Just a quick post here. Bill McBride, like many others, thinks that rising population implies that housing prices should have a long-term upward trend. I'm not sure he's right. McBride writes:
A key reason for the upward slope in real house prices is because some areas are land constrained, and with an increasing population, the value of land increases faster than inflation...The bottom line is there is an upward slope to real house prices.I'm not sure this is true. The reasoning is intuitive: More people + same amount of land = land is more scarce. But here's why I think that reasoning is not quite right: Most of the value of land is the value of its proximity to centers of economic activity. Any urban economic model that incorporates geometry, geography, etc. will tell you this.
In other words, New York City real estate is high-priced because New York City is an agglomeration of economic activity. It is not high-priced because an increasing number of people are being forced to live in New York City. That isn't even the case! No law makes people cram themselves into NYC (except in that Kurt Russell movie!); you are legally free to move out to North Texas and get a nice ranch. People choose to live in the heart of New York City because of the economic (and social) opportunities offered by proximity to all the other people living there. So they're willing to pay lots for land.
To use an old real estate cliche: Location, location, location.
So will land-use restrictions around big cities cause land prices there to increase? Maybe, maybe not. If those land-use restrictions hurt agglomeration, they will choke off the economic value of living in the city center, which might lower land prices. Also, a lot depends on what else is going on in the region, and in the rest of the country. Agglomeration effects can be weirdly non-linear and history-dependent. You can even have long-term de-agglomeration, simply due to shifting geographic patterns of trade and industry; as an example, just look at the Rust Belt. Even if land prices up-trended nationally due to population pressure, regional prices might experience long secular downtrends due to rearrangements of national economic activity.
Also, there's technology, which can change a lot faster than population. Urban economists like Masahisa Fujita will tell you that once transportation costs get really low - for example, the more we switch to a digital online economy - the less economically important it is for companies and people to be in close physical proximity. That will cause land prices to decline in some places, and rise in others, even as total economic value increases across the country. And if the imperatives of those technologies cause land-use restrictions to be altered, all bets really are off. Remember, the total amount of American land actually occupied by humanity is tiny. And (as a commented points out), there is plenty of unoccupied cheap land in the near vicinity of many cities.
So I say, don't fall for the easy logic of more people = more expensive land. It might work that way, but it very well might not.
Update: Paul Krugman has some data to back up my suspicion; it turns out that the average American actually lives in a less densely populated area than a decade ago. My suspicion is that this trend stretches back farther than the year 2000. But as Krugman notes:
McBride’s point that actual real housing prices do seem to have an upward trend remains important, and needs explaining.My intuition says that it's because we've been occupying larger and larger living spaces. Now, that wouldn't always tend to raise land prices (maybe it happened because agglomeration effects decreased), but if it indicates a shift in consumer demand for dwelling space, it would. If the value of proximity stays the same and people at a given spot choose to spend their money on bigger dwellings, they'll crowd each other out, and land close to agglomeration centers will become more scarce. Also, it might be that agglomeration effects themselves have increased in some places like San Francisco and New York, where industrial clustering in tech and finance has raised the value of living close to other people in the same industry. Anyway, if I had more time, I'd look up data and try to solve the mystery; those are just guesses.
Update 2: A couple more issues I didn't raise before, but which are interesting:
* In the very long run, McBride is right; if population goes up enough, land prices will eventually have to rise. But there's good reason to think we'll never reach that very long run. American fertility rates are slightly below replacement levels, and most rich countries are far lower; developing countries aren't far behind (China's working-age population is already falling, India and Latin America and Southeast Asia are all at or near replacement levels). Our population is growing slowly and steadily because of immigration, but that will eventually trickle off as countries' incomes converge around the world (Mexican immigration is already at zero or negative). So even if population growth is positive right now, expectations of long-term future population growth may be negative or flat, which might affect land prices.
* If median incomes fall, people will have less to spend on land, which will exert downward pressure on land prices. This has been the norm in America for over a decade now; no one knows if it will continue.
* Public transit policy matters. If cities build a lot of light rail, a lot of people can give up their cars, freeing up lots of urban land that used to be garages and parking lots.
* For many investors, what matters for housing as an investment is not really whether land prices rise, but whether they rise faster than overall GDP (or some other benchmark like the risk-free rate or the stock market). Since population growth raises GDP, it's not clear whether any realistic amount of population growth will make land appreciate faster than - or anywhere near as fast as - the economy's stock of productive assets.
So these are all caveats to think about before concluding that population growth gives land a long-term upward price trend.