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What’s the rush? New housing market absorption rate metrics and the incentive to slow housing supply

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  • Murray, Cameron

    (The University of Sydney)

Abstract

Why do housing developers voluntarily slow their rate of new housing production when they make money from selling new homes? This question lies at the heart of current aca- demic and political debates about the effect of planning and zoning on housing markets. Any answer must consider the market absorption rate—the rate of new sales that max- imises economic gains to property ownership over time. How this rate varies with market conditions, outside of any potential planning constraints, is hard to observe. We propose four new absorption rate metrics; 1) the development rate ratio (DRR), 2) development rate variability (DRV), 3) the delay premium ratio (DPR) and 4) delay premium variability (DPV). We calculate these metrics for a sample of nine approved major Australian housing subdivisions (>3,000 dwellings), showing the enormous variation in the pace of new housing lot supply and gains from delay. The average rate of new housing production is 34% of the maximum rate (DRR) and the minimum rate is just 7% of the maximum (DRV). Total revenue in these sample projects was 82% higher than the counterfactual of setting the price at the start and selling all new lots at that minimum price (the DPR metric). A 204% difference in total revenue was available if all new dwellings were sold at the highest observed price rather than the lowest price over the project life (the DPV metric).

Suggested Citation

  • Murray, Cameron, 2022. "What’s the rush? New housing market absorption rate metrics and the incentive to slow housing supply," OSF Preprints xscg5, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:xscg5
    DOI: 10.31219/osf.io/xscg5
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    References listed on IDEAS

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