Peter Ganong and Daniel Shoag write,
Though lawyers still earn much more in the New York area in both nominal terms and net of housing costs, janitors now earn less in the New York area after housing costs than they do in the Deep South. This sharp difference arises because for lawyers in the New York area, housing costs are equal to 21 percent of their income, while housing costs are equal to 52 percent of income for New York area janitors. While it may still be “worth it” for skilled workers to move to productive places like New York, for unskilled workers New York’s high housing prices offset the nominal wage gains.
Once again, land-use regulation is accused of being a major culprit. And along those lines, discussing Tokyo, Alex Tabarrok writes,
Rising housing prices are not an inevitable consequence of growth and fixed land supply–high and rising housing prices are the result of policy choices to restrict land development.
However, note that in a post devoid of politics or vitriol, Paul Krugman writes,
In today’s world, core headquarters functions – the stuff done by top executives and highly paid experts – can be unbundled from the more mundane operations of a company. These high-end functions are also the ones that benefit most from the agglomeration economies of a big city; not to mention the amenities such a city offers to people whose salaries are enough to let them afford decent housing despite high prices.
Meanwhile, it’s no longer necessary to have all the back-office operations in the same place, requiring that a lot of less-well-paid workers deal with high rents even as they suffer on the long subway ride in from Queens.
Pointer from Mark Thoma.
The point is that with modern communications technology, the upper echelons no longer have to be close to all of their mid-level staff.
This particular form of unbundling may or may not be the major factor. However, I think that patterns of specialization have shifted in ways that allow the affluent to invade some major cities and drive out the less-affluent. My view is that, as with colleges, affluent residents are a powerful attraction to other affluent residents, so that you head toward an outcome in which there is competition for “admission” to the high-end cities. For a variety of reasons, including differences in tastes, many of the less-affluent do not enter this competition.
Consider two types of jobs.
1. Jobs that can be ‘unbundled’ from location and done away from high rent areas. Ok, but if tech (cheap and quick comms and transport) makes that possible, then why not outsource to the cheapest place on earth, probably not in a high-wage developed country at all? Government regulations may require locals, but that’s probably a distortion
2. Jobs that
Whoops
2. Jobs that must be done in close proximity to coworkers, clients, suppliers, etc, and that benefit from or rely upon economies of agglomeration.
If the 1-jobs get outsourced, then the 2-jobs are what are left as sources of lucrative employment opportunities. That means people are doing tasks that effectively physically ‘tether’ them to other people, who are subsequently tethered to other counterparties in a giant spider web of proximity dependencies. That means more urbanization, more centralization, and more economic competition for (and productive value of) the zero sum resource of central real estate in the hubs of sectoral agglomeration.
Which is what is happening simultaneously across the entire developed world, the trend of which is only slightly alleviated or aggravated by local variance in land improvement regulation.
Handle:
I look at the list of 2-jobs and I notice that they tend to be highly regulated. For instance I notice that there is no lobby pushing for admitting indefinite numbers of Indian and Chinese immigrants to work as lawyers or doctors or senior managers. There is a very strong lobby pushing for admitting indefinite numbers of Indian and Chinese immigrants to work as engineers.
I also notice that programmers and engineers tend to support “red” government vice “blue” government.
I think that the 2-jobs might not be as firmly fastened to the global megacities as their current residents might hope.
http://marginalrevolution.com/marginalrevolution/2016/08/laissez-faire-in-tokyo.html
It seems like local variance in regulation can have a pronounced effect. It doesn’t change things much from London to NY to Seattle because it doesn’t vary much from London to NY to Seattle, but it *could* change things a great deal.
I read that, but I don’t think it made the case, because Tokyo and San Francisco from 1995-2015 do not have close to genuinely comparable situations or trajectories. But this is not the place for that debate.
Instead, ask this question about more comparable cities in the U.S. that have similar – at at least stable – zoning rules over that period. Why did the rent boom so high in some of those places and not others?
Well, dangerous to ‘reason from a price change’, but the first approximation answer is “demand increased to live in those places”.
Ok, but why is the demand for those particular places so price inelastic? Why does the rent keep going up in the Bay Area without deterring more and more people from trying to pile in and big prices up even more, whereas we don’t see this happen in areas with equally restrictive and stable land improvement regulation over the same time?
To me the answer must have something to do with most of those people’s “best alternative opportunity for employment.” (like the job+lifestyle equivalent of BATNA).
In other words, for more and more people with higher-skill incomes, the ‘net’ standard of living in a place where crazy levels of rent and taxes suck away huge fractions of their incomes is still higher than whatever the best job and living situation they could hope to obtain in a location with a much lower cost of living.
The problem is that the high paying jobs are, increasingly, only available in certain hubs, which is what makes the demand to live there so price inelastic.
I think Krugman is severely underestimating the importance of face-to-face meetings. At the upper end of the management chain it’s all about relationships and it is difficult, at best, to maintain those through a TV screen.
I’ve worked in departments that were offsite (in the same city even!) and the old adage “out of sight, out of mind” couldn’t be more true. Lots of important business happens in the hallways and around the water coolers.
Right. My DC government office is dramatically curtailing teleworking, much to the consternation of employees, after concluding that it made core management tasks too ineffective vs workplace proximity. Of course, that issue runs all the way up and down the hierarchy, which partially explains why many agencies and companies tend to centralize in one or several giant campuses even if the local rent is high. Indeed, DC is like a meta-campus of campuses all needing to be close to the center of gravity for proximate interactions the valuable qualities of which, for some intractable reason of fundamental human psychology, cannot be adequately substituted for by means of any current technology.
Handle:
I wonder how much the “big central campus” management mentality in government is due to the fact that most government work is impossible to value? In other words I take it as a tacit admission that access to local DC social networks are seen as more important by the senior management than efficiently doing whatever it is that government does?
I don’t buy the criticality of rhw management by walking around.
I do buy that managers want social networking and fear what they don’t see. My managers have always triple-booked meetings and I’ve never had bonded management.
But I would bet managers don’t want to appear to be lackadaisical in management style to other managers.
Rhw = the
Bonded = bonified
In the final analysis the why doesn’t matter. Only that the key decision makers feel it critical enough that they are willing to forgo the enormous incentive to relocate tasks to cheaper locations, and that no competitor is apparently able to capitalize on the potential arbitrage opportunity by lowering costs and undercutting prices.
To explain the persistence of this state of affairs requires recourse to some theory of market failure, or else accepting the likelihood of the possibility that proximity is indispensable even if extremely costly.
Right. Good management still means going down into the pits to see what the minions are up to. Holographic powerpoint presentations are not different in principle from carrier pigeons.
This is the important core of the housing boom. The private securitization boom was facilitating in-migration of aspirational workers into those cities. There was a large spike in out-migration of low income/low education households from the expensive cities during the boom. That’s why the latest research is showing that there was no mortgage expansion among marginal households. It wasn’t about finding marginal new borrowers, it was about giving qualified borrowers terms that would allow them to bid up Closed Access housing to a level that would induce this migration, which was the only way for them to tap into those labor markets. Aspirational households were bidding up closed access housing and working class households were moving out to flyover country, more typically as renters.
+1 in the broad sense. It doesn’t explain all of the housing bubble but it does explain many secular housing trends we are seeing.
To build on asdf’s comment, how can you reconcile these observations with the bubbles in places like Las Vegas, Arizona and Florida, which are mostly outside of the housing squeeze and saw the majority of their property prices rise in the suburbs?
Can’t wait for your book, btw.
Thanks!
There was a spike in migration that coincided with the private securitization boom. The expensive cities that won’t build any new housing stock had spikes of out migration focused on low income/education households who were driven out by costs. And the bubble cities took on those housing refugees. They had big spikes of in migration, even more than their generous housing markets could handle. We are just digging into the details now about more subtle characteristics of the migration.
As an aside, Taborrok’s writing on Japan was pretty sloppy. I’m against plenty of zoning shenanigans, but a lot of peoples analysis stops there without doing the empirical work necessary to figure out if their proposal makes much sense.
So we all know who the winner global cities are, and its a bit late to try and get in on that at some kind of deal rate.
Which mid-level cities are going to make the cut in the great centralization.
Denver?
Philadelphia?
Atlanta?
Raleigh-Durham?
Pittsburg?
Phoenix?
The Texas Cities
I have heard you make these comments elsewhere… You really believe that the very high housing costs found in, say, San Francisco or New York City (or really any major metro area in the Northeast or California) are not a result from land-use regulation? In other words, you think that the deregulation of land-use thirty years ago would not result in lower prices today?
Do you disagree with the “tests” outlined by Edward Glaser and Joseph Gyourko here: http://www2.oaklandnet.com/w/OAK036413? Take this fact: “Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000” (http://www.economist.com/news/united-states/21646221-americas-fastest-growing-metropolis-faces-up-cheaper-oil-life-sprawl?fsrc=scn/tw_ec/life_in_the_sprawl). What do you make of it?
Houston has lower density and more virgin land. In fact that’s true of all the booming Sun Belt cities. To get more dense, SF would have to build up. Houston isn’t building up. It’s building out. It’s a poster child for suburban sprawl.
http://www.interfluidity.com/v2/6487.html
He basically shows that the amount of building needed to simply stabilize current SF rents hasn’t been achieved since 1941. Basically, once the virgin land got filled in, building got a lot more difficult. A lot of these cities have really bad geography, there isn’t much more room. And building up is really hard, no city has really figured that out well. Not Houston, they build out.
This seems like a good reason, but it really isn’t. Is LA that different from Houston? Riverside? Sacramento? Even suburban San Francisco.
And there are plenty of developers who could easily build up in San Francisco. The city extracts fees amounting to $100+ per square foot to do it. The binding constraints are political and nothing else.
Whatever the source of the constraints, its simply true that we aren’t seeing higher densities get achieved elsewhere in the world where conditions are similar. If you can’t achieve a certain political objective despite all sorts of polities and cultures, maybe its just not possible.
It’s like people complaining that communism could work if only it were “really” tried. Communism had a pretty good run at it, more then enough empirical data to say it couldn’t work.
If dense vertical building in already crowded cities over existing land were some easily solvable social/political problem then you’d think someone somewhere would have already figured it out.
Alex Tabarrok’s post that Kling linked to provides the example that shows higher densities are possible: Tokyo. Take this quote from Robin Harding, whom Tabarrok quoted in his piece: “Here is a startling fact: in 2014 there were 142,417 housing starts in the city of Tokyo (population 13.3m, no empty land), more than the 83,657 housing permits issued in the state of Califoria (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).”
So the idea us that elites are using living costs as a filter to screen out competition.
But then why wouldn’t economics work and increase supply?
We know why supply doesn’t match subsidized demand when cost is used to screen out competitors in, for example, university. Because supply is restricted and subsidized demand is targeted to winner-picking.
The way costs serve as a filter is by constricting supply. Those cities are well past the cost level that would trigger supply. So, a unit that would cost $300,000 is already worth $1 million. To build it, you basically have to negotiate your way through a series of fees and kickbacks so that local governments and interest groups claim the $700,000 difference. It’s like third world governance with a functional bureaucracy. You don’t necessarily bribe anyone, but the parks department gets $100,000 per unit because your building throws a shadow somewhere for 30 minutes, and that money funds a healthy pension.
I’ve long looked at the modern cities like Boston or San Francisco as models of the post industrial economies. They are very good at creating high income jobs in finance, information technology, education and healthcare but they are poor at creating middle income jobs like you find in more traditional manufacturing and services. So people who qualify for the high income jobs move in and the people who have to settle for the moderate income jobs move out. This tend to occur without any constraints on home building but if the housing stock is constrained this pattern will be stronger, especially of the moderate-low income people and jobs leaving. My conclusion is that it is not just the constraint of housing but it also requires the market creating different types of jobs.