Mark Thoma Points us to Robert Shiller on Unlearned Lessons

Did the false belief that land suitable for building houses was becoming scarce help to drive the housing bubble?:

.Unlearned lessons from the housing bubble, by Robert J Shiller, Project Syndicate: There is a lot of misunderstanding about home prices. 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 fuelled 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. ...

I think Shiller is largely right but for two things.

First, there are a small number of places on earth for which there is no close substitute: Santa Barbara, Aspen, Paris come to mind. Rich people will always outbid the rest of the world for these places, whose fundamentals are more similar to those of Monet paintings than real estate. But these are a very small number of places indeed, and we can argue about what they are.

Second, I think Shiller underestimates the power of NIMBYIsm to prevent housing construction. He should visit places like Mumbai and Johannesburg, where regulations limiting residential density have driven values well beyond what middle-income people in those places can afford. I agree that land shortages are an artificial, rather than a natural, phenomenon. But it remains a powerful phenomenon nevertheless.