Real Estate Markets Create Order

One of the most underrated facts about real estate markets is that markets create spontaneous order. It reflects the true preferences of people.

Consider this: there are restrictions against commercial enterprises and apartment buildings in your neighbourhood. If a store comes up, will this lead to less harmony? This is unlikely, because we find stores across neighbourhoods occupied by single-family homes. People do build houses across the street from such stores. Many even prefer to live across the street from commercial enterprises, because it is a matter of convenience. At the same time, it is more difficult for stores to attract customers in a residential neighbourhood because there is not much traffic. So, storeowners prefer to run their businesses on busy streets.

According to a recent newspaper report, commerce is making Coimbatore congested. These streets would not have become congested if people genuinely prefer to live far from commercial enterprises. Real estate prices would not have risen if these areas had not become more liveable.

Houston, an American city, is relatively free of zoning regulations. Housing prices in Houston are relatively low. This is partly because zoning regulations are almost non-existent. Did the absence of zoning lead to anarchy? Not really.  In the absence of zoning regulations, real estate developers, investors, firms and households react to incentives. In Houston, for example, heavy industries are near railway lines, and gas stations are near busy intersections. This is so, because it makes economic sense for firms to be located in areas where it is more convenient.

Firms and stores respond to the needs of people, and buy real estate in locations where they can more efficiently meet the needs of their customers. Businessmen earn profits by meeting the needs of people. A store that is not sensitive to the needs of customers will either go out of business, or will be forced to relocate to an area where it can profitably meet the needs of people. In fact, competition leads to the best possible land use in cities.

This is not true of urban planners, and other officials. They are not sensitive to market signals because their survival does not depend on the feasibility of zoning regulations. Government officials and policy makers are immune to competition.

It is possible that others do not share their aesthetic preferences. For example, a policy analyst who lives in a crowded neighbourhood may claim that he prefers to live in the pristine countryside. The sad truth is that it is difficult to take people's words at face value.

Real estate prices do not lie. Prices reflect the collective preferences of everybody. They may be wrong in having these preferences. But so long as they are willing to pay, it is reasonable to assume that their preferences are genuine.