Tuesday, 4 February 2014

[Divide and conquer] Missing the point most gloriously

From City AM Forum, Tech resentment in San Francisco is ignoring the real culprit: Government

RENTS are rising, pushing people on low incomes out of the neighbourhoods they’ve lived in for years. Resentment towards the rich is growing, with the most profitable and dynamic industries singled out for the most ire. Talk of a cost of living crisis, driven above all by the cost of housing, is dominating politics.

This isn’t London, it’s San Francisco. In Resentment City, as Time called it this week, discontent has focused on the Silicon Valley workers whose housing needs and high incomes have driven the price of rents out of the reach of many long-time residents...

Yes, that's as can't be helped. We want to have successful businesses who pay high wages, and their employees like living near their employer so rents go up.

But the transfer of wealth here is not from the natives to the newly arrived high earners (if anything it is in the other direction, trickle down), it is from both groups to land owners, who collect the higher rents from both groups (trickle up).

But they’ve chosen the wrong target. The problem is not too many rich Silicon Valleyites buying and renting, it’s that the city has a housing shortage. It comes down to supply and demand. As the Cato Institute’s David Boaz has noted, San Francisco’s strict planning laws have made it much more costly to build new housing to meet rising demand. Zoning laws restrict the construction of higher density buildings on the city’s limited land mass...

Yes, they've chosen the wrong target. But the target is neither "the government" nor "strict planning laws".

The real passive beneficiary of all this are the landowners. Governments don't go round imposing strict planning laws for the sadistic fun of it, they do it under pressure from different groups of landowners, all wishing to collect/enjoy as much rent as possible while preventing others from doing so.

The fact that they are cutting off their noses to spite their own faces and making things worse for everybody is by-the-by.

Instead of Google employees, we have bankers and foreigners, but the principle is the same: people are attacking the demand-side, instead of asking why the government has put a stranglehold on the supply-side...

The government didn't, the landowners did, using the government as its own agent.

The US economist Karl Smith has pointed out that a new book by Thomas Piketty on the history of equality seems to show that the rise in capital’s share of GDP in the West is largely down to land-use planning controls like those of London and San Francisco. If we want to let the market do its job of resolving conflicts over scarce resources, we – and San Franciscans – should be angry at the government, not the rich.

For a start, the share of GDP going to capital has been going down in line with the share going to wages (reflected by lower interest rates), it is the share going to monopolies, above all to land owners, which has been increasing.

We also happen to know as a matter of fact that new construction only puts a very short term dampener on price rises, and then only if new construction is on a massive scale. Once the dust has settled, rents and prices will tend to go up (more housing = more people = more specialisation = higher wages = higher rents).

Why did Google (and all the other Silicon Valley companies) decide to set up shop where they did rather than in the middle of the desert? Because they need lots and lots of employees, so they go where all the people are.

That's why rents in areas with a high population/density are higher than in areas with a low population/density. Just building more homes to try and get rents down is like throwing twigs on a fire to cool it down.

And if they allowed higher density buildings, the total rental value of each individual site goes up; instead of collecting rents from ten flats, the lucky landowner can now collects rents from twenty flats; land outside the 'zone' which gets rezoned for development sees a huge uplift. Whether the new rent-per-unit falls slightly or goes up slightly is neither here nor there.

So he has managed to turn the whole logic on its head - the share of GDP going to land owners is 'too high' and he suggests something (liberalise planning laws) which will push it even higher.

Oh dear.


Kj said...

Good post. But don´t you mix two points? A: that the rent-portion of GDP is high, and whether abolishing planning helps (it doesn´t), and
B: whether increased construction/density as a reaction to higher land value dampens individual rents/create more housing (it probably will/it certainly does).

If San Fransisco hadn´t increased density historically(as noted by HG ímself as a problem that occured without planning), as a reaction to increased rents, it wouldn´t have expanded to be the concentration of people it is, and either stalled or spread out very inefficiently. Are you saying that the issue of speculation is not a problem because it doesn´t change the total portion of rents?

Mark Wadsworth said...

Kj, I said that B. creates more housing (indisuputably true) but A. whether or not it depresses rents (in short term, yes, in long term, no) the overall amount of rent being collected goes up.

Density goes up by itself naturally, there's only so long that one group of landowners (the NIMBYs) can hold out against market forces (and the landowners who benefit from those market forces).

And land speculation will always be a problem (until we have full-on LVT).

Kj said...

Density goes up by itself naturally, there's only so long that one group of landowners (the NIMBYs) can hold out against market forces (and the landowners who benefit from those market forces).

- and the article fails to mention that speculation is just as big a problem as planning. But again, ignore whether landowners are behind planning or not, if planning inhibits increased density, density won´t go up naturally will it?

Mark Wadsworth said...

Kj: "if planning inhibits increased density, density won´t go up naturally will it?"

OK, planning slows down density increases, so density increases are delayed by ten or twenty years after they would/should have happened, but in the end, density increases will happen.

I live in one of the most NIMBY suburbs of London, but I see small houses on big plots being replaced with blocks of flats, very slowly, but equally surely.

The big developers who own the city centre land have got deep pockets and pay out a lot in bribes (known in the UK as "Section 106 agreements").

Kj said...

So density can only increase by bribes? Is that what you refer to as "naturally"? :) That´s not very good badge of honor for planning is it. So why defend it if it has the exact same effect as speculation? I´m being a devil´s advocate here, but the point still stands, that I´m sure we agree that planning as in certain limitations within zones is appropriate, but why not allow density increases at will, that´s what helps GDP increases and wages to match the higher rents.

Mark Wadsworth said...

Kj, as a free market liberal, I would introduce LVT and scrap limits on density (while introducing minimum standards for quality).

For a couple of years, a lot of people would do right-sizing, derelict buildings would be replaced or brought back into use and in a few small areas, there might be a bit of a building boom.

But after a couple of years we would find that we have enough land and buildings to go round, so after that, the amount of new construction without planning will probably be the same as it would have been with planning.

Kj said...

Sure, and there probably is more than enough land and buildings to go around. California surely has enough, San Fransisco doesn´t. The problem is where there´s a demand next, and for what (uppity young professionals, students, large families, pensioners?), hence the need not to assume that at some point it´s just about right.

Dinero said...

Sam Bowman is calling for the government to allow high density housing on all plots of land to placate the locals unhapiness about rising land values. The contradcition in that thesis is plane to see. The market value of all plots would in that scenario rise.

Mark Wadsworth said...

Kj, I 'did' California recently.

It's not 'land' that's particularly expensive compared to rest of USA, it is the strip along the coast - because people are prepared to pay extra for it.

Housing in inland California costs the same as anywhere else. So tough. The wealthy people get the nice bits, that's the whole point of being wealthy is to have nice stuff.

And no, the supply is never exactly 100% right, but plus or minus 5% it probably is and so as long as the land and buildings are being put to their best use, then no harm done.

Din, got it in one.

Kj said...

Dinero: hard for me to defend Bowman, he isn´t. He certainly mixes in rents as a portion of GDP and all that, and MW is right that he is wrong about planning liberalisation reducing that. But the point is that the locals don´t care about land value per plot(assuming they are renters), which may very well increase with loosening zoning, but they care about individual rents. And the question is whether density increases will allow individual rents to fall.

Kj said...

- with LVT, it most definetly will, which is why I´d object to strict planning with LVT, which sort of defeats the point. Without, it probably will, or at least increase the total available stock at the same rent, and I don´t understand why we would be against that, even if we don´t get it our way with LVT.

Ben Jamin' said...

High land rents are a very good thing. They show the Government have struck the right balance between supply and providing/protecting amenities(regulation).

Get that right and demand is strong. This is Government adding value. A good thing.

Where this all goes wrong is allowing that value to be privatised.

This "free lunch" creates huge dead weight costs.

Firstly the capitalisation of this "free meal ticket" into the exchange value of freehold titles(ransom fees as MW calls it).

Secondly, any "free lunch" means over consumption. So we get inefficiency and mis-allocation in our land market. AKA poor widows in mansions etc, etc.

If we think of the exchange of freehold titles as a public auction for access to the benefits of UK Plc, and the proceeds of that auction where used as revenues, planners would have the perfect incentive the get the correct balance between supply/ demand and the provision of amenity.

If rich people bid for exclusive rights for a view of St James Park, that's great because it shifts the burden of taxation away from lower income households. ie they are perfectly compensated.

When we do this, housing affordability(median household) increases by four fold in the short term(100% LVT) and perhaps double that in the long term.

It is the tax system!

Why are these "experts" even mentioning planning? This is depressing.

Ben Jamin' said...

One more thing.

As with most things, there is a Laffer Curve of maximising revenues from LVT.

This would inform all planning decisions.

So, if you are a local authority, you have to balance two considerations.

Firstly, the number potential rate payers.

Secondly, how much are they prepared to pay to exclude for the amenities in your borough.

There will be a optimum.

This is one reason LA's should keep a portion of LVT revenues.

We want them competing for "business".

Which is another reason why LVT is great. It is the only free market solution to government funding.

People and business can vote with their feet.

Mark Wadsworth said...

BJ, yup, agreed to all that.

"This is one reason LA's should keep a portion of LVT revenues..."


Under my halfway house plan, LA's would in fact keep ALL local LVT revenues; their Year Zero central govt grants out of income tax would be adjusted accordingly so that they all end up with the same amount to spend per capita.

Bayard said...

"The US economist Karl Smith has pointed out that a new book by Thomas Piketty on the history of equality seems to show that the rise in capital’s share of GDP in the West is largely down to land-use planning controls like those of London and San Francisco"

I expect that it actually shows no such thing. All that removing the planning laws would do is to transfer the windfall profits from big landowners like developers to small landowners like farmers and owners of suburban gardens. Considering that developers already have plenty of land they can build on and are not building on it, presumably because they know they can only sell so many houses a year, then letting a lot of small landowners loose on the market probably would push the supply of housing up, but it would do b*gger all to bring down land prices and so b*gger all to slow down the amount of money disappearing into land.