Land supply restrictions in two states slowed US growth big time



The principle of competitive land supply – Anthony Downs


via Florida Repeals Smart Growth Law |

Urban planners are confident souls


from The transformation of cities: A suburban world | The Economist via

The economic forces underpinning the housing affordability crisis

The key point is that increases (declines) in demand can bring sharply rising (falling) house prices when supply is constrained. However, when land supply is not regulated, it adjusts to demand and house price volatility is reduced.

As long as commentators focus primarily on the demand side of the housing market, whilst ignoring supply-side constraints, they will never fully understand the drivers of housing bubbles and busts. The resulting incorrect diagnosis will inevitably lead to poor policy prescriptions and outcomes.

via The Truth About the U.S. Housing Market | Seeking Alpha

Housing affordability and land regulation around the globe

Auckland is up with London and New York in terms of housing unaffordability relative to median incomes. US cities with responsive land regulation don’t experience housing bubbles.

Glaeser and Gyourko summarised the findings of a number of studies  on land supply and housing prices:

Recent research also indicates that house prices are more volatile, not just higher, in tightly regulated markets …. price bubbles are more likely to form in tightly regulated places, because the inelastic supply conditions that are created in part from strict local land-use regulation are an important factor in supporting ever larger price increases whenever demand is increasing.

…. It is more difficult for house prices to become too disconnected from their fundamental production costs in lightly regulated markets because significant new supply quickly dampens prices, thereby busting any illusions market participants might have about the potential for ever larger price increases.

Via The Truth About the U.S. Housing Market | Seeking Alpha.

Land use regulation knocks 10 points of US GDP!

Bloomberg Business highlighted a great new study by Enrico Moretti on power of the regulatory restrictions on land supply to destroy wealth.

Moretti focused on the impact that restrictions on land supply have on the ability of workers to move to higher productivity cities. Moretti is the second best urban economist working at the moment. The best is Ed Glaeser. Moretti concluded that

A limited number of American workers can have access to these very high-productivity cities

He concluded that a more efficient distribution would be “a general benefit for the entire economy.”

The secret of his analysis was to look at how different US cities, the high productivity cities, contributed to national economic growth. He then explore the implications of fewer and fewer workers been able to move to these cities to take advantage of the great productive potential. The barrier to them moving was high housing prices and high rents.

For example, labour productivity grew quickly in San Francisco, New York and San Jose overt 45-years. All of these cities are famous for their human capital-intensive industries including technology and finance. These cities weren’t America’s growth engine:

The reason is that the main effect of the fast productivity growth in New York, San Francisco, and San Jose was an increase in local housing prices and local wages, not in employment.

Despite the large difference in local GDP growth between New York, San Jose, and San Francisco and the Rust Belt cities, both groups of cities had roughly the same contribution to aggregate output growth.

The drivers of US growth between 1964 and 2009 were southern U.S. cities and 19 other large cities. These cities attracted many residents because of good weather and abundant supply of cheap housing.

The lesson both the US and for New Zealand, and Auckland in particular, is this reallocation of population away from the expensive cities with restricted land supply reduced national output because these population movements bring workers to cities "where the marginal product of labour is low."

In a technology boom town such as San Francisco, it is now what like New Zealand will be as Generation Rent runs its course – 65% of residents are renters:

Over the past year, the City and County of San Francisco boasted the second strongest labour market in the nation, adding 25,000 new jobs. Yet only 2,548 new housing units were permitted and even fewer were built.

Just think: 25,000 new workers and their families have been knocking on San Francisco doors, but there are new units for less than 10 percent of them. It is not surprising that apartment prices get bid up.

Sorry @WJRosenbergCTU the class war has been based on a measurement error! The real class enemy is the RMA and restricted land supply – updated again

The other day, I replied to a rant by Bill Rosenberg about the decline in labour share of national income and its implications for income inequality and the great wage stagnation. The labour share of national income has dropped by at least 5% in most countries including New Zealand.

New data from the USA has found that the entire declining the value of the share of labour of national income is due to home ownership:

…the net capital share has increased since 1948, but when disaggregated this increase comes entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other.

The capital share is rising because of the increased value of housing in countries with widespread home ownership. The concentration of capital ownership and wealth in the top 1% was a misplaced concern based on measurement error.

Piketty assumed the returns to capital were increasing across the entire economy. Rognlie found the trend to be almost entirely isolated to the housing sector. His 23 page long conference paper at the Brookings Institution started as a comment on a blog post on Marginal Revolution.


Source: Brad DeLong

When Rognlie adjusted for the rapid depreciation inherent to investments in capital such as computer software, most of the rest of the increase in the capital share in recent decades in the USA and six other countries has came in housing.

Source: Business Insider

A single sector such as housing is not the force that is shaping past and future of inequality as Piketty and others such as Bill Rosenberg in New Zealand have assumed. They attributed a growing share of income going to capital across the board as Tyler Cowan explains.

In the simplest version of the Piketty model, wealth grows more quickly than does the economy as a whole and thus the picture changes. The relative losers are no longer low earners but rather anyone who is not a capitalist. Any disparity is due not to their shortcomings in labour markets but rather to their lack of a high initial endowment.

The main driver of inequality is the tendency of returns on capital to exceed the rate of economic growth and company shares, businesses and other capital are owned by a narrow section of the community, and in particular by the top 1% of income earners. Trends in housing prices and the comings and goings of intangible capital is not part of that story.

Image: Intangible capital

Investment and depreciation of software and other intellectual property is not well handed, or even well measured in current national accounting systems as Edward Prescott has shown in a long research programme dating back 10 years. Intangible capital produced and owned by businesses is known to be big part of all investment in the economy but nearly all  of it is recorded as an expense and therefore most is not part of GDP as currently measured.


Source: Edward C. Prescott and Ellen R. McGrattan (2014)

Prescott estimated the value of intangible capital to be equal to about 60% of that of tangible capital in the US economy. Incorrect treatment of investment in intangible capital seriously underestimates investment, output, fluctuations in labour productivity and movements in the capital shares. The graph above shows that the recently introduced intellectual property classification in the US national accounts is both large and volatile relative to equipment and structures investments over the last 40 years. The graph below shows that including intangible capital completely changes the predictions of real business cycle models about trend US labour productivity in the 1990s.

Labor Productivity, for the Model, With and Without Intangible Investment (Real, Detrended) 1990-2003

Chart: Labor Productivity, for the Model, With and Without Intangible Investment (Real, Detrended) 1990-2003

Source: McGrattan and Prescott, 2005, “Expensed and Sweat Equity,” Research Department Working Paper 636, Federal Reserve Bank of Minneapolis.

This depreciation adjustment for software investment is important because you can’t eat depreciation, as a shrewd observer noted. The rapid depreciation of software is depreciation – it cannot be redistributed from the top 1% to the downtrodden workers as some sort of income. Others have also earlier argued that Piketty’s claims rest on the recent increase in the price of housing.


Source: Brad DeLong

The main reason for increases in the price of housing in New Zealand and elsewhere is restrictions on the supply of land by local councils. They are the real class enemy.

urban limit

The metropolitan urban limit in Auckland increases land prices by 9 fold just inside that limit. As Tim Taylor said today:

The rise in capital income as a result of a long-term rise in land and housing prices across the high-income countries is a phenomenon that isn’t easily crammed into the usual disputes over whether capital owners are exploiting wage-earners.

The role of the housing sector and restrictions on land supply driving up housing prices in recent decades in shaping the future of inequality is perhaps underplayed given the many discussions of Generation Rent.

Generation rent: The Office for National Statistics revealed how the proportion of home owners has fallen in the last decade for the first time in a century

Housing affordability is a real crisis in New Zealand and many other countries with the younger generation no longer able to buy a house. They are condemned to decades of renting a house. They may never be able to afford a house on one income and perhaps two ordinary comes.

The future of inequality is between those who can and cannot afford a dream and a right for their parents and grandparents, which was to buy a house and pay the mortgage off within a couple of decades.

Source: Transport Blog

Young people used to buy a house shortly after leaving university and paid it off by their middle age when I was in my 20s and 30s. Back then, which was not all that long ago, ordinary workers could aspire to take out a mortgage and buy a house in the suburbs.

Rising house prices, lower wage growth and tighter lending rules have made it harder to get on the property ladder

Unless there is a major deregulation of the supply of land in the big cities, home ownership for most in the community will really be a dream, rather than a dream of aspiration achieved  by most by their 30s, if not often earlier through working and saving. The grandchildren of the baby boomers will become and perhaps already are Generation Rent.

There is no housing bubble in US cities with a flexible land supply

In areas with a readily available supply of land on which to construct new homes—either because of geography or few land-use restrictions—builders have been sensitive to increases in local demand and existing-home prices. When existing houses rise in price relative to the cost of new homes, prospective buyers are willing and able to buy new units.

Supply conditions determine how house price and construction react to shifting demand. When housing demand rises—perhaps due to rising incomes, lower mortgage interest rates or easier credit standards—the outward shift in demand produces sharply higher house prices with a small increase in the supply of newly built units in areas with less-plentiful land. By comparison, when there is a more-plentiful land supply, the amount of housing is more supply sensitive and a rise in demand results in a less-pronounced rise in house prices and a greater increase of newly constructed homes.

As a result, house prices rise less in these supply-sensitive areas during booms and they fall less in downturns. Similarly, prices swing more and homebuilding varies less in regions with less-sensitive housing supply.


via Regionally, Housing Rebound Depends on Jobs, Local Supply Tightness – The Long-Awaited Housing Recovery – 2013 Annual Report – Dallas Fed.

Edward Glaeser on regulation and housing prices

Could the New Zealand housing unaffordability crisis been prevented?


The relationship between housing prices and the Wharton Land Use Index

Note: the Wharton Land Use Index measures the restrictiveness of a metropolitan area’s land use regulations.

Suburban rent seeking and green rent seeking are a dangerous brew for housing affordability


Child poverty monitor report finds that housing unaffordability is the cause of rising child poverty in NZ


Why Middle-Class Americans Can’t Afford to Live in Liberal Cities – The Atlantic

via Why Middle-Class Americans Can’t Afford to Live in Liberal Cities – The Atlantic.

Andrew Atkin explains how housing affordability has been destroyed in New Zealand.

Previous Older Entries

Why Evolution Is True

Why Evolution is True is a blog written by Jerry Coyne, centered on evolution and biology but also dealing with diverse topics like politics, culture, and cats.

Great Books Guy

Reading The Classics

Science Matters

Reading between the lines, and underneath the hype.

Peter Winsley

Economics, and such stuff as dreams are made on

A Venerable Puzzle

"The British constitution has always been puzzling, and always will be." --Queen Elizabeth II

Real Time with Bill Maher Blog

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The Market Monetarist

Markets Matter, Money Matters...

The Antiplanner

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Pedestrian Observations

For Walkability and Good Transit, and Against Boondoggles and Pollution

Bet On It

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Movie Nation

Roger Moore's film criticism, against the grain since 1984.


Franck Portier's professional page


Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Bowalley Road

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

History of Sorts


Tudor Chronicles

News, reviews and talk all about the Tudors

@STILLTish. Gender Abolition

Examining Gender Identity ideology and its impact on Women's Sex based rights and Gay Rights. Exploring how this has taken such firm root in Western societies (Cognitive & Regulatory Capture).

Offsetting Behaviour

Celebrating humanity's flourishing through the spread of capitalism and the rule of law


Res ipsa loquitur - The thing itself speaks

Conversable Economist

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The Victorian Commons

Researching the House of Commons, 1832-1868

Coyote Blog

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The History of Parliament

Blogging on parliament, politics and people, from the History of Parliament

Books & Boots

Reflections on books and art

Legal History Miscellany

Posts on the History of Law, Crime, and Justice

Sex, Drugs and Economics

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Doc's Books

A window into Doc Freiberger's library

Media Myth Alert

Calling out media myths

European Royal History

The History of the Emperors, Kings & Queens of Europe

Tallbloke's Talkshop

Cutting edge science you can dice with


Small Steps Toward A Much Better World

The Risk-Monger

Let's examine hard decisions!


“We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert”. - J Robert Oppenheimer.


The truth about the great wind power fraud

Trust, yet verify

Searching for the missing pieces of climate change communication

Lindsay Mitchell

Celebrating humanity's flourishing through the spread of capitalism and the rule of law


Celebrating humanity's flourishing through the spread of capitalism and the rule of law

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

James Bowden's Blog

A blog (primarily) on Canadian and Commonwealth political history and institutions

%d bloggers like this: