It's just human nature:
An often overlooked factor in rising home prices is the tightening of development restrictions in an area. This is especially true in areas experiencing rapid growth due to their climate, natural beauty, or other locational factors. The influx of more people normally changes the characteristics of an area. A major factor in the tightening of development restrictions has to do with human nature.With growth comes resistance to more growth:
We move to a new area for a variety of reasons. These may include economic prosperity and jobs, natural beauty, recreational opportunity, or for cultural amenities. Once we're there and enjoying our new area, we notice that more people are arriving at a rapid rate. These new arrivals are changing our environment in a way we might not have expected, nor in ways we enjoy. So, to try and protect the area and to keep it as it was when we moved there, we become active in the enactment of more restrictions on development.Even the simplest restriction increases costs:
Understanding the motivations behind these restrictions, it becomes easy to understand their influence on home prices. Anytime we add layers of bureaucracy or heightened building controls in an area, we also add cost to building homes there. Perhaps, in an effort to decrease population density, we increase the minimum lot size in our neighborhood. Obviously, a home suitable for a family of four is now more expensive because the lot is increased in size by legal means.Other restrictive covenants that increase costs:
This is a very human desire to close the door behind us once we find a really great place to live. We want to limit the new residents to people who enjoy the same things we do. We want to keep our area as it was when we arrived. There are so many restrictive development rules that illustrate this trend:
- an increase in minimum lot size.
- an increase in building setbacks, thus decreasing the usable land.
- an increase in minimum square footage for homes.
- more required greenbelt space for subdivisions.
- wider streets, lighting, wider sidewalks, etc.
Pay attention to these trends in your real estate investments:
The unfortunate consequence of these and other tightening restrictions is an increase in the cost of building. Whether we're looking for a home for a principal residence, or we are an investor looking for upside potential, we can't afford to overlook the effect of increasing development restrictions on home prices in an area.A real estate investor definitely wants positive cash flow. However upside potential is icing on the cake. Real estate investment opportunity is often the greatest in areas at the front end of a growth curve. More people means more demand. However as we've seen here, human nature brings about greater development restriction and higher building costs. Higher costs bring price appreciation and possible increased rental revenue. An awareness of this human tendency to close the door behind us can make a huge difference in the return on a real estate investment.
