Thursday, 6 September 2018

Either the observations are wrong or the theory is nonsense.

The observations

1. The larger the conurbation-the denser the population-the better the links to other places, the higher the average productivity-wages-profits. This is partly because of synergies-specialisation-agglomeration benefits; and partly because higher wages at the top of a pyramid depend on how wide the base of the pyramid is. This pulls up the overall average while widening the difference between top and bottom. The fag packet calculation is double the size of a conurbation and average wages go up by 5%.

2. Within any country, there is free movement of people and workers. Between leaving home and 'settling down', plenty of people are willing move from lower wage to higher wage areas. Once all housing in the higher wage area is occupied, this pushes rents up to the point where a new equilibrium is reached and the rent differential is equal to the wage differential. At this stage, there is little financial advantage in moving and net internal migration falls to a trickle.

3. This is easily measured by looking at average wages minus average rents in different regions of any country, this 'basic minimum' is much the same anywhere.

See for example here

(Clearly, rent and wage differentials between countries if there is no free movement of people and workers between them can be sustained almost indefinitely.)

Anybody who disputes this can leave the conversation right now.

The theory

1. Supply of housing is kept below its optimum level by one or more of the following:
i.  Councils' planning departments (for reasons unspecified) not handing out enough planning permissions.
ii. NIMBYs putting political pressure on councils not to hand out planning permissions.
iii. Land owners holding on to land as long as possible to bank the biggest gains.
iv. Home builders restricting new supply to keep prices up.

Choose your favourite according to political bias!

2. Housing is a perfectly ordinary good, like coffee beans, cars or carpets. If there is an increase in supply, prices will fall, and vice versa. This is easily observable in the short term, like if there is a coffee glut, or in Germany post-unification when East Germans sick and tired of Trabis, were itching to buy decent second hand VWs and second hand car prices doubled for a year or two. This levels off very quickly, as manufacturers make a certain minimum profit margin. Any less than that and some go out of business, any more than that and they manufacture more, or new players enter the market.

3. Therefore, if somehow home builders/land bankers could be persuaded to increase output (despite it being against their interest to do so), prices and rents would fall. Simple, 'housing crisis' solved! Duh, why did nobody think of that before?

(I always ask these people, OK, if it's all about supply, and there are more homes within the M25 than in the whole of Scotland, why are prices so much higher within the M25? None has ever answered that, the closest they ever get is 'it's different this time'.)

Either the observations are wrong or the theory is nonsense

OK, let's measure 'affordability' in terms of how much disposable income working tenants (actual or potential internal migrants) have left over after paying rent ('the basic minimum'). We know from observation that within any country or area with freedom of movement, this is pretty much the same everywhere and however many homes there are in any area, the basic minimum will still be the same all over the country.

(This is why people at the bottom of the wage pyramid in a wealthy country are negatively impacted by freedom of movement - they are competing for jobs with people with a much lower basic minimum expectation, who are happy to accept lower wages or pay higher rents).

This is where is becomes nigh impossible to reconcile the theory to the observed facts:

Probability A. We increase supply of homes in high wage-immigration areas, there will be more agglomeration benefits = higher average wages, so the trajectory is that rents there will increase rather than fall. Assuming that in emigration areas there is the opposite effect and wages fall, then the basic minimum must fall. This actually exacerbates the whole thing.

Possibility B.We increase supply of homes in high wage-immigration areas, people move there but there are no agglomeration benefits. Wages, and hence rents, and hence affordability stay the same.

Possibility C. A greater mind than mine can actually reconcile the theory with the observations.

20 comments:

L fairfax said...

London's population has increased since 1991 to today. Has this increase shown this effect compared to other parts of the UK
"The larger the conurbation-the denser the population-the better the links to other places, the higher the average productivity-wages-profits."
? Or was the increase not enough to show this?

"Housing is a perfectly ordinary good, like coffee beans, cars or carpets. If there is an increase in supply, prices will fall, and vice versa."
I don't believe that, there are planning controls unlike coffee beans etc.

Woodsy42 said...

As L.Fairfax says, there is not a free market in housing. You have the planning and building controls which artificially distort (upwards) the value of land allowed for building by creating shortage and huge windfall gains for some landowners. Plus you have large numbers of essentially 'non-productive' people being paid state benefits (ie subsidies) to live in areas where housing is already in short supply, this effectively blocks the market even further and raises prices/increases shortages for people who need to work in the area.

Mark Wadsworth said...

LF and W42, the theory assumes that the primary restriction on new construction is planning regs and that these would be loosened.

Mark Wadsworth said...

LF,the answer to your first question is yes.

L fairfax said...

So real wages and profits in London have increased since 1991 by more than the rest of the economy? By how much?

Dinero said...

Also the government features, circulating the money, taxing in the centre, and spending in the periphery.

mombers said...

A key feature of a market is the option not to participate. Impossible with land, even with completely laissez fair planning. You have to live somewhere to participate in a local economy. Competition between local economies is severely limited even if people move due to friction of changing job, schools, social networks, family etc. No other good or service has such a high barrier to exit or entry. You have to fundamentally change your life. And have zero net gain due to any increase in income being eaten up my rent, and vice versa

Frank said...

I'm struggling to work out what this means:
"Probability A. We increase supply of homes in high wage-immigration areas, there will be more agglomeration benefits = higher average wages, so the trajectory is that rents there will increase rather than increase."
Did you mean "increase rather than decrease" or "decrease rather than increase" or something else?

Mark Wadsworth said...

LF, by "more". That is all we need to know.

Din, true but completely irrelevant in this context.

M, sure, once you have 'settled down', it's hard to move. But that is also irrelevant as prices are decided by actual or potential movers.

F, sorry, the former, I have updated.

L fairfax said...

If we don't know how much it has increased in London compared to comparative places, then how do we that it has increased by more?
I am not sure these observations have been observed.
The population in London decreased from 1939 to 1990 - but I am pretty sure that real wages relative to the rest of the UK were higher in 1990 than 1939.

Mark Wadsworth said...

LF, we could look this up but it is irrelevant.

You seem to be disputing the observations in part 1. These have been observed since the dawn of time in every civilisation. You are wasting your time and mine trying to disprove this.

Bayard said...

"You have the planning and building controls which artificially distort (upwards) the value of land allowed for building by creating shortage and huge windfall gains for some landowners."

No, planning and building controls artificially distort downwards the value of land disallowed for building (agricultural land).
Think about it, if you bought a house that was under a restrictive covenant that said it could only be used as, say, a primary school,and you managed to get that covenant lifted, what do you think would happen to the value of the house?

L fairfax said...

@These have been observed since the dawn of time in every civilisation.
Surely that should only take a minute to prove then?

L fairfax said...

PS FWIW I am quite keen on LVT and think that there probably are benefits to conglomeration, I am not 100% sure that it is entirely linear.

Mark Wadsworth said...

LF, why do I need to I prove that something observably happens? Go out there and observe, you will observe the same.

Whether any of this is linear is irrelevant, we are comparing 'more', 'the same' and 'less'.

It doesn't have anything to do with LVT either.

The topic in hand is whether building more will lead to lower prices.

Ben Jamin' said...

"The fag packet calculation is double the size of a conurbation and average wages go up by 5%."

15% surely?

Ben Jamin' said...


@ L Fairfax

Apply Ricardo's Law of Rent to this.

https://www.youtube.com/watch?v=_JUAx445ReU&t=1635s

Socio-economic benefit scale at 0.15 every time a city doubles in size.

Mark Wadsworth said...

BJ, ah, I was quoting another source from memory. 15% seems a bit high but he's the scientists.

Either way, what is important is that it is "more", not "precisely how much more".

Dinero said...

An aside note , why doesn't council tax per dwelling go down in line with aglomeration.

L fairfax said...

@Ben Jamin

Thanks for that.