Over at the New Geography, Joel Kotkin has an essay up on how the UK’s neglect of white poverty, and the lessons it may entail for the US. Particularly haunting:
Rising housing prices, driven in part by “green” restrictions on new suburban developments, have further depressed the prospects for upward mobility. The gap between the average London house and the ability of a Londoner to afford it now stands among the highest in the advanced world. Indeed, according to the most recent survey by demographia.com, it takes nearly 7.1 years at the median income to afford a median family home in greater London. Prices in the inner-ring communities often are even higher. According to estimates by the Centre for Social Justice, unaffordability for first-time London home buyers doubled between 1997 and 2007. This has led to a surge in waiting lists for “social housing”; soon there are expected by to be some 2 million households–5 million people–on the waiting list for such housing.
link: The Future Of America’s Working Class | Newgeography.com
American Smart Growth researchers tell me that restrictions on the suburbs do not reduce the supply of housing, and thus do not raise house prices. Instead, housing gets supplied through more density and smaller units; the land consumption goes down, the housing supply goes up nonetheless; creative financing and better mortgage instruments enable home ownership among those whose finances would be strained by having a car or a house.
This is hard for me to believe past a certain level of metropolitan population.
First off, if banks or anybody else with money to lend actually believed in the location efficient mortgage, why haven’t they been all over LEMs by now? Every other riff on mortgage innovations that promised profits–no matter how ill-advised– took off like wildfire over the past 10 years. In an LEM-thriving world, people would be trying to cook their “I’m so close to transit score” the way they’d like to cook their credit scores. Yet for the most part, people with cars have more money than people who don’t. I have yet to see research that really convinces me that, expensive though cars are, they really aren’t better at enabling higher long-term returns to wealth for individuals than transit is, cheaper though it is. Saving yourself the on-average $8000 a year cost by not having car is financially dumb (for individuals) if the car would add more than $8000 to your productivity, including the marginal increase in the number of consumption and production possibilities you get and can trade against each other.
The endogeneity problems here are daunting. Do people have cars because as they get wealthy they buy more expensive things, or do people with cars see real returns in wealth from the spatial expansion of consumption and production opportunities made possible, unfortunately, with cars? Chances are, both, and it’s hard to suss those relationships out empirically.
Looking at the price differentials between cities, it seems pretty clear that high land values prompt densities through markets and politics, along with a political impulse to place restrictions on growth. Once some level of population gets surpassed, it has to put upward pressures on prices in a way that outpaces wage growth; island city-states are a good example.
How do we break open the cycle between affordability and growth controls once you reach 10 million in population, give all that entails for the land needed for both housing and economic production?
Is an impact fee a growth control or a reasonable imposition that links infrastructure provision to the impact of new development? Is exclusionary zoning a growth control or a mechanism to ensure fiscal balance in a Tiebout world? Are the low sticker prices of housing in Houston and Dallas a good thing because they pose few barriers to entry, or a bad thing because they create few incentives for reinvestment in the standing stock? What are the costs of unregulated development? And what are the full benefits?
It’s interesting that so many urban and housing economists (not to mention Kotkin and other liberatarian pundits) have not absorbed the lessons of environmental economists who study (for example) regulation of air pollution; we know by now that we need a comprehensive view of both the costs and the benefits of a regulatory regime before we finish the evaluation. But for the last 40 years, most economic studies of land-use regulations have ended after finishing the cost side, and then have mainly stuck to the sticker price of houses (often failing to consider other costs like property taxes, which are a lot higher as of % of houses Texas than they are in California). “Regulations raise average sales prices by X%,” these studies often say, leaving open the “therefore” part that the reader can only infer: “therefore, we should not regulate housing production.”
Then, of course, we (planners) need to know to whom the benefits and costs accrue. And only then should we decide on a course of action. Should we (a) not regulate, because low-income people bear more of the costs and upper-income people most of the benefits (even if they also enjoy some — and perhaps a disproportionate share — of the protections, which rich people can buy by seceding in gated planned communities)? or (b) try to capture some of the benefit and redistribute it so that low-income people enjoy more of it? I know which answer I choose, but we don’t even get to start fighting about this unless we hear the full story of costs and benefits.
It seems like you and I are asking the same questions. I come from environmental economics, Rolf, so the urban side of my economics training has come later. One of the things we accept in environmental economics is that production and consumption externalities cause overproduction and overconsumption, and Pigouvian and Coasean interventions can both move us back to a more socially reasonable level. I’m usually among the first to argue that mobility via autos is overconsumed, but I am less sure about whether the answer there is plying people with speculative transit investment or whether driving should be just more expensive flat out so that people are smarter and more responsible about how they use the car.
Housing a tougher nut for me to wrap my head around. Yeah, people can overconsume it, with all the consumption externalities that entails. I’ve got no heartache with pulling in on the McMansion phenomenon.
But you if you look at the problem I am considering, it’s not the Portland case or the Denver case or the Minneapolis case. It’s the high population case–the limiting case–where we run out of technology and financial feasibility to build higher, where land is getting very very expensive, and where at some point the “low end”of the market becomes higher and higher than most people can get to. Most US regional housing markets aren’t even remotely there. London may actually be; Singapore; Hong Kong; etc.
The answer seems to be (b), right? That’s the break in the cycle. But if the history of the US is any indicator, we’re kind of bad at b, particularly in housing market interventions. So if we were to press me for an answer, I’d say the problem is a combo: the political and social acceptability of growth controls combined with the political and social acceptability to provide demand-side subsidies for housing. So we end up with the first part, the higher cost case (not a problem, as we are trying to defray other costs as you note), but without a serious treatment of the distributive and social consequences that entails for people who are low-income.
From an economist’s point of view, the question isn’t whether we intervene in the housing market, but when and how. Even I agree that market intervention is appropriate when (1) externalities are present; (2) public goods are at issues; or (3) inequities exist. The interventions are supposed to correct these market imperfections.
I agree with Lisa that “American Smart Growth researchers” claim that growth controls don’t decrease the supply or increase the price of housing. Perhaps in theory that may be true in some circumstances, but not in practice. I don’t see any research that claims that regulation increases the price of housing (which is undoubtedly true), therefore let’s get rid of regulation.
The problem as I see it is that the specious claims of “American Smart Growth researchers” seem to be part of the “false environmentalism” that we have. NIMBYs claim that we need to keep housing out for environmental reasons, but they are just protecting their investments in their property (the same thing that developers do and are labeled as “greedy”).
The U.S. is just zoning for dollars these days. The regulatory interventions not only exacerbate the inequities, but are specifically intended to exacerbate the inequities. When planners can cite the “breakeven” price of a home in their communities (as 90% of the ones I talk to can) something is wrong.
The land trust movement is part of this “tyranny of the favored quarter” also. Land trusts try to put perpetual conservation easements on every square inch of their communities to keep those pesky low- to moderate-income families out.
Have either of you seen the cost of community services “studies” that communities are using to justify exclusionary zoning? Methodologically flawed and impropertly used. Still, some “economists” promote them so that they can reap substantial consulting fees by telling local governments what they want to hear. I wouldn’t be able to look at myself in the mirror if I did that.
Good stuff, Lisa. Keep it up.
I have been trying on and off to get the regulars at Planetizen to admit that steep rises in the price of ALL urban land, consequent on urban limits being imposed or tightened, becomes the main obstacle to all development anywhere, good as well as bad.
Look at the difference in inner city apartment prices in Houston compared to the California smart growth bubble markets. In which jurisdiction is it more likely that more people will choose to live in the inner city? Planners simply must confront the issue of affordability. No-one has yet been able to explain to me how it is possible to have Houston’s low cost inner city apartments without Houston’s lack of urban limits and cheap urban fringe land which acts as a price dampener for ALL urban land.
I hypothesize that “Smart growth” will actually only work if the “urban limits” aspect is abolished – all the other ideals in it can be retained. As soon as the land values start to bubble, you can’t achieve ANYTHING.