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The supply limit on ocean front property was created in some earlier geologic age and should long ago have been capitalized in the price of ocean front realty. Thus high prices for ocean front property, but no guarantee that the price can only go up.
On the contrary, the rental price increase assumptions that determine the price premium for ocean front property may be much more uncertain than the future rental assumptions that apply elsewhere, and revisions to these ocean front fundamentals over time as more news arrives can cause large swings in the value of ocean front property, down as well as up.

Likewise, whatever effect the anti-growth forces may have had on California p/e ratios should have been absorbed by the market long ago, and is not a reason for continued appreciation of housing prices. Thus, when Steven Cochrane of Economy.com is reported by the Los Angeles Times to say, "With limited inventory and tightly controlled lending for new projects, the industry runs ‘no risk of collapse’ even if the economy stumbles," he is completely wrong. Even with absolute supply constraints, like the ocean front, asset prices can fall, and, if they do, that will surely be accompanied by a sharp drop in transactions and construction.

I think that what the California housing market has been struggling to value in the 1990s is not antigrowth government actions, but rather the uncertain persistence of the impact of the defense cutbacks in Southern California in the first half of the 1990s and the uncertain persistence of the impact of the New Economy tech boom on Northern California in the last half of the 1990s. The rise in the Southern p/e ratios comes from our ability, finally, to get beyond that difficult defense cutback. The stratospheric p/e ratios in the North require that the Tech effect on the North is very permanent.

But remember Survivor Investing requires a story. This story about ocean front property never falling in price is a good one, rivaling the New Economy story. The story that California anti-growth restrictions mean that housing cannot collapse is another good one. If enough buyers and sellers think this way, then the market can validate this thinking for a long time. But in the longer run, there has to be a comeuppance. In the meantime, there are two investments I wouldn’t be making: Pets.com.revival and overpriced real estate.

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* Edward E. Leamer,
Director, UCLA Anderson Forecast.
Check the link for author's profile: http://www.anderson.ucla.edu/faculty/edward.leamer/pdf_files/cv.pdf