Have you ever wondered why some products, like the coveted Hermes Birkin bags, have an 18-month waitlist? This phenomenon is known as Artificial Scarcity (A.S.), a strategy where manufacturers choose to produce less, despite the capability to produce more. But why? The principle is simple but profound: scarcity fuels pricing, inflating it to extraordinary heights. Let’s start with the basics before we move onto Artificial Scarcity in real estate.
What Is The Economics of Scarcity?
Artificial Scarcity is a complex phenomenon that extends far beyond the world of fashion. Many industries across the globe have capitalized on this illusion of scarcity, both natural and engineered.
A $15,000 handbag may not cost more than $4,000 to produce, and with almost 250,000 already in existence, they’re not as rare as you might think. But the illusion sells, and it’s a highly profitable business.
From limiting paper towel production to raising prices or cutting back oil production in the wake of a global crisis, scarcity is a powerful economic tool. A limited edition artist’s work? It’s more valuable because there are only ten copies. DeBeers practically wrote the playbook on artificial scarcity by controlling the global supply of diamonds for decades, until that monopoly was disrupted.
Artificial Scarcity in Real Estate
But let’s zoom in on the housing world, where A.S. now is more prevalent than ever. Could we have built more over the past decade or so? YES. But many factors contribute to this artificially fueled scarcity, such as:
- Developers: Focusing on more expensive homes brings bigger profits, but it leaves many people unable to find affordable places to live. By building only high-end properties, developers make housing feel scarce for those on tighter budgets. This means more money for some but fewer choices for others.
- Governments: Local governments sometimes make building homes a slow, complicated process. By not offering incentives to build more affordable homes, they may think they’re being careful, but in reality, it leaves people struggling to find housing. The intentions might be good, but the results fall short.
- People: You’ve heard of not wanting something in your backyard, right? This NIMBY-ism leads to old and unfair zoning rules that stop new building projects. Communities may resist changes, but this can lead to less housing for everyone. It’s time to replace those old rules with ones that make sense for today’s world.
- Infrastructure: Think about your local schools, roads, and water supply. If they’re old and not well-maintained, building more houses can feel like a bad idea. Neighbors’ worries about these practical things are real and must be addressed. It’s like inviting friends over when you don’t have enough chairs – you definitely need to buy more chairs first.
- Politics: Different states and cities sometimes solve problems in a way that only benefits them, without thinking about how it might affect others. It’s like fixing a leak in your part of a shared boat but ignoring a hole on the other side – eventually, everyone might end up sinking. We need solutions that don’t just patch up problems for some but fix them for all, like working together to repair the whole boat.
A Diamond Isn’t Forever
While the saying goes that “a diamond is forever,” the scarcity surrounding them – and many other commodities – is not. The artificial scarcity in general as well as artificial scarcity in real estate, have led to significant, expensive problems that are costing us all.
Perhaps the time has come to reassess this strategy. Be more practical and take a broader, more inclusive approach to address scarcity. Whether it’s a shiny new car or an affordable home, understanding the mechanics of artificial scarcity can lead to smarter decisions, economically and socially.
After all, scarcity, whether artificial or real, has a real impact on people’s lives. And understanding it might just be the key to unlocking a future where all can thrive without waiting 18 months for a handbag.