Thursday, April 27, 2006 | Our series on common real estate myths continues this week with a local favorite: the idea that San Diego’s limited supply of land justifies our recent home price runup and safeguards our city against a potential downturn in the housing market.

Proponents of this line of reasoning correctly point out that San Diego is surrounded. We’ve got ocean to the west, desert to the east, Pendleton to the north, and Mexico to the south. We are effectively boxed in.

The problem is that a limited supply of land does not entail limitless home prices – nor does it mean that prices can’t come down.

The significance of San Diego’s finite amount of buildable land is that at some point in the future, we will not be able to build any more. If and when we reach that point, housing supply will cease to expand.

But the fact is that we have not reached that point at all. Despite both the limited land supply and the zoning laws restricting the use thereof, plenty of homes have been built in recent years. Since 2003, according to the San Diego Association of Governments, or SANDAG, the supply of San Diego homes has actually grown at a faster pace than the population. And that trend has strengthened the entire time.

Hard-and-fast boundaries do nothing to explain a rapid price rise like we’ve seen over the past several years. San Diego has always had a limited land supply – it is not the case that this fact suddenly started to matter enough to cause home prices to double in the span of less than five years. It might be possible for such a price increase to justifiably take place if a city’s population suddenly grew in great excess to its number of homes. But that, as we saw in the last paragraph, did not happen.

But we can really dispense with all the theorizing. The historical record indicates very clearly that an upper limit on the supply of land by no means grants any sort of immunity to declining home prices.

Our very own city, surrounded on all sides by hostile terrain though it was, experienced a downturn in the housing market not so long ago. The Case-Shiller home price index shows that a typical San Diego home lost sixteen percent of its value between 1990 and 1995.

Japan provides a more dramatic example. Here we have a small and densely-populated island that is surrounded on all sides by ocean. It doesn’t get any more land-constrained than that.

Yet the Economist magazine tells us that after doubling between 1980 and 1991 (11 years? It took us less than five…), Japanese home prices declined for the next fourteen years, eventually losing about 40 percent of their value. Real estate in Japan has only recently begun to rise once again.

I am not by any means implying that San Diego is the next Japan. My point is that it just doesn’t hold water to argue that an upper limit on land area renders a city safe from a housing downturn. Just as that same constrained land supply fails to justify extremely rapid home price increases – especially if, as in our case, homebuilders haven’t had much difficulty in increasing supply.

San Diego in 2006 is certainly a special place, and there is only so much of it to go around. But the same could have been said about San Diego in 1990, Japan in 1991, or any number of land-constrained areas that have weathered housing busts. Being special isn’t the same as being invulnerable.

Rich Toscano is an independent real estate analyst residing in Hillcrest and working in La Jolla. He writes extensively about San Diego housing at Piggington’s Econo-Almanac.

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