Oligopoly harms housing affordability

Interesting paper from Jacob Cosman and Luis Quintero that finds the concentration of house builders has a significant impact on construction, and therefore availability and prices.

The research is from the US. But it is particularly concerning in Australia, where builders appear to be dropping like flies in the face of the downturn and investor pullback.

Our estimates suggest that in the average market a decline from six firms producing 90% to housing to five firms producing 90% of housing (the change in median from 2006 to 2015) with all else equal would lead to a reduction in the value of housing produced by 58%, a reduction in square footage by 60%, and a reduction in the number of housing units by 46%.

Of course there are particular reasons for increased concentration in the states, but it’s hard to imagine the same is true for the mechanism:

When many firms are competing to build, they build early to preempt their competitors. This increases total housing production, raises the volatility in the supply of housing, and creates a surplus of unfinished units. Conversely, in a more concentrated market, firms can time their housing production to maximize their profits without fear of pre-emption. This lowers production volumes but increases price volatility as firms with market power can opt to build when demand growth is strongest and charge prices higher above their marginal cost of production.

(My emphasis)