whole has birth rates far below its death rates, with birth rates being lower in major cities just like almost every other developed country.

• Japan has little immigration, so it doesn't have a surge of foreign born people who need housing, driving demand.

• Japan's urbanization trend has come close to running its course. A large share of the formerly rural population that would have reason to move to a major city has already done so, so the pressure on housing demand from internal migration is not as intense as in countries that are in an earlier stage of urban migration. Some of this is due to physical geography, as much of Japan is mountainous and very expensive to develop high density housing upon as a result, so Japan's population has been concentrated in or near major urban centers that are suitable for this kind of development for a long time.

Answer 4

Singapore is another unique and interesting case. The majority of residents there live in public housing, which means the government effectively determines the prices most people are paying for housing. I'm not able to find any comparable cases, but it is one way to solve the problem.