Home economics

A LARGE PART of the recent growth in wealth—in some economies nearly all of it—consists of rising property values, according to Thomas Piketty’s analysis. House prices in many parts of the world have been booming for the better part of two decades. The biggest increases have been in rich cities such as London, New York and San Francisco.

Rising house prices are a response to an imbalance between supply and demand. Demand has been affected by the globalisation of economies. As transport costs started to fall at the beginning of the 20th century, many of the manufacturing firms clustered in cities in developed countries left in search of cheaper land and labour. This threw many of those cities into crisis as their tax base crumbled and their public services deteriorated, hastening the exodus. Yet starting in the 1980s cities that had retained a core of highly skilled workers enjoyed a rebound. Population decline slowed and eventually halted, and local economic growth and property prices picked up.

Ed Glaeser, an economist at Harvard University, links this turnaround to the ICT revolution. Cities enjoy a number of benefits that encourage people to live in them despite higher costs, crowds and congestion. A shorter distance between customers and suppliers (and indeed friends and lovers) is one. The ease with which ideas seems to spread within cities is another.

The Bay Area of California is a prime example: a place in which ideas seem to reverberate from person to person and firm to firm, and in which those with good ideas can easily tap into networks of engineers, designers and financiers. Similar forces are at work in other large cities around the world. In a paper written with Matthew Resseger, also of Harvard, Mr Glaeser finds a strong relationship between city size and productivity per worker, but only in places with highly skilled workforces. Carl Benedikt Frey and Thor Berger of Lund University note that since the 1980s new work has been getting much more cognitive in nature. They link this to the ICT revolution and to the rapid growth of cities with a core of highly skilled workers.

Yet since the 19th century a dense thicket of zoning regulations has grown up in many of those cities, sending the cost of housing skywards in attractive cities. A generation ago only a handful of cities on American coasts had housing costs much above the cost of new construction. Today most large cities suffer from such an excess, which represents a regulatory “shadow tax” on new construction. Indeed, most of the value of properties in places like London and New York reflects the difficulty of building new homes.

So even as large, high-skill metropolitan economies are becoming more important, they are getting less affordable for anybody but the rich, prompting migration away from the most economically dynamic places towards those that offer good jobs and allow lots of construction. The maths are clearest in America. In Harris County in Texas, which takes in most of the fast-growing Houston metropolitan area, the median household income is about $53,000 and the median value of an owner-occupied home is $128,000. In California’s Santa Clara County, which includes the heart of Silicon Valley, the median household income is over $90,000 and the median price of a home is $657,000. A Californian moving to Texas will almost certainly take a pay cut but nonetheless enjoy a higher disposable income.

The difference in housing costs is mostly due to different attitudes to building. Freewheeling Houston approved more than 51,000 new dwellings in 2013 whereas San Jose, home to some of the nation’s worst NIMBYs, approved just under 8,000.

The economic effect of keeping a tight lid on housebuilding is stunning. Enrico Moretti, an economist at the University of California, Berkeley, estimated the employment multiplier of different sorts of work in his book “The New Geography of Jobs”, published in 2012. A new manufacturing job, he suggested, typically creates 1.6 new jobs in the local service economy. In innovative industries, one new position might yield four to five new service-sector jobs within a metropolitan area. But vertiginous house prices stunt this effect. Rich Googlers in San Francisco spend money on homes that might otherwise go to local restaurants or gyms.

In developed economies, all this is having a negative effect on employment, productivity and output. A new paper by Mr Moretti and Chang-Tai Hsieh, of the University of Chicago, estimates that between 1964 and 2009 output in America was 13% lower than it might have been because high housing costs encouraged people to move away.

For homeowners in London, New York or San Francisco, this is all excellent news as long as they plan to sell up some day. Sky-high housing costs mean that more of the gain of new job creation is captured by landlords (or homeowners who get out) than by employers or workers. Technology has raised the return to living in high-skill cities, but has done nothing to make it easier to find a home there.

(Photo credit: STAN HONDA / AFP)