Real estate boom of the 1970s

A rapid increase in commercial and residential building and prices

Forces that acted to increase demand for real estate met with forces acting to decrease the supply of real estate during the 1970’s, creating a boom. Many demographic, regulatory, and economic causes were behind the precipitous rate of growth in real estate prices during this time.

Historically, owning one’s own home has generally been considered an important part of the American Dream. During the 1970’s, more homes were built, larger homes were built, and in turn, those homes were sold at prices that rose faster than the rate of inflation. Combined with an increase in the building of commercial spaces during this time, the real estate boom of the decade was a growth industry in an otherwise lackluster economic climate.

Between 1970 and 1980, the number of housing units in the United States grew by 29 percent—roughly twice the rate of the previous decade and the decade that followed. Fueling this rising demand for housing were the now-adult children of the baby boom, who were renting their first apartments and buying their first houses and condominiums. While the number of housing units was growing quickly, average household size was shrinking during this time as a result of divorce and smaller families. Despite this fact, the size of the average house was increasing, growing from an average of 950 square feet just after World War II to 1,400 square feet in 1970.

Inflation

The presence of growing price inflation in the economy made real estate an attractive form of investment during the 1970’s. Inflation, which had averaged 2-3 percent during the 1960’s, had steadily grown to a rate of 5-12 percent during the decade—levels that had not been experienced during peacetime in nearly a century. Real estate was seen as an inflation-proof investment in part because land is a finite commodity and in part because the price of real estate was rising steadily.

During a decade in which the overall price level rose 90 percent, the median price of a new home had grown from $23,400 in 1970 to $64,600 in 1980—an increase of 176 percent. By comparison, new house prices had risen about 50 percent during the 1960’s. Traditional investments in stocks and bonds were much less attractive during the 1970’s, and the Dow Jones Industrial Average ended the decade only 31 points higher than it had been in 1970.

The Role of Regulation

Against this backdrop of increased demand, real estate development costs were increasing during the 1970’s. Some of the increased costs of building came from regulations prohibiting development in environmentally sensitive areas such as wetlands and floodplains. Land that might have been filled in and built upon in previous decades became off-limits for development. These new regulations limited the land on which houses and commercial developments could be built and resulted in higher prices for the remaining land.

Zoning regulations were tightened in many localities during the 1970’s, which also resulted in higher real estate prices. Many municipalities introduced zoning regulations for the first time during the decade, in the process restricting the land available for commercial and residential construction. Towns and cities that had welcomed development during most of the postwar era were becoming concerned about the demands that further development would place on services such as water systems, police and fire protection, and schools. In an attempt to reduce the building of apartments and smaller, cheaper “starter homes,” which paid lower property taxes than larger homes, many zoning authorities increased the minimum lot size for homes, placing further pressure on land prices.

The federal income tax system did not change appreciably during the real estate boom, but it too played a role in the increased demand for real estate. The purchase of a primary residence is not a tax-exempt purchase, but interest paid on the mortgage to purchase a residence is deductible for tax purposes. The same is true of commercial real estate. The highest personal income tax rate during the 1970’s was 70 percent. Real estate owned for one year or longer qualified for treatment as a capital gain, which lowered the tax paid on the profit realized from the sale of the property to a maximum of 35 percent. When the benefits of interest deductibility for homeowners was added to the possibility of a potentially large capital gain, which would then be taxed at a lower rate than ordinary income, the benefits of owning real estate were particularly attractive to investors who were not enjoying similar benefits from traditional investments in the financial markets.

Impact

Many incentives were in place to encourage investment in real estate during the 1970’s. As a result of inflation and regulatory incentives, as well as disincentives, more capital was invested in real estate and less in the types of assets that could boost productivity and enhance future living standards for Americans.

Bibliography

“American Survey: Boom, Baby, Boom.” The Economist, September 16, 1978, 52. Short article on the effects of urban sprawl and increasing prices in and around Washington, D.C.

Maloney, Laurence. “Houses in the ’80’s: Smaller, Fewer, Costlier.” U.S. News and World Report, April 2, 1979, 54. A review of the causes of the real estate boom of the 1970’s and its projected effects on the early 1980’s.

“South Californian Bubble.” The Economist, July 2, 1977, 44. A comprehensive review of the economic factors behind the boom, paying particular attention to land restrictions and their role in rapidly increasing prices.

“Starting to Put Up Office Buildings Again.” Business Week, February 13, 1978, 33. Provides a perspective on the real estate boom from the view of commercial real estate in Chicago.