Unlearned Lessons from the Housing Bubble
Robert Shiller, The Economists' Voice, July 2009
"Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates. That misunderstanding encouraged people to buy homes for their investment value - and thus was a major cause of the real estate bubbles around the world whose collapse fueled the current economic crisis. This misunderstanding may also contribute to an increase in home prices again, after the crisis ends. Indeed, some people are already starting to salivate at the speculative possibilities of buying homes in currently depressed markets. But we do not really have a land shortage. Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land. Less than 1% of the earth's land area is densely urbanized, and even in the most populated major countries, the share is less than 10%. There are often regulatory barriers to converting farmland into urban land, but these barriers tend to be thwarted in the long run if economic incentives to work around them become sufficiently powerful... Despite a huge twenty-first century boom in cropland prices in the U.S. that parallels the housing boom of the 2000s, the average price of a hectare of cropland was still only $6,800 in 2008, according to the U.S. Department of Agriculture, and one could build 10-20 single-family houses surrounded by comfortable-sized lots on this land, or one could build an apartment building housing 300 people. Land costs could easily be as low as $20 per person, or less than $0.50 per year over a lifetime. Of course, such land may not be in desirable locations today, but desirable locations can be created by urban planning. Many people seem to think that the U.S. experience is not generalizable, because the U.S. has so much land relative to its population...But, to the extent that the products of land (food, timber, ethanol) are traded on world markets, the price of any particular kind of land should be roughly the same everywhere...Shortages of construction materials do not seem to be a reason to expect high home prices, either. For example, in the U.S., the Engineering News Record Building Cost Index (which is based on prices of labor, concrete, steel, and lumber) has actually fallen relative to consumer prices over the past 30 years. To the extent that there is a world market for these factors of production, the situation should not be entirely different in other countries."
(Nod to Kevin L, who doesn't need land. He has evolved into pure energy, and exists in the atmosphere)