Results for “housing” 708 found
Rent Controls and Affordable Housing in Mumbai
The slums are the only free market housing in Mumbai.
That’s me in the latest video from MRUniversity, an on-the-ground look at the consequences and political economy of rent controls and affordable housing in Mumbai, India. Rent controls have been in place for so long in Mumbai that buildings are literally collapsing. Moreover, the approval process is so slow that just about the only new housing being built is condos for the well-off while at the same time a large fraction of the housing stock lies vacant.
Reuben Abraham is very good on how government housing is captured by the rich and why any solution to the affordable housing problem must focus on increasing supply.
Why Housing in California is Unaffordable
It’s interesting how similar land policy is around the world. In the United States today, we don’t have collapsing buildings like they do in Mumbai (see video above) but the fanatical fear of density and the slow approval process are the same. Berkeley Mayor Jesse Arreguín, for example, says a bill that would allow higher density construction near transit hubs and bus lines is “a declaration of war against our neighborhoods.” And a new report finds that in San Francisco:
…in 2000, it cost approximately $265,000 per unit to
build a 100-unit affordable housing building for families in the city, accounting for inflation. In
2016, a similar sized family building cost closer to $425,000 per unit, not taking into account
other development costs (such as fees or the costs of capital) or changes in land values over this
time period.
Did you get that? Inflation adjusted construction costs have increased in San Francisco over the last 16 years by 60% not including changes in land values.
Interviews and focus groups identified four local drivers of
rising construction costs: city permitting processes, design and building code requirements,
workforce regulations and ordinances, procurement (small and local business) requirements,
and environmental regulations.… the most significant and pointless factor driving up construction costs was the length of time it takes
for a project to get through the city permitting and development processes.
Housing Hypergamy
NYTimes: Thanks to the now-abandoned one-child policy, China has more young men than young women, setting off a male-led surge to buy homes to make themselves more appealing husbands. Shang-Jin Wei, a Columbia University business professor, found that rising real estate price increases in 35 big cities were strongly correlated with lopsided gender ratios.
CNN tells us that “When it comes to dating, homeownership can be the ultimate aphrodisiac,” so the effect may not be confined to China.
Was there a Housing Price Bubble? Revisited
In 2005, I thought housing prices were rising above the fundamentals and I said so. In 2008, as the fall in housing prices was well under way, I wrote a blog post and later a NYTimes op-ed saying that the housing price bubble was not nearly as big as people thought. I wrote:
I think that housing prices went beyond the fundamentals sometime around 2004…but 2004 levels are still well above long run trend.
…Prices will probably drop some more but personally I don’t expect to ever again see index values around 110. Do you? If we don’t see the massive drop back to “normal” levels then the run up in prices should be described as a shift to a new equilibrium…[with some overshooting, rather than as a bubble.]
To put it mildly, not everyone agreed with my argument. I certainly got the timing wrong–I didn’t think the recession would be as long or as deep as it was. Nevertheless, some people are coming round to my point of view. Karl Smith, for example, has a new post Was There Ever a Bubble in Housing Prices? which concludes more or less, as I did nearly ten years earlier, that the answer is no. What happened was greater liquidity which made housing prices gyrate more like stock prices but “the fundamental driver isn’t irrational bubble behavior. It is competition over a scarce resource.”
Let’s go back to the Shiller graph (now updated to 2018 with some slight corrections since 2017 post). Over the entire 20th century real home prices averaged an index value just under 100 (and over the the entire second half of the 20th century were only slightly higher at 112). Over the entire 20th century, housing prices never once rose above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels.
Now one might argue that there is still a bubble or perhaps another bubble in housing prices. But the United States does not look anomalous compared to other countries. In fact, in many other countries prices have risen more than in the United States. Here is the Economist’s Global Price Index of real house prices for a variety of countries. (Do note that some countries not shown, such as Germany, haven’t seen big increases in prices.) Are all these countries experiencing bubbles? Or has the equilibrium changed?
Understanding why the equilibrium has changed is a fundamental issue that I don’t think we yet have a good handle on. My view, is that it’s a combination of expected long-run lower interest rates, greater liquidity, and supply constraints on land. Lower interest rates, for example, mean that durable assets increase sharply in price, all the more so if the rates are expected to stay low. Combine this with greater liquidity (see Smith’s post) and supply restrictions and you can explain most of what is going on in the United States. What I don’t know is if the same explanations work worldwide and can the same factors also be used to explain why land prices haven’t risen in Germany, Japan or Switzerland?
Hat tip: Nathaniel Bechhofer.
The impact of housing supply restrictions
I calibrate the [spatial] model to the U.S. economy and find that the rise in regulation accounts for 23% of the increase in wage dispersion and 85% of the increase in house price dispersion across metro areas from 1980 to 2007. I find that if regulation had not increased, more workers would live in productive areas and output would be 2% higher. I also show that policy interventions that weaken incentives of local governments to restrict supply could reduce wage and house price dispersion, and boost productivity.
That is from Andrii Parkhomenko (pdf), a recent job candidate, there are 62 pp. at the link, and for the pointer I thank Tyler Ransom.
Here is a related column by Noah Smith.
Piketty, Housing, and Capital Share
Gianni La Cava has a very interesting article (based on a longer paper) on what accounts for the rising share of capital in the income accounts:
A key observation in Thomas Piketty’s Capital in the Twenty-First Century (Piketty 2014) is that the share of aggregate income accruing to capital in the US has been rising steadily in recent decades. The growing disparity between the income going to wage earners and capital owners has led to calls for government intervention. But for such interventions to be effective, it is important to ask who the capital owners are.
Recent research has shown that the long-run rise in the net capital income share is mainly due to the housing sector (e.g. Rognlie 2015, Torrini 2016 – see Figure 1). This phenomenon is not specific to the US but has been evident in almost every advanced economy. This suggests that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners.
…The decomposition of the national accounts by type of housing indicates that the secular rise is mainly due to a rising share of imputed rent going to owner-occupiers. The owner-occupier share of aggregate income has risen from just under 2% in 1950 to close to 5% in 2014 (top panel of Figure 2). The share of income going to landlords (i.e. market rent) has also doubled in the post-war era. But, in aggregate, the effect of imputed rent is larger simply because there are nearly twice as many home owners as renters in the US economy. A similar phenomenon is observed in the personal consumption expenditure data (bottom panel of Figure 2). In other words, today’s landed gentry are predominantly home owners, not private landlords.
…The geographic decomposition reveals that the long-run rise in the housing capital income share is fully concentrated in states that face housing supply constraints. To see this, I divide the states into ‘elastic’ and ‘inelastic’ groups based on whether the state is above or below the median housing supply elasticity index (as measured by Saiz 2010). This index captures both geographical and regulatory constraints on home building across different US regions. For 50 years, the share of total housing capital income going to the supply-elastic states has been unchanged at about 3% of GDP (Figure 3). In contrast, the share going to the supply-inelastic states has risen from around 5% in the 1960s to 7% of GDP more recently. Notably, these divergent trends in housing capital income are not due to a few ‘outlier’ states where housing supply is particularly constrained, such as New York or California – instead, there is a clear negative correlation between the long-run growth in housing capital income and the extent to which housing supply is constrained across all states (Figure 4).
How bad is rent control when housing supply is artificially restricted by law?
Many of you have been asking me about this NYT article on the pressures for rent control in Silicon Valley. If no (or few) new apartment blocks will be built anyway, what is wrong with rent control in that setting?
One effect is that rent control will limit the incentive for prospective builders to fight to overturn current building restrictions.
A second effect of rent control is that it will lower the quality of the apartment stock. This outcome has some second best properties, since a lower-quality, lower-price selection of apartments is probably what the market would have delivered under freer conditions. Still, quality will fall in inefficient ways. For instance sizes of apartments already are given, so landlords will cut back on maintenance. Rather than well-maintained but smaller apartments, we will see overly large but run-down abodes.
At rent-controlled prices there will be excess demand for apartments. The “plums” will go to those who bribe, those who are well-connected, those who are skilled at breaking the law, and, to some extent, those who have low search costs. The latter category may include well-off people who hire others to search for them.
So overall I still don’t think this is a good idea. Even if the current housing stock is fixed, rent control probably will create costs in excess of its benefits, and without significantly desirable distributional consequences.
Addendum: In the comments, Kommenterlein adds: “The rental housing stock isn’t fixed – it will decline rapidly with rent control as rental apartments are converted into Condos and sold at market prices.”
The housing shortage and low real interest rates
The mystery of low natural interest rates has become the topic of the hour, and everyone is perplexed by the mystery. Why are interest rates so low? Has anybody mentioned housing? This virus infected everyone’s brain so that we can only believe houses are too expensive or too plentiful, but not the other way around. So, nobody seems to notice that the return on real estate investments is very high.
I have posted some version of this graph several times. In the 1970s & 1980s, its tough to get a read on it because there weren’t markets in inflation-adjusted treasury bonds at the time. But, there is clearly a relationship between real estate returns and real interest rates. Why wouldn’t there be?
And this relationship broke down at the end of 2007 when we shut down real estate credit markets. The lack of access to home ownership made real estate returns go up while bond yields were going down. This is an important signal of financial breakdown, and nobody seems to notice.
So, no. Natural interest rates are not low. The real long term natural rate right now is about 2.5%. If you have tons of cash or you can run the gauntlet and get a mortgage, or if you are an institituional investor going through the difficult organizational process of buying up billions of dollars of rental homes, you get the preferred rate of 4% real returns.
If you aren’t, then you get the “class B” shares of low risk fixed income, which pay about 1% real (3% nominal).
The real estate market is much larger than the treasuries market. This is a big deal. This should be just about the only thing anybody is talking about regarding natural rates. Household real estate is worth about $25 trillion. If we hadn’t stopped building homes a decade ago, and if home prices did not contain an access premium, there would be more than $40 trillion in real estate. It dwarfs the size of the treasury market. That’s why rates have not reacted to large deficits. The federal government couldn’t realistically accumulate enough debt to make up for the gaping hole we have created in real capital.
We need to make some mortgages and build some houses. We will not be doing that, because of the virus. So, it looks to me like we will be wondering about the big interest rate mystery for another decade.
That is all from the always-stimulating Kevin Erdmann, additional graph at the link.
What is keeping single-family housing weak?
Surprisingly, two variables can explain 38% of the metro area variation in the single-family growth from 2000 to 2004 to today: the number of jobs today relative to 2000 to 2004, and single-family house prices relative to the prerecession peak. The change in the unemployment rate had no statistically discernable effect.
Both measures have an intuitive relationship with the housing market. What these results suggest is that net job growth may not be enough to drive a single-family recovery. Instead, long-lasting scars from the housing bubble remain an issue.
That is from Adam Ozimek.
Demystifying the Chinese housing boom
That is the next NBER macro paper at these sessions, by Fang, Gu, Xiong, and Zhou, here is the pdf. The abstract is this:
We construct housing price indices for 120 major cities in China in 2003-2013 based on sequential sales of new homes with the same housing developments. By using these indices and detailed information on mortgage borrowers across these cities, we find enormous housing price appreciation during the decade, which was accompanied by equally impressive growth in household income,e xcept in a few first tier cities. Housing market participation by households from the low-income fraction of the urban population remained steady. Nevertheless bottom-income mortgage borrowers endured several financial burdens by using price to‐income ratios over eight to buy homes, which reflected their expectations of persistently high income growth into the future. Such future income expectations could contract substantially in the event of a sudden stop in the Chinese economy and present an important source of risk to the housing market.
Facts about low-income housing policy
Collinson, Ellen, and Ludwig have a new and long NBER paper (pdf) devoted to that topic. Here are a few bits:
The United States government devotes about $40 billion each year to means-tested housing programs, plus another $6 billion or so in tax expenditures on the Low Income Housing Tax Credit (LIHTC).
Yet total subsidies for home ownership may run as high as $600 billion, most of those not going to the poor.
There are over twenty different federal subsidized housing programs and most of them are no longer producing new units.
I am speaking for myself here, and not for the authors, but I cannot imagine any better case for cash transfers than to read this 75 pp. paper.
How about this?:
In 2012, housing authorities nationwide reported more than 6.5 million households on their waitlists for housing voucher or public housing.
That to my eye suggests targeting this aid is not working very well.
I found this to be an interesting comparison (I am not suggesting it is being driven by these federal housing policies):
The median renter household in 1960 was paying approximately 18 percent of his/her total family income in rent; the equivalent figure today is 29 percent.
Overall, I would like to see more economists call for the abolition of these programs and indeed some approximation of laissez-faire toward housing more generally.
Matt Rognlie on Piketty, net capital returns, and housing
Brookings emails me:
Capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital’s share of total income – refuting one of the main theories of economist Thomas Piketty’s popular book Capital in the 21st Century — according to a paper presented today at the Spring 2015 Conference on the Brookings Papers on Economic Activity (BPEA).
Existing studies that show an increase in capital’s share of income miss the growing role of depreciation in short-lived capital, in items such as software, says MIT’s Matthew Rognlie in “Deciphering the Fall and Rise in the Net Capital Share.” Rognlie subtracts depreciation in seven large developed economies (the US, Japan, Germany, France, the UK, Italy, and Canada) to get net capital income, and finds that the only long-term rise in capital’s share of income is in housing. Capital income elsewhere in the economy has grown moderately, but it is only recovering from a large fall that lasted from 1948 through the 1970s.
Piketty’s Capital argues that the role of capital in the economy, after falling during the Depression and two world wars, is set to recover to the high levels of the 19th and early 20th centuries. According to Piketty, wealth will accumulate amid slowing economic growth to push up the capital-to-GDP ratio in the economy, which will then cause an increase in capital’s share of income — and growing inequality.
In contrast, Rognlie finds that a rising capital-to-GDP ratio is most likely to result in a fall in capital’s share of income, since the net rate of return on capital will fall by an even larger proportion than the capital-to-GDP ratio rises. Outside of housing, postwar changes in the value of the capital stock have not led to parallel changes in capital’s share of income. In fact, the value of the capital stock relative to private income reached its highs in the late 1970s and early 1980s, when capital’s share of income was near a low.
Rognlie shows that the share of net income generated by housing has risen in all seven large developed economies since data became available. “Housing’s central role in the long-term behavior of the aggregate net capital share has… not been emphasized elsewhere…Observers concerned about the distribution of income should keep an eye on housing costs,” he writes.
Brad DeLong offers comment.
Here Jim Tankersley has a superb profile of Rognlie and the story behind his comment, MR plays a role too. Recommended.
Were poor people to blame for the housing crisis?
When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.
There is also this:
Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income.
That is from the new NBER working paper by Adelino, Schoar, and Severino. In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis. The biggest problems came in zip codes where home prices were having large run-ups. Their conclusion is:
These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.
Changes in policy, of course, also for this context would count as “a change in the lending technology.”
Further evidence that the housing crisis was about screwy beliefs, not moral hazard
Ing-Haw Cheng, Sahil Raina and Wei Xiong have a new paper in the AER, here is the abstract:
We analyze whether mid-level managers in securitized finance were aware of a large-scale housing bubble and a looming crisis in 2004-2006 using their personal home transaction data. We find that the average person in our sample neither timed the market nor were cautious in their home transactions, and did not exhibit awareness of problems in overall housing markets. Certain groups of securitization agents were particularly aggressive in increasing their exposure to housing during this period, suggesting the need to expand the incentives-based view of the crisis to incorporate a role for beliefs.
There are other versions of the paper here.
More of Surrey is now devoted to golf courses than housing
More of Surrey is now devoted to golf courses than housing, according to provocative new research that claims to dispel many of the myths associated with Britain’s housing boom.
A study by the Centre for Economic Performance at LSE suggests soaring house prices are not caused by an influx of foreign buyers but are down to restrictive planning policies that have ensured the country’s green belt is a form of “discriminatory zoning, keeping the urban unwashed out of the home counties”.
Paul Cheshire, professor emeritus of economic geography at LSE and a researcher at the Spatial Economics Research Centre, has produced data showing that restrictive planning laws have turned houses in the south-east into valuable assets in an almost equivalent way to artworks. He points out that twice as many houses were built in Doncaster and Barnsley in the five years to 2013 than in Oxford and Cambridge.
As a result of the policy that specifically safeguards green belts, Cheshire claims houses have not been built where they are most needed or most wanted – “in the leafier and prosperous bits of ex-urban England”.
There is more here, with the pointer from Graham Farmelo. And here is Cheshire’s home page. Can any of you find the original paper online?