Economy based RC in CAT 2015 was taken from Economist – special report
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.
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.
Full article here.