Target the planning laws not the one per cent

 

At FT.com Robin Harding (@RobinBHarding) has a very smart essay on the true cause of high real estate prices. This is a wide-spread disease, with familar standout cases such as London and San Francisco. Excerpt (emphasis mine):

About 40 per cent of the stated wealth of the UK – more than £3tn – does not exist. It is a terrible illusion. For the US the figure is about 12.5 per cent of total wealth, or $10tn, and growing fast.

The “assets” in question are what planning or zoning restrictions have added to house prices. They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions.

Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder.

[…snip…]

You might think the rise in house prices reflects a natural scarcity of land. Britain is a small island; San Francisco sits on a narrow peninsula. However, the best available studies suggest that the vast majority of this rise in urban house and land prices reflects not natural scarcity but planning restrictions.

A clever 2005 study by American economists Edward Glaeser and Joseph Gyourko compares the price of an extra square foot of land attached to a house (a slightly bigger back yard, perhaps) with the average price of a square foot of land under a house in the same city. If the problem is a natural shortage of land, the two prices should both be high because it is profitable to build on the back yards until the two prices converge.

That is not what happens, however. In the cities of coastal California, the average price of urban land is 10 times the price of land in a back yard because zoning laws make it impossible to turn one into the other. In Los Angeles, the price of the extra square foot on the garden was $2.60 while the average price of urban land was $30.44. In San Francisco, the back yard land was worth $7.84 per square foot, versus $63.72 on average for the same lot.

The ratio of these two figures – as much as 10 to 1 – suggests only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions.

Paul Cheshire and Christian Hilber at the London School of Economics applied the same trick to British and European offices in 2006, with terrifying results. For the well-heeled West End of London, the cost of planning restrictions was eight times the cost of actually building an office. In Birmingham, it was 2.5 times the cost of building the office. This was not because land in the West Midlands is desperately scarce – just land you are allowed to build on is scarce.

We have many examples of localities that have avoided the housing-tax (Austin, Houston, Dallas). However, I don’t know of any cases where the populace has chosen to tear down the restrictions on building. There are powerful incentives for the present property owners to prefer that prices keep climbing.

Politician are not keen to educate the populace about the full cost of their preference for building restrictions. E.g., the total economic loss caused by preventing workers from moving from relatively low to relatively high productivity areas. We know that a Haitian taxi driver’s productivity improves by roughly 10x if she can move to New York. Same job, but her productivity is automatically so much higher because the value of her service is proportionately higher. The same applies to a software developer moving from Oklahoma to San Francisco.

My Haitian taxi driver case illustrates that building restrictions have costs similar to immigration barriers. Progressives are more likely to recognize the need for immigration reform, whilst vigorously “protecting” their Manhattan or Palo Alto neighborhoods. The terrible costs of these “protections” weigh most heavily on the poorer demographics. Robin closes with this:

These rules have added billions and billions of dollars to the price of housing, money that must be paid to those who already own houses by those who do not. If we want to make society fairer and more equal, just let people build.

Mark Hogan on San Francisco’s housing shortage: “Living in a Fool’s Paradise”

“… the current state of permitting regulations for building and the glacial pace of infrastructure projects in San Francisco benefit very few people and risk turning it into a caricature of its former self for tourists and residents rich enough to live in a fantasy, not a living city. If there was ever a time when San Francisco needed to embrace a dynamic, expansive policy for building housing, offices and transportation, it is now.”

San Francisco architect Mark Hogan wrote a very smart and well-informed essay Living in a Fool’s Paradise for the Summer 2014 issue of Boom A Journal of California. In this essay Mark tackled the very prickly issue of how San Francisco became “the most-expensive large city in the United States”.

If you have seen any of the media reporting on San Francisco housing prices you have probably been reading about how city residents want to evict the “rich Google and Apple techies” who are thought to be responsible for making their neighborhood unaffordable. That favored media meme converts the real supply/demand economics into a human-interest story about evicted single mothers and Google-bus protests.

The true story is more complex. Mark moved to San Francisco in 2003, when it was feasible for a young architect to rent an apartment in Lower Nob Hill. Specializing in urban housing, Mark has experienced the inevitable price impacts of extremely restricted housing supply. In this essay he recounts the story of anti-growth Bay Area housing policies and some pragmatic solutions.

San Francisco has had a very strong tendency to try to stave off change through regulation and legislation. Limiting growth artificially usually has many unintended effects, however, as there is no way to prevent people from moving in, and we probably wouldn’t want to if we could. For individuals who want to live in walkable neighborhoods with reliable access to public transportation, there are not that many places in the Bay Area that are as attractive as San Francisco. The city is at or near the top of this list regionally, nationally, and even globally. The demand for such beautiful city living is not going away. It’s only going to increase.

Mark’s analysis reminds us of Ed Glaeser’s Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier. Harvard’s Glaeser has made a deep study of urbanization including supply/demand for space of all types. Mark Hogan offers his first-hand perspective – informed in part by his current position as Chair of the Housing Committee at the AIA San Francisco. You can follow Mark’s thinking at http://www.markasaurus.com and on Twitter @markasaurus.

Image credit america.aljazeera.com

 

From subsistence farming to prosperity?

Nairobi 2009

[Image Nairobi 2009 ©Corbis, Nigel Pavitt]

For several years I’ve been writing about the development challenge — what policies are the most effective to help Paul Collier’s “Bottom Billion” escape from poverty to our world of prosperity? There are a number of central ideas which I think of in an interdependent relationship: (Industrial agriculture, urbanization, cities) => (Ideas, innovation, economic growth) => (Women control their own fertility, women’s education, population growth stabilizes). This virtuous pyramid rests on a foundation of affordable, low-carbon energy.

The purpose of this post is to offer recommendations for print, audio and video resources on these topics.

A good place to begin is with iconic ecologist Stewart Brand:  Environmental Heresies at MIT Technology Review “The founder of The Whole Earth Catalog believes the environmental movement will soon reverse its position on four core issues.” Rethinking Green (video, SALT lecture). And his 2010 book Whole Earth Discipline.

For a current and informed view of development challenges and progress, see the 2014 Gates Letter “3 Myths That Block Progress For The Poor”.

Are you concerned that population growth is out of control? Then read the recent essay by Stanford professor Martin Lewis “Population Bomb? So Wrong”. Marian Swain at the Breakthrough Institute looks at the current situation for population growth rates, carbon free energy, food supplies and development in Four Surprising Facts About Population: Why Humans Are Not Fated to Ecological Disaster. I’m reasonably confident that you will have fewer population nightmares after watching Hans Rosling in the BBC documentary “DON’T PANIC — The Facts About Population“.

My current favorite introduction to both climate change and energy policy  is Stanford University nuclear physicist and Nobel laureate Burton Richter’s 2010 book: Beyond Smoke and Mirrors: Climate Change and Energy in the 21st Century. It is very accessible to the non-technical reader, and balanced in the presentation of energy policy options. Dr. Richter calls energy-policy winners and losers as he sees them.

For an overview of agricultural reform try Pamela Ronald and Raoul Adamchak’s “Organically Grown and Genetically Engineered: The Food of the Future” [video of their SALT talk], [the book at Amazon]. On agriculture and urbanization, try Why big dams and big ag are good for the poor (transcript of interview with Harvard’s John Briscoe).

Regarding urbanization: ideas come from places where people congregate – in particular cities. Innovation comes from banging ideas against each other. And the central engine of economic growth is innovation – both in the form of new technologies and new institutions (or rules). This is one of the insights that made Paul Romer one of today’s most influential economists. Romer’s “endogenous growth theory” or “new growth theory” is sure to win him a much-deserved Nobel Prize. From Dr. Romer’s Stanford biography:

(…) The contrast between the economics of objects and the economics of ideas is the thread that runs through my work. In graduate school, I wondered why growth rates had been increasing over time. Fresh from cosmology, I was not motivated by policy concerns. It just seemed like an important puzzle. Existing theory suggested that scarcity combined with population growth should be making things worse, but they kept getting better at ever faster rates. New ideas, in the form of new technologies, had to be the answer. Everyone “knew” that. But why do new technologies keep arriving at faster rates? One key insight is that because ideas are nonrival or sharable, interacting with more people turns out to make us all better off. In this sense, ideas are the exact opposite of scarce objects. (See my recent paper with Chad Jones for more.)

For an introduction to Romer’s growth theory I recommend Paul’s chapter “Economic Growth” inThe Concise Encyclopedia of Economics, and the Econtalk interview “Romer on Growth” (if you prefer to read, see the full transcript).

Paul Romer’s current project is Charter Cities, a pragmatic scheme to overcome the development bottleneck of bad rules (for examples of bad rule systems think of Haiti, Zimbabwe, North Korea). I am persuaded that the Charter Cities concept has a chance to evolve into an effective development tool, and continue to find every Romer presentation fascinating. There are two TED Talks so far: Paul Romer’s radical idea: Charter cities (2009) and Paul Romer: The world’s first charter city? (2011 regarding Honduras).

For a 2011 look at cities as idea- and hence prosperity-generators, Harvard’s Ed Glaeser is getting a lot of favorable comment on his 2011 book Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier. Glaeser is the subject of an excellent Freakonomics Radio podcast [MP3], and the London School of Economics lecture of the same title. See also the LSE review of Triumph of the City.

More on cities, ideas and growth: why do cities seem to be able to keep growing while most corporations die? Geoffrey West and colleagues at the Santa Fe Institute have been searching for a common theory which might answer that question. Geoffrey recently gave a thoughtful lecture at the Long Now Foundation (SALT).

Lastly, on the same theme, Steven Johnson’s 2010 book Where Good Ideas Come From: The Natural History of Innovation is summarized in his TED Talk: Where good ideas come from, and in his recent RSA Animate lecture of the same title. Enjoy!  

3 great housing policy ebooks: The Triumph of the City, The Gated City, The Rent is Too Damn High

The past year has seen three sharp minds applied to revolutionizing housing policy – I recommend them all. If you are new to this topic you will probably find Ryan Avent’s Kindle Single to be the most approachable.

Ryan Avent: The Gated City $1.99

Matt Yglesias: The Rent is Too Damn High $3.79

Ed Glaeser: The Triumph of the City $12.99

Cities are key to global carbon limits

Harvard’s Ed Glaeser was interviewed by the European Magazine. Ed is author of the excellent Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier. There are many important points, including the possibility that development policy could significantly reduce the per capita energy intensity of the ongoing urbanization. The future much richer Chinese peasant could require an energy footprint more like Hong Kong than Houston.

Such an ultradense pathway is not a sure thing – just look at the sprawl of Beijing and Shanghai, which have less than one tenth the density of NYC and half the density of LA. The challenge for the West is to help the Chinese, Indians et al achieve the French path (of 80% nuclear electricity).

Here’s an excerpt on that point:

The European: Could moving people into cities be a sustainable solution for emerging economies dealing with the issues resulting from growth?

Glaeser: From an environmental standpoint it seems very clear that it needs to be done. But you have got to do it in a way that makes sense: Part of the issue with African poverty is that as long as people remain rural, they will be whipsawed by every environmental hazard that comes along. By engaging in subsistence agriculture, there is no way to for them to take advantage of the global trading system. I want to make it clear that I am not an environmental expert, but some regions may end up losing as a result of changes of the environment and others regions may end up benefitting. Areas that now are cold may end up being easier to grow on just as areas that are hot now may end up being worse to grow on. If you are part of the global trading system, you will be able to take advantage of wheat grown in Canada or in Siberia. If you are not, if you are a subsistence agriculture country, then every famine that hits rural Nigeria will leave thousands dead. It is easy to see the benefit that comes from a transition out of agriculture towards a more urban future.

Concerning the environmental impact, it is clear that if everybody remains in rural poverty, there won’t be much going on in terms of carbon emissions. But I don’t think we can possibly hope for that. If you compare countries that are more than 50% urbanized with countries that are less than 50% urbanized, incomes are five times higher in the more urbanized countries and infant mortality rates are less than a third in the more urbanized countries. The path of rural poverty really is awful. But there are different paths and if for example the great growing economies of India and China see their carbon emission levels rise to the level seen in sprawling United States, global carbon emissions will go up by 120%.

But if they stop at the level seen in hyper-dense but still prosperous Hong Kong, global carbon emissions go up by only 25%. So, density is a way of managing growth so that it involves less carbon emissions in the future.

Highly recommended. Read the whole thing »

Detroit’s Decline and the Folly of Light Rail

Harvard’s urban economist Ed Glaeser wrote this little essay last spring. US president Obama and his advisors really need to spend some time with Glaeser. Here’s a fragment of Ed’s concluding paragraph:

(…) The defining characteristic of declining cities is that they have plenty of infrastructure relative to the level of demand. Detroit didn’t need the People Mover—an expensive monorail that glides over empty streets. And today, a Light Rail project is being pitched by the federal government, which seems to have learned nothing from the failures of past follies.

Neither Detroit nor the U.S. suffer from any profound transportation problem that can only be fixed with vast federal spending. The country doesn’t need more People Movers. It needs unleashed, educated entrepreneurs—and they will only be held back by taxes being funneled into fanciful make-work projects in a futile attempt to fix our economic malaise.

The locavore’s dilemma

Don’t miss Harvard’s Ed Glaeser on the fantasy of “urban agriculture.” Isn’t it odd that most people seem to appreciate that it doesn’t make sense to make their own shoes, pencils or iPhones. But somehow it is a “good thing” to grow their own food. As a hobby, of course, gardening is satisfying, relaxing. But somehow this is generalized into the locavore philosophy of “local food good, agriculture bad”.

The locavores might learn from interviewing a few African farmers on how wonderful it is to grow their own food.

(…) The connection between higher density living and less energy use is strong. Urban farms mean less people per acre which in turn means longer drives and more gasoline consumption. Shipping food is just far less energy intensive than moving people. If the First Lady wants to help the environment, she should campaign for high rise apartments, rather than plant vegetables.

Ed Glaeser: Why Cities Rock

Another excellent Freakonomics Radio podcast [MP3]. I’m looking forward to reading Glaeser’s new book Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier. From the blog:

When Edward Glaeser looks at a map, he sees something different than many people. Glaeser’s world is one in which cities are the engines that drive the world. Wide-open spaces are nice, but when people live atop one another, they exchange ideas, create wealth, and live longer and happier lives as well. Glaeser is an economist at Harvard and, while his work celebrates the success of city life, it also questions why we have so many incentives opposed to it — tax breaks that encourage people to buy single-family homes in the suburbs, subsidies for roads and high-speed rail that help create sprawl. We spoke to Glaeser about his new book, “Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier.” In this podcast, he tells the story of how the young naturalist Henry David Thoreau inadvertently destroyed a big patch of nature, and why Glaeser believes that blacktop is greener than grass.

[From Why Cities Rock]

Is “to Kindle” in the vocabulary yet?

How skyscrapers can save the city

Harvard real estate economist Ed Glaeser has an excellent essay in The Atlantic. The analysis and history is largely based on NYC, but the principles are universal. Example:

The relationship between housing supply and affordability isn’t just a matter of economic theory. A great deal of evidence links the supply of space with the cost of real estate. Simply put, the places that are expensive don’t build a lot, and the places that build a lot aren’t expensive. Perhaps a new 40-story building won’t itself house any quirky, less profitable firms, but by providing new space, the building will ease pressure on the rest of the city. Price increases in gentrifying older areas will be muted because of new construction. Growth, not height restrictions and a fixed building stock, keeps space affordable and ensures that poorer people and less profitable firms can stay and help a thriving city remain successful and diverse. Height restrictions do increase light, and preservation does protect history, but we shouldn’t pretend that these benefits come without a cost.

(…) But one of the advantages of building up in already dense neighborhoods is that you don’t have to build in green areas, whether in Central Park or somewhere far from an urban center. From the preservationist perspective, building up in one area reduces the pressure to take down other, older buildings. One could quite plausibly argue that if members of the landmarks commission have decided that a building can be razed, then they should demand that its replacement be as tall as possible.

The cost of restricting development is that protected areas have become more expensive and more exclusive. In 2000, people who lived in historic districts in Manhattan were on average almost 74 percent wealthier than people who lived outside such areas. Almost three-quarters of the adults living in historic districts had college degrees, as opposed to 54 percent outside them. People living in historic districts were 20 percent more likely to be white. The well-heeled historic-district denizens who persuade the landmarks commission to prohibit taller structures have become the urban equivalent of those restrictive suburbanites who want to mandate five-acre lot sizes to keep out the riffraff. It’s not that poorer people could ever afford 980 Madison Avenue, but restricting new supply anywhere makes it more difficult for the city to accommodate demand, and that pushes up prices everywhere.

Again, the basic economics of housing prices are pretty simple—supply and demand. New York and Mumbai and London all face increasing demand for their housing, but how that demand affects prices depends on supply. Building enough homes eases the impact of rising demand and makes cities more affordable. That’s the lesson of both Houston today and New York in the 1920s. In the post-war boom years between 1955 and 1964, Manhattan issued permits for an average of more than 11,000 new housing units each year. Between 1980 and ’99, when the city’s prices were soaring, Manhattan approved an average of 3,100 new units per year. Fewer new homes meant higher prices; between 1970 and 2000, the median price of a Manhattan housing unit increased by 284 percent in constant dollars.

Bad land use is not just a western problem. E.g., dynamic cities such as Mumbai are being crippled by wrong-head regulation. You know the traffic and congestion in Mumbai is mind-boggling. Did you know that this is largely due to a 1.33 maximum floor-to-area ratio?

The public failures in Mumbai are as obvious as the private successes. Western tourists can avoid the open-air defecation in Mumbai’s slums, but they can’t avoid the city’s failed transportation network. Driving the 15 miles from the airport to the city’s old downtown, with its landmark Gateway of India arch, can easily take 90 minutes. There is a train that could speed your trip, but few Westerners have the courage to brave its crowds during rush hour. In 2008, more than three people each working day were pushed out of that train to their death. Average commute times in Mumbai are roughly 50 minutes each way, which is about double the average American commute.

The most cost-effective means of opening up overcrowded city streets would be to follow Singapore and charge more for their use. If you give something away free, people will use too much of it. Mumbai’s roads are just too valuable to be clogged up by ox carts at rush hour, and the easiest way to get flexible drivers off the road is to charge them for their use of public space. Congestion charges aren’t just for rich cities; they are appropriate anywhere traffic comes to a standstill. After all, Singapore was not wealthy in 1975, when it started charging drivers for using downtown streets. Like Singapore, Mumbai could just require people to buy paper day licenses to drive downtown, and require them to show those licenses in their windows. Politics, however, and not technology, would make this strategy difficult.

Mumbai’s traffic problems reflect not just poor transportation policy, but a deeper and more fundamental failure of urban planning. In 1991, Mumbai fixed a maximum floor-to-area ratio of 1.33 in most of the city, meaning that it restricted the height of the average building to 1.33 stories: if you have an acre of land, you can construct a two-story building on two-thirds of an acre, or a three-story building on four-ninths of an acre, provided you leave the rest of the property empty. In those years, India still had a lingering enthusiasm for regulation, and limiting building heights seemed to offer a way to limit urban growth.

But Mumbai’s height restrictions meant that, in one of the most densely populated places on Earth, buildings could have an average height of only one and a third stories. People still came; Mumbai’s economic energy drew them in, even when living conditions were awful. Limiting heights didn’t stop urban growth, it just ensured that more and more migrants would squeeze into squalid, illegal slums rather than occupying legal apartment buildings.

Singapore doesn’t prevent the construction of tall buildings, and its downtown functions well because it’s tall and connected. Businesspeople work close to one another and can easily trot to a meeting. Hong Kong is even more vertical and even friendlier to pedestrians, who can walk in air-conditioned skywalks from skyscraper to skyscraper. It takes only a few minutes to get around Wall Street or Midtown Manhattan. Even vast Tokyo can be traversed largely on foot. These great cities function because their height enables a huge number of people to work, and sometimes live, on a tiny sliver of land. But Mumbai is short, so everyone sits in traffic and pays dearly for space.

Is it a surprise that Singapore has so few of these planning mistakes? Read the whole thing »

Edward L. Glaeser: Behind the Population Shift – NYTimes.com

Edward L. Glaeser: Behind the Population Shift – NYTimes.com:

Why is housing supply so generous in Georgia and Texas? It isn’t land. Harris County, Tex., which surrounds Houston, has a higher population density than Westchester County, N.Y.

A rich body of research shows that regulation, which is intense in the Northeast and California but lax in the Sun Belt, explains why housing is supplied so readily down South. The future shape of America is being driven not by quality of life or economic success but by the obscure rules regulating local land use.

In a sense, the anti-regulation crowd is right that the laissez-faire attitude of the South and West explains their recent growth. But the usual argument focuses on the wrong regulations.

Housing regulations, more than those that bind standard businesses, explain the Sun Belt’s population growth. If New York and Massachusetts want to stop losing Congressional seats, then they must revisit the rules that make it so difficult to build. High prices show that the demand would be there if the supply is unleashed.