Fixed Supply of Single-Family Houses

Part 10 of... "6 Tax Breaks Landlords Get that Hurt the Economy and You"

Usually, when the government gives tax breaks to some people to buy and own a product it doesn’t hurt other people. If the government lowered taxes on cars for some people, that wouldn’t make cars much more, or any more, expensive for other people.

The people with the tax break wouldn’t have to buy cars away from the people without the tax break because global car manufacturers would just increase their production as needed within several months or a year. Car prices wouldn’t necessarily go up much, or at all.

Houses are different. The supply of houses increases extremely slowly and is fixed in the short run. In addition, houses are immobile. You can’t import houses from Japan or Germany when the demand for houses increases in your town.

The natural economic ecology of a product with such a fixed, inelastic supply like houses is that prices are very sensitive to increases in demand. Small increases in demand for single-family houses cause surprisingly large increases in house prices.

House Supply More Fixed Than Gold Supply

I did a quick search online a few years ago and found the supply of single-family houses in the U.S. is more fixed than the supply of gold globally. And since you can’t ship houses to wherever demand is highest like you can with gold, the supply of houses in the average U.S. neighborhood is far more fixed and inelastic than the supply of gold internationally.

Because the supply of houses increases more slowly than the supply of gold, house prices are naturally very sensitive to increases in demand. Small increases in demand for single-family houses – for any reason – cause surprisingly large increases in house prices. 

An economic historian, for example, documented a large housing boom and bust in Amsterdam in the mid-1600s… and another in the early 1700s… and another in the late 1700s.

200 Years Of Amsterdam Housing Bubbles

SOURCE: WORKING PAPER, “THE FIRST HOUSING BUBBLE? HOUSE PRICES AND TURNOVER IN AMSTERDAM, 1582-1810,” MATTHIJS KOREVAAR, 2018.

Houses are naturally prone to price bubbles because the amount of money chasing houses can increase a lot faster than houses can be built whether in the mid-1600s or 2021.

It doesn’t matter why the money chasing houses is increasing, only that the money chasing houses is increasing faster than houses.

Next

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All

Part 1 – 6 Tax Breaks Landlords Get that Hurt the Economy and You

Part 2 – Depreciation Tax Deduction – (Tax Deferral)

Part 3 – 1031 Exchange – (Tax Deferral)

Part 4 – Mortgage Interest Tax Deduction – (Tax Reduction)

Part 5 – Tax-Free Landlord Profit – (Tax Deferral)

Part 6 – Taxes on Capital Gains are a Lot Lower Than Taxes on Ordinary Income – (Tax Reduction)

Part 7 – Stepped-Up Tax Basis – (Tax Reduction)

Part 8 – 6 Distortions of the Housing Market

Part 9 – 2 Sets of Rules for Single-Family Houses

Part 10 – Fixed Supply of Single-Family Houses

Part 11 - Houses for Homes, Not Tax Shelters

Part 12 - Solutions

Part 13 - Permanently Increase Economic Growth

Part 14 - Life is Crazy Enough

Part 15 - The Hardest Part

Part 16 - Distorted Back to Reality

Part 17 - Stop Distorting the Housing Market

Part 18 - Conclusion