Posted Friday, Feb. 10, 2012, at 9:35 AM
What impact should we expect the Facebook IPO to have on housing prices in the Bay Area? Matthew Kahn sums up what we know:
There are millions of homes in the greater Bay Area in California. If thousands of newly minted Facebook multi-millionaires seek their dream home in the area, how will local real estate prices change? The NY Times presents a strong article. In my 2011 piece, I present evidence that liberal cities tend to issue fewer housing permits than other communities. Albert Saiz has written an important paper documenting how topography influences housing supply. Combining the insights from both of these paper, there won’t be much new housing supply in response to this demand shock so existing homes will be bid up in price. What trickle down effects will this have on the rest of the market? Bay Area foreclosures should decline and incumbent home owners will gain a windfall. Property tax revenue will soar in these counties and this should help the local public schools.
This is all true but I think it paints an unduly optimistic picture of the consequences of restrictive permitting policies. Note that a house is both land and a structure. Whether or not the supply of houses increases, the value of the land is going up and so incumbent "home" (i.e., land) owners will gain a windfall one way or the other. Similarly, property tax revenue would soar even more in counterfactual scenario where the Bay Area witnesses a boom in construction since taxes are levvied on the value of both land and structures. What's more, more residents would mean more income and sales tax revenues. The benefits to the local community of restricting housing supply are largely illusory. The issue is that even though almost everyone in the Bay Area would benefit from more housing density in the Bay Area, most people prefer that the additional density be added someplace other than the immediate vicintiy of their house and so it ends up going nowhere.
This is, however, a deeply dysfunctional dynamic. In The Gated City, Ryan Avent observes that population in the Silicon Valley area actually fell at the height of the 1990s tech boom. Try to imagine the birth of the great American industrial clusters if the invention of mass produced automobiles hadn't led to large-scale population migration toward Detroit? You can't have a boom without boomtowns.