> He speculates that poorer city dwellers are missing out on the increased social interactions that are credited with driving innovation and wealth creation in large metropolises.
I don't disagree, but it seems a little strange that the article highlights this point rather than the endemic rent-seeking of the urban upper-classes?
It does seem strange to relabel the accelerating trend of converting housing into speculative investment vehicle as "wealth creation" and wondering why the poor are "missing out".
IMO, the eeath creation happens almost by definition from increased efficiency of resource allocation in the society: Thebl free market forces drive more efficient allocation of scarce resources, so the weath is created in a sense, that there is the least amount of waste compared with other alternatives.
In a free market of rational economic actors, no externalities, no liquidity limitations, and an unlimited time horizon this is probably true.
The North American urban real estate market is increasingly dominated by a dwindling number of economic actors who collectively act to restrict housing supply. This is not a system where the free market is functional or would necessarily produce the best results.
> In a free market of rational economic actors
Not sure what rationality has to do with this. It is about personal utility which is subjective and at time irrational.
> liquidity ... time horizon
Not sure how is this related? Liquidity in itself is an asset, if you have readily available money vs oney on paper that a big difference, always was and always will be. But how is this related?
> ...limited number of actors...
IMO, there are always so many alternatives, (e.g. moving to a different city, living in suburbs) it is hard to image uncompetitive real estate market, even if all the land in a city was in a private hands of a single "actor" it would still be very competitive market overall. But that's hardly a case, indeed even if the land is in hands of two actors it's enough for a competition here. Or do you suggest there is a cartel? In that case it's a legal issue of failed police force not a free market failure unless you privatize police as well.
Liquidity matters in free markets as it effects the ability of buyers to buy and sellers to sell. In Urban housing markets many individuals do not have the liquidity to buy even if they have the cash flow.
The number of actors matter as moving to different cities typically means changing jobs which may or may not be viable, if alternative cities have the same pricing dynamics at play - then it may not be possible to find a better alternative in price.
As to the reason why this all matters and we aren't content with simply choosing to rent from REIT A or REIT B is that zoning boards have proven unable to cut through A & B's protests against new construction. While A&B may compete with each other they do not compete with any alternative, and all potential customers must acquire housing. As long as the total number of housing units remains below the demand for housing then A&B will benefit.
In practice there are still a number of players who interact with the zoning board - but the net result is still a frustratingly stagnant housing supply.
IMO, this is still a free market modulo the part with the city planning which is not about voluntary exchange of services or goods but a coertion by law. The definition of free market is so much broader than the peculiarities you've mentioned. Couldn't there be a free market before the fiat money existed? In any case, in my original post I was talking about forces of free market, these forces might exist in partially free market where many things are not a free choice but consequence of one or the other type of social coercion. Free market force: all it means is that the specific exchange between the parties was done voluntarily as a manifestation of the parties preferences in face of all other alternatives they have. In this sense the parties came to a conclusion that this action maximizes their utility.
I'm not arguing that free market forces are better than the alternative (you need to define what you mean by better), just saying in terms of resources allocation, free market forces maximize utility in face of other alternatives.
You can argue that this is a prisoner dilemma situation etc... but that's a fallacy as well IMO (can discuss this if more details are desired)
Investing in housing is GOOD for society, because housing is not a scarce resource - the more is invested the more is built. It's precisely those places that have put up the most barriers to investing and building housing that have seen the greatest deterioration in housing affordability:
The [city] government can build housing according to need just as any other infrastructure.
This would however go against a lot of interests, both institutional and citizens with a large mortgage, that depends on high housing prices. So it's rare. But one can see Vienna, Austria, as a good example of where the government takes an active role in building housing and can show a great result in low rents and high availability.
Yes, the state can embark on massive construction of housing. The advantage is it gets around zoning restrictions on building height.
State-funded housing tends to be unimaginative/repetitive in design and lower quality though. The same outcome, of higher density housing, can be achieved by simply repealing zoning restrictions, and if that doesn't do enough, by replacing sales taxes with land taxes, which discourage sprawling land-inefficient housing.
There may be advantages, in political economy, that makes overcoming special interests opposed to densification easier, with the state-led approach though.
As for special interests in general, there are plenty in and close to the state itself that would massively profit from large public projects, so I don't see this as a question of whether or not we support special interests. It's simply a question of which special interests.
Obviously having housing stock is probably good. Housing however IS a scarce resource, especially housing when it comes to being close to things like transit, views, natural amenities, parks, businesses and other amenities - and one of the most important things that doesn't seem like its talked about: neighborhoods of similar social classes.
There are myriad reasons one area does great, and I don't think its entirely due to barriers in investing and building, else those with no barriers would see massive movement towards them. Often times the desirability of living in a place is almost directly inversely related to how little regulation they have.
It's artifically scarce in North America. Houses are being used as investments and are often sitting empty as, for instnace, the owners (or the foreclosing bank) don't want to deal with renters.
The percentage of housing sitting empty is quite low, and well within the range for any asset. 100% utilization is not a realistic expectation and would not be a healthy situation. Markets need the flexibility of owners being able to wait before committing a resource to a particular usage.
But there is artificial scarcity in housing, and that's almost solely down to regulatory restrictions that suppress private property rights, whether that's rent control that make it less profitable than it should be to invest in housing, onerous permitting processes for building a new house, or zoning restrictions limiting the density of a new housing development. Economists have chronicled the problems created by these interventions, in detail.
>>Housing however IS a scarce resource, especially housing when it comes to being close to things like transit, views, natural amenities, parks, businesses and other amenities
Obviously density can compromise something like having good views, or the benefit of a relaxed low-density neighbourhood, but almost any other kind of housing scarcity can be addressed through densification.
The study in the aeaweb link above estimates that increased housing restrictions in just three cities in the US; New York, San Francisco and San Jose, caused the US to have 36% less economic growth between 1964 and 2009 than it otherwise would have, by inhibiting population growth in these cities, which all provide settings for higher productivity due to agglomeration effects and being coastal cities with low logistical costs.
A report by the White House's Council of Economic Advisors in 2016 largely came to the same conclusion:
It's hard to isolate factors behind this move, but I don't think it's a leap to assume lower housing costs, largely due to fewer restrictions on housing investment and construction, is one of them. In contrast to San Francisco, which is notorious for zoning restrictions and rent control mandates instituted by extreme-left city governments, and unsurprisingly, has the highest rental rates in the world (while not having the highest average income rates), Houston is renowned for its pro-free-market housing policy, and communersately affordable housing:
"Investing in housing is GOOD" but speculation in housing is very bad. Having anyone middle class or lower completely priced out of home ownership because the upper middle class want "a safe investment" or "the real estate market is HOT HOT HOT" is not good for society no matter how you want to spin it.
The secondary market for any asset, whether housing or equity, is what allows the primary market to raise large amounts of capital, so no, speculation is not bad at all. It indirectly leads to more investment in housing construction.
maybe it's strange, or maybe the santa fe institute's funding would be in danger if they published that sort of analysis. i tried to get in idea of what they were about briefly, but it made my eyes cross.
Urban upper-classes are landowners, the endemic rent-seeking they are engaging in is via monopoly control of land, which people need for living and working. They are able to extract high proportions of people's income for rent from those who are unable to afford to join the land-owning upper class.
> Urban upper-classes are landowners, the endemic rent-seeking they are engaging in is via monopoly control of land,
Who has monopoly control of land? is there a cartel or corporation of all these shadowly urban upper-classes who own everything?
> which people need for living and working. They are able to extract high proportions of people's income for rent from those who are unable to afford to join the land-owning upper class.
Owning land is not "rent-seeking". Owning highly desirable land is not. Owning a large amount of highly desirable land is not. Renting it out is also not. Investing in appreciating assets of any kind is also not.
Landowners have monopoly control of land. There are ways of defining monopolies that avoid this conclusion, but the effect of a monopoly is precisely the effect of landowners. See, for example, Churchill: http://www.andywightman.com/docs/churchill.pdf
Land is essentially monopolised through regulatory capture (council land use restrictions) and the lack of new production of land (ignoring for now the very minor exceptions of, say, Dubai, Singapore, the Netherlands). There is a lack of viable substitutes of land, and due the necessity of land for human life, the owners of land are able to extract rent far above their marginal cost.
It would be possible for landlords to not engage in rent-seeking, but in practice there are exceedingly few landlords who do not. See, for example, Ricardo's Law of Rent for an introduction as to why land-lording is the classic example of rent-seeking.
Note that by saying "Investing in appreciating assets of any kind is also not." I suspect that you see land as equivalent to other forms of capital, and thus a legitimate form of investment to be pursued without any ethical qualms. However, land is not capital, and is distinct from other forms of investment.
They don't have a monopoly control of "land", the have control of the land they own. And whether or not new land is being produced or land is unique is pretty flimsy. There's vast amounts of land around the globe under varying laws and systems of government and usage. Land use regulation is also not equivalent to regulatory capture. I don't have much time for redefining common terms as a way to argue -- if you want to abolish private ownership of land, just out and say it.
> Land is essentially monopolised through regulatory capture (council land use restrictions) and the lack of new production of land (ignoring for now the very minor exceptions of, say, Dubai, Singapore, the Netherlands). There is a lack of viable substitutes of land, and due the necessity of land for human life, the owners of land are able to extract rent far above their marginal cost.
This is just emotional handwaving. Water is vital for human life and you can't produce more of it ignoring very minor exceptions of chemical reactions. If I pour myself a glass of water I don't gain monopoly control of water.
And Ricardo's Law of Rent does not explain that land-lording is rent-seeking. Millions of people own a second house and rent it out, how are they rent-seeking?
> Note that by saying "Investing in appreciating assets of any kind is also not." I suspect that you see land as equivalent to other forms of capital,
From the point of view of an investor it's pretty equivalent to other assets. Everything is finite. Water, sand, apples, cell phones, gold.
> and thus a legitimate form of investment to be pursued without any ethical qualms. However, land is not capital, and is distinct from other forms of investment.
Everyone wanting to live in the Upper East Side of New York City but not being able afford to rent or own a place there because everyone else wants to live there does not illustrate any ethical problems with land ownership at all. No more than me owning a box of corn flakes when some people starve to death because of poverty.
> They don't have a monopoly control of "land", the have control of the land they own.
The land-owning class as a group have monopoly control of land. As far as I know, there isn't much un-owned land, so the land-owning class owns all the land.
> And whether or not new land is being produced or land is unique is pretty flimsy.
This is one of the definitional factors of a monopoly: "a lack of economic competition to produce the good or service", so I don't think it's flimsy at all. It's also a very commonly noted point by basically every economist that has looked at land, when distinguishing land from capital.
> if you want to abolish private ownership of land, just out and say it.
Not at all!
> This is just emotional handwaving. Water is vital for human life and you can't produce more of it ignoring very minor exceptions of chemical reactions. If I pour myself a glass of water I don't gain monopoly control of water.
As it turns out, if you and, say, 1 million others owned all the water in your country, you would in fact be part of the group that has monopolised control of water. You could then charge whatever you want to those who do not own the water, given they need it for life. This would be rent-seeking, as the amount you charge could far exceed your marginal costs of production. Water is actually a form of economic land, it just happens to be in great abundance and is slippery enough to be difficult to monopolise.
> And Ricardo's Law of Rent does not explain that land-lording is rent-seeking. Millions of people own a second house and rent it out, how are they rent-seeking?
Rent-seeking is the activity by which people try to gain more economic rent; that is, they are trying to gain something without doing anything in return. Those who own a second house and rent it out are actually doing two things: they are hiring out a house, which is not rent, properly speaking. And they are extracting rent for access to the land, which is economic rent. Building a house and maintaining it is a productive use of capital, and hiring it out is not rent-seeking. Owning land and renting out it is, definitionally, rent-seeking (unless one were to only charge as much rent for the land as the costs of keeping the land).
You're just redefining "monopoly" to make some ill defined emotional argument.
> Rent-seeking is the activity by which people try to gain more economic rent; that is, they are trying to gain something without doing anything in return. Those who own a second house and rent it out are actually doing two things: they are hiring out a house, which is not rent, properly speaking. And they are extracting rent for access to the land, which is economic rent. Building a house and maintaining it is a productive use of capital, and hiring it out is not rent-seeking. Owning land and renting out it is, definitionally, rent-seeking (unless one were to only charge as much rent for the land as the costs of keeping the land).
No it isn't. You're doing lots of handwaving about semantics but you still haven't actually explained what rent-seeking activity these people engage in when they hire out their house-and-land to someone else.
>As it turns out, if you and, say, 1 million others owned all the water in your country, you would in fact be part of the group that has monopolised control of water.
Untrue.
> You could then charge whatever you want to those who do not own the water, given they need it for life.
Also false.
> This would be rent-seeking, as the amount you charge could far exceed your marginal costs of production. Water is actually a form of economic land, it just happens to be in great abundance and is slippery enough to be difficult to monopolise.
That is not what rent-seeking means, but at least we have gotten to the point where you agree that ownership of land is not fundamentally different from ownership of other assets in this regard.
I don't disagree, but it seems a little strange that the article highlights this point rather than the endemic rent-seeking of the urban upper-classes?