Ryan Greenaway-McGrevy on housing vs equities, what barriers to affordable housing cost the economy, upzoning, restoring affordability & more

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Today’s Top 5 is a guest post from Ryan Greenaway-McGrevy, a Senior Lecturer in Economics and the Director of the Centre for Applied Research in Economics at the University of Auckland. 

As always, we welcome your additions in the comments below or via email to [email protected]

And if you’re interested in contributing the occasional Top 10 yourself, contact [email protected]

See all previous Top 5s here.

Before I begin this week’s Top 5: The past two weeks have been among the darkest days of our nation’s history. I cannot add to what has already been said by our leaders or by those affected by this tragedy. Nor do I think it is my place to. Rather, I’d like to acknowledge the terrible suffering that some our fellow Kiwis are going through, and that their lives will be forever changed. Kia Kaha, Christchurch.

1) Whether or not housing outperforms equities as an investment is a perennial debate. New research from NBER throws a cat among the pigeons by concluding that housing is better on a risk-adjusted basis in a sample of 16 developed nations. (Unfortunately New Zealand is not included.)

If the returns are so great, why haven’t we invested more in housing?  Perhaps it is hard to scale investment in housing, which makes it difficult for the corporates to compete with households, particularly when it comes to quality of service. Meanwhile, financial frictions and regulatory barriers prevent households from scaling up too much themselves.

2) While we are on the topic, what are barriers to affordable housing costing the economy? Well, about 7% of GDP, according to research by MR Cagney Economist (and former UoA Economics student) Peter Nunns. Posts explaining it all are here, here and here

The gist of the result is as follows. Agglomeration makes cities highly productive. But expensive housing can prevent people from moving to the cities where their labour is most productive. Making housing more affordable means enhancing productivity and growing the economy.

Now, if memory serves, that 7% figure shrinks to about 1% on a per capita basis, which is still nothing to be sneezed at, but suggests that agglomeration in New Zealand has not yet yielded vast improvements in productivity. It is far less than the 10% figure that Hsieh and Moretti (2015) originally found for the US, for example. Perhaps Auckland grew expensive before it grew wealthy?

3) Upzoning is one policy response to unaffordable housing. Seattle has followed Auckland and gone all-in. Historically such large-scale upzonings have been quite rare: perhaps this is a sign of things to come.

4) Meanwhile, Tyler Cowen facetiously proposes an alternative way to restore affordability: erode the quality of public services. In cities with constrained land, the value of any quality improvements in public services – such as lower crime or better public transport – gets capitalized into land, leaving non-landowners no better off.

In other words, to the scarce factor of production go the spoils. But it’s not just the benefits of better public services that go to land owners. Here’s Cowen again:

Once you think about these cities in terms of the Ricardo-George model, it is remarkable how many orthodox views get revised. What about an increase in the minimum wage, for example? Any initial gains for workers will eventually be offset by higher rents.

Who has benefited from the rise in women’s labour force participation? Clearly, women themselves, as they have more options and more financial independence, which is something to celebrate. But who can afford a house in Auckland on a single income these days? In our expensive cities, landowners are pocketing much of the value that women have created.

5) New research maps beliefs in “pseudo-profound bullshit” to political ideology.

In case you are wondering, yes, that is the technical term. To generate PPB the researchers “generated sentences by randomly stringing together words from a list of profound-sounding words or from tweets by Deepak Chopra (a prominent figure in the New Age movement) into syntactically correct but vacuous sentences”. LOL.

Go on: click the link to see whether your political preferences fall into one of the at-risk categories.

Enjoy your Friday! And remember: Imagination is inside exponential space time events.

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