Efficiency in housing production
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Real Estate Watch
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Economic, social or regulatory changes that take place in the medium and long term constantly redefine this institutional frontier and condition the development of the real estate market and, with it, the development of the industry operating in it. In this respect, a regulatory framework that foments and favours the development of the market will be more propitious for generating efficiency gains in real estate development than more discretionary regulatory environments, where "rent seeking" is stimulated as a way of obtaining extraordinary profits and takes priority over improvements in efficiency.
c) More Oocal aspects
The real estate markets are extremely locally-oriented. On the one hand, local administrations' capacity to determine the uses of land and to establish the processes for transforming the same or granting building permits leads to wide differences arising between the different local markets. On the other, the degree of concentration of the construction industry in each municipality conditions the level of competition amongst the players.
In respect of local administrations' capacity, in the markets where there are fewer restrictions to real estate development, the availability of land is generally greater and there tend to be fewer barriers preventing the entry of competitors in the market. In these markets, the development business can respond more rapidly to increases in demand, gaining in efficiency and keeping prices more stable.
In the markets where there are limitations to development, either because the land policy is restrictive or because the number of building permits are limited, developers cannot respond adequately when there is an increase in demand, and this generates increases in prices. In the circumstances, the developers who have land or a permit may receive a "premium" for this without there necessarily having been any efficiency gains.
In these restrictive markets, having land for operating in the long term thus becomes a fundamental strategic element for the companies and so they will tend to accumulate more land in their portfolios than in markets with fewer restrictions. Since a wider margin is generally obtained in these markets from the availability of land or permits than from efficiency gains, companies' efforts focus more on obtaining land than on improving efficiency.
In relation to the concentration of industry, in the markets where there is less concentration and a larger number of developers, competition foments the improvement in companies' efficiency. In the markets where supply is highly concentrated and competition is less fierce, developers have fewer incentives to improve their production processes.
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