Argument Analysis: Real Estate

http://www.economist.com/blogs/freeexchange/2011/11/real-estate
Real estate
Consumption goods are often production goods
Nov 7th 2011, 15:14 by R.A. | WASHINGTON * *
WHEN you buy a computer, is that a consumption good or a production good? Think about that, then read this Megan McArdle post on how residents of expensive cities shouldn't complain about their relatively low real wages:
The fact is that living in an expensive city is a consumption choice.
You hear this argument all the time from people in New York. "Rich? Hah! We've got four people in 1600 square feet, and our school bills are going to put us into bankruptcy." Many New Yorkers believe that they should be given some sort of income tax abatement because of the expense
of living there (with the lost revenue being made up from "really rich" people, natch). Slightly less affluent New Yorkers frequently believe that landlords should be forced to offer them "reasonably sized" apartments at a modest fraction of their income, because after all, otherwise they couldn't afford to live in New York...
There's a sort of irritating supposition in all of this that living in New York (or San Francisco, or Boston) is something that just happens to you, like getting cholera. And that therefore high incomes, expensive real estate, and so forth, somehow don't count for the purposes of assessing how well off you are relative to the rest of society. In fact, perhaps society should get busy making it up to you for all the hardships.
Perhaps we should offer such a perceptual discount to the small number of people who really couldn't make anything like their current incomes in any other place--investment bankers, some securities lawyers, a handful of entertainers and creative types. But in most cases, this is ludicrous. For starters, not everything costs more--online purchases, to name just one obvious example.
And so on. Now, the choice to live in an expensive city is clearly associated with considerations about consumption amenities. But it is not simply a consumption choice. It is also a production choice. Ms McArdle quickly mentions that investment bankers might not be able to earn quite as much outside of New York but that for most people the difference in production opportunities doesn't much matter. That is not what economists tend to find. In fact, there is a broad relationship between large cities and the return to skills. Skilled individuals in many industries are more productive and better compensated in big, high-skill cities like New York, Boston, and San Francisco—places that are remarkably expensive.
Now, to the extent that the choice to live in a big city is about consumption, high local housing costs have an evening effect: they imply that recent growth in inequality is overstated. To the extent that the choice to live in a big city is about production, high housing costs are a significant problem. They imply that a country's most productive cities are constrained at sizes well below the optimal level, and they represent a signficant tax on and deterrent to skill accumulation.
That doesn't mean that skilled residents of big, rich cities ought to be subsidised, but their complaints should be heeded. Expensive cities are expensive in large part because of the constraints zoning rules place on housing supply growth. Regulatory constraints on building represent a tax on households that rises to and above 50% of housing costs in some cases. That people who have worked hard to obtain useful skills can only realise their full productive potential in places where housing costs are twice what they ought to be due to zoning should be cause for outrage, not snide remarks.
One other quick note: American households spend the vast majority of their incomes on housing, transportation, energy and utilities, and food. I'm not sure exactly what impact the expense of "online purchases" has on the total cost of living, but I believe it's safe to consider it a rather minor portion of the typical budget.

http://www.economist.com/blogs/freeexchange/2012/05/housing-markets-0
Housing markets
Two productivities
May 29th 2012, 18:01 by R.A. | WASHINGTON * *
FREQUENT readers will be well aware of my (let's not say obsession with) attention to the relationship between land-use restrictions and housing costs and the impact of that dynamic on productivity and innovation.
Infrequent readers can visit this post for a taste of the argument. Given my interest in this area, I was (let's not say overjoyed) intrigued at the arrival of this new NBER working paper, entitled "Metropolitan land values and housing productivity" in my inbox. Best news: the paper provides more evidence in favour of my general
hypothesis.
The authors, David Albouy and Gabriel Ehrlich, put together an index of housing productivity, which measures how successfully different metropolitan areas turn the inputs into housing (land, materials, and labour) into places for people to live.
Cities in which the gap between input costs and housing costs is low are productive in housing while those with a large gap are housing unproductive. Unsurprisingly, productivity is negatively correlated with geographic and regulatory constraints, and with housing costs. And unsurprisingly, hotbeds of NIMBY sentiment like San Francisco and Boston are very unproductive in housing. Among large metropolitan areas the five cities with the highest housing productivity are Houston, Indianapolis, Kansas City, Forth Worth, and Columbus. California accounts for the five lowest productivity cities (and the Bay Area for the worst three): San Francisco, San Jose, Oakland, Los Angeles, and Orange County.
What's particularly interesting about the paper is its analysis of housing productivity vis-a-vis productivity in output of tradable goods. While it's occasionally assumed that the two are two sides of the same coin they are in fact negatively correlated. Cities with high productivity in tradable goods, like those in the Bay Area, have among the lowest housing productivity. Which results, of course, in high housing costs and—shifting to my argument—migration away from places productive in tradables and toward places that build a lot of
housing.
The authors extend their analysis to consider the nature of the discrepancy. In general, they write, productivity in tradables is increasing in scale; trade productivity rises with population and population density. Housing productivity is decreasing in scale; cities become less successful at adding housing as they grow larger. The authors relate these dynamics to positive and negative externalities. On the tradables side, more people means deeper markets and more knowledge spillovers, boosting productivity. On the housing side, more people means more congestion, blocked views, and so on, leading to higher demand for regulation and less new construction. Their analysis turns up a weak positive relationship between quality of life and low housing productivity. The authors observe:
These results help to rationalize the existence of welfare-reducing regulations, if the benefits accrue to incumbent residents, who control the political process, while the costs are borne by potential residents, who do not have a local political voice.
Here's the concluding paragraph:
The pattern of housing productivity across metropolitan areas is also illuminating. Cities that are productive in tradeables sectors tend to be less productive in housing as the two appear to subject to opposite economies of scale. Larger cities have lower housing productivity, much of which seems attributable to greater regulation. These regulatory costs are associated cross-sectionally with a higher quality of life for residents, although this relationship is weak, suggesting that landuse regulations lead to net welfare costs for the economy as a whole.
Exactly. Now one difficult-to-answer question concerns the magnitude of these welfare losses. I tend to think they're meaningful if not earth-shatteringly large. Perhaps most important, the ICT revolution seems to be generating a secular increase in the positive spillovers of metropolitan size and density, such that the welfare costs of land-use regulation have been rising over time. Attention should be paid.