Living in cities lets us reap the benefits of agglomeration: being near others in similar or complementary industries makes each of us more productive. Wages are higher in cities not because of the cost of living but rather because people are more productive there - otherwise, firms would just move out to the sticks. Higher productivity in cities is what allows the cost of living there to be higher.
In the latest AEJ: Microeconomics (ungated), Ortalo-Magne and Prat build a nice little model explaining how urban homeowners manage to appropriate the agglomeration gains. They invest in housing, then vote against any policy that would allow the supply of housing to increase, whether from suburban growth or increased density. When cities can't grow up or out, prices go up.* The better the city, the stronger the incentive for homeowners to start siphoning out the agglomeration gains via restrictive housing policy. Here's their political economy mechanism:
...we assume that (i) adding a house to a city requires a building permit, and that (ii) local residents have a say (vote) on the number of permits to be issued every period. The issue of building permits affects voters through three channels. First, new housing construction reduces their housing rents for the remainder of their lives. Second, lower future rents imply an immediate drop in the price of their housing investment. Third, voters may capture some benefits from any windfall gains deriving from the new construction permits if permits are sold to developers and the revenues are used for local services (for example).
...We find there are stationary equilibria, where a city is below its optimal size, yet the median cohort and all older agents oppose urban growth because they have made sizeable housing investments. Agents also continue to invest heavily in housing, because they expect the majority to oppose urban growth in the future. Before they made purchase decisions, all agents would have preferred a larger city, so that housing would have been cheaper and more people could have located there but the equilibrium is sustained because the median voter is someone who already owns housing.They find that subsidising housing encourages greater investment in housing and greater homeowner opposition to urban growth, making housing even more expensive. Other implications:
- Moving land use authority away from local governments and up to central government shifts the identity of the median voter and reduces the rentiers' power;
- Splitting up cities into multiple smaller competing jurisdictions can facilitate greater housing supply: basically, the permit fees paid by a developer are split across the smaller number of people in the smaller jurisdiction, but the capital losses from lower house prices are spread over the broader jurisdiction.
* I'm sure I stole this line from Ed Glaeser.
The problem in the NZ context is that central governments are also dominated by homeowners. Just look at the national obsession about how the OCR might affect mortgage rates, or the opposition to any form of CGT that affects housing. The median central govt voter is also a homeowner.
ReplyDeleteSeems like a problem solved by "land value tax-"man to me. Like most things.
ReplyDeleteI would argue that "if cities can't grow OUT, prices go up". The ability to grow "up" or not is a red herring. There is no affordable high density city in the world. Every affordable city is a low density one. This is just basic reality. Everyone from Ed Glaeser down should be able to see this.
ReplyDeleteWhen a city can't grow "out", every "housing unit" tends to embody a form of "monopoly rent". The permitted size of lots merely determines the price of land per square foot. A low density unaffordable city like Boston has the same problem as Auckland: fringe land owners where development is zoned for, "holding out" for maximum "planning gain". But when there is a large minimum lot size mandate, developers will not pay as much for the raw land. In Auckland they are paying up to $2 million per acre, cramming in as many 1/10 of an acre lots as possible, which have to sell for around $300,000 each. They can't pay $2 million per acre if there is a 1 acre minimum lot size mandate because they wouldn't be able to clear the market at the prices they would need to ask.
The same goes for "intensification", when a city cannot grow "out". The taller the building you permit, the bigger the site rent. There is no reduction in the economic rent embodied in a "housing unit". How does Hong Kong have median multiples of around 15, when its housing unit average size is about 1/8 of that of pretty much all median-multiple 3 cities in the USA, and these are stacked vertically leading to an overall density around 80 times greater?
The land rentier vested interests LOOOOOOVE UGB's combined with "freedom to build UP". The big fat lie that building "up" results in affordability, obviously comes from their bought-and-paid-for stooges somewhere along the line.
If you can grow "out", everything is cheaper. Small apartments are far cheaper than in cities that can't grow "out". But because decent housing is affordable, fewer people choose the tighter accommodation. Because land is always so cheap in such cities, there is very little saving to be made by having a 1/10 of an acre lot rather than a 1/4 acre one. "Splatter" developments are often done on $20,000-per-acre land. Even close to the very centre of a city like Houston, land prices are probably not as high as what Auckland developers are paying for fringe GREENFIELDS.
When Glaeser's favourite Manhattan evolved, and re-evolved, there were no restrictions on the New York urban area growing "out". Median multiple 3 housing was the norm in the miles and miles of low density suburbia stretching away into the hinterland. "Option values" - i.e. of location would have kept Manhattan land rents lower than otherwise, and Glaeser's theory would be correct because of this - that is, apartments in Manhattan could be cheaper if more "building up" was allowed, but I would bet that there would be a bit of an apartment bubble first and the "affordability" would only come later when reversion to mean occurred. The elasticity of supply on building "up" can never be anything like "freedom to grow OUT" supply elasticity.
But allowing "building UP" in Boston, would not create affordability and it will do nothing for affordability in Auckland either. New York urban area has, by the way, gone unaffordable lately because its fringes, dozens of miles from Manhattan, have run up against strict "rural" zoning in surrounding municipalities. This will create a ripple effect in the option values throughout the urban area. We will have to wait and see what that does to land rent in Manhattan.