One common argument against new housing is that the laws of supply and demand simply don’t apply to dense cities like New York, San Francisco ands Hong Kong, because new housing or upzoning might raise land prices.* After all (some people argue) Hong Kong is really dense and really expensive, so doesn’t that prove that dense places are always expensive?
A recent paper by three Hong Kong scholars is quite relevant. They point out that housing supply in Hong Kong has grown sluggishly in recent years. They write that in the late 1980s, housing supply grew by 5 percent per year. But since 2009, housing supply has grown at a glacial pace. Between 2009 and 2015, housing supply typically grew by around 0.5 percent per year; in the past couple of years, it has grown by between 1 and 1.5 percent per year. The authors note that these numbers actually overstate supply growth, because they do not include housing that has been demolished.
Not surprisingly, housing prices have grown more in recent years. In the 1980s, housing costs increased by roughly 1 percent per year; in the past decade, costs have risen by as much as 3 percent per year. (Figure 4d). Thus, Hong Kong data actually supports the view of many American scholars that housing prices tend to be highest in places where housing supply fails to grow.
Why is supply stagnant? The authors point out that in Hong Kong, as in some U.S. cities, government limits housing density through floor area ratio regulations. And because Hong Kong land is government-owned, the local government can restrict housing supply by refusing to sell vacant land. Because high land costs mean more revenue for the government, government has an incentive to sell land slowly in order to keep land prices high. Finally, government has not made up for this supply gap by building public housing; the percentage of the city budget devoted to public housing has decreased from 14 percent in 1989 to 7 percent today.