Wednesday, 18 July 2018

"Agglomeration effects (might) change the YIMBY calculus"

A splendid article by Devon Zuegel, the first half of which I wish I'd written myself.

Worth reading in full, but the upshot is this:

There's a distinction within the YIMBY cause that's mostly unspoken, but it's important. Two* of the key goals the movement aims to address are (1) to lower housing prices and (2) to unlock economic, cultural, and social potential. These are often described in similar ways and are in many cases complementary, but they are not the same.

On one hand, there's a lot of talk about how building more will decrease prices because of the models of basic supply and demand curves from Econ 101. We'll call this goal the affordability objective: let's make housing affordable in key metro areas, both for residents who are already there and for those who'd like to come.

Another related but different goal is about how much is lost as a result of locking people out of opportunities in the most productive regions. We'll call this the opportunity objective: let's make it possible for people to to participate in the economic and cultural dynamism in places that they're locked out of right now...

So far, so good. Here's what most YIMBYs resolutely fail to take into account (and refuse to do so, if challenged):

The issue with the conventional supply-demand model is that it assumes that supply and demand are functions of price and price only. At a first approximation, and maybe at the margins, this is basically true. However, it does not account for the fact that the population is also a critical factor in determining the shape of the demand curve for a particular place... the value of living in a particular place is greatly determined by how many people live around it. As the number of people living in a place increases, so does the value of being there. This is often labeled the "agglomeration effect".

She concludes that additional supply probably depresses prices by more than the agglomeration effects push them up, while admitting she has little hard info to support this.

This is clearly not true, we know for a fact that the largest and best connected cities in any country or region always have the highest prices in that country or region (assuming no rent controls or similar measures). But hey, at least she has broken down the issue into manageable chunks and explained what the YIMBYs are missing.
The analysis I would disagree with is this:

A lot of laws exist to effectively cut out the bottom part of the market. (The mechanism here is similar to the argument for how the minimum wage is in fact bad for the very low-wage workers it aims to protect.)

Laws like minimum lot sizes, setbacks, amenity provision, max numbers of occupants, etc effectively make it illegal to build affordable housing.

I wish it were as simple as that, but it clearly isn't.

Imposing large lot sizes is by and large a waste of space etc, but this reduces agglomeration benefits, so cancels out.

Remember - while allowing higher densities and smaller homes reduces the amount which people have to pay for entry-level bricks and mortar, it means more people and more efficiency, and more people and more efficiency means more agglomeration benefits, and that means higher total prices (the savings on the bricks and mortar cost are outweighed by the higher location rent). Think Manhattan vs Houston.

We know that in large, well-connected cities, even the modest/dense housing originally built for lower income people is now insanely expensive and only higher income people can afford it. Think an ex-council flat in London.

I rest my case.
* On a personal note, I have been a lifelong YIMBY on the basis of "not being a total fucking hypocrite".

Vegans and vegetarians can rightly rail against the meat industry and meat eaters in general, that's intellectually coherent. But NIMBYs are like motorists who complain about all the cars on the road. I have always lived in a flat or house wherever it was I wanted to live, and who am I do deny others the right to live in a flat or house wherever it is they want to live? And if there aren't enough, build some more.

More subtly, I have been an owner-occupier for most of my life and it dawned on me decades ago that if they build more stuff near me, that must, however marginally, increase the value of my home (which I later found out was called "agglomeration benefits"). So as a laisser faire kind of chap who likes unearned gains, YIMBYism was always part of my belief system; as a Georgist, YIMBYism sits just as comfortably.


Blissex2 said...

Oh please this is totally obvious, "agglomeration effects" have been studied for a long time.

But apart from obvious it is also quite unenlightening, because of a minor and a major point:

* The minor point is that agglomeration effects tail off pretty rapidly (e.g. at the level of 1m people city), and eventually reverse; for example London is now so big and dense and congested that parts of London are in practice "nearer" to Doncaster than to other parts of London.

* The major point is that as to housing not all agglomeration effects are equally import, by far and away the most important one is jobs. People don't leave in London because of the beaches, the weather, the number of theatres, the relaxed lifestyle; they live 4-8 to a room in crumbling doss houses because that's where the jobs are.

Put another way, most people are not financially independent and thus choose where to live "just because" or because of generic agglomeration effects or the amenities; overwhelmingly people's decision as to where to live is driven by availability of jobs, and everything else is secondary.

As to jobs agglomeration effects do influence where businesses decide to build offices and factories, but that is not such a big deal: the agglomeration advantage rapidly tails off, and reverses, and anyhow transport and communication costs have fallen so much over the past centuries that significant business clusters (and the related supply chains) have moved to all over the world. If agglomeration effects were still so important steel would still be in Sheffield, pottery in Stoke, etc.

To properly understand the London and south-east property market the best way is not to vacuously say that there is under-supply of housing in those already over-congested areas, but there is an over-supply of jobs relative to housing expansion potential.

That is, there are too many jobs where there is housing congestion, and there are too few jobs where there is ample housing supply and space to expand.

Why? Well, obviously because of government policy: the overriding political goal of both Conservative and New Labour policy for 30-40 years has been to deliver massive property gains to their affluent southern voters, and thus they have invested fantastic amounts of taxpayer to subsidize jobs in the south-east and London, mostly by bailing out at colossal cost industries like finance that cluster in those areas, and by spending colossal amounts on job-attracting infrastructure in those areas.

Mark Wadsworth said...

B thanks for comment.

You are quite right that London is subsidised, which exacerbates things. But let's not be so UK-centric, this is a general point about the contradiction/blind spot at the heart of YIMBYism, which is a world wide thing.

But I'm not aware there is a natural upper limit to agglomeration benefits, or where dis-economies of scale kick in. There are now cities/conurbations in the world with tens of millions of people in them. As at today, the cut off point is certainly much higher than 1 million, otherwise there wouldn't be any cities larger than that.