Monday, 30 April 2018

World cities - rents vs metropolitan area population

The BBC ran a good article pointing out that it will soon be rent-freedom day, which is analogous to the Adam Smith Institute's tax-freedom day.

So one-half of their earnings go in tax (stealth or otherwise) and one-third goes in rent. That means the average working tenant's disposable income after tax and housing costs is one-sixth of their earnings!

What caught my eye was this graphic further down the article:

Those rents are fairly proportional to the size of the population of those cities and their metropolitan/surrounding areas, co-efficient of correlation 0.93 (says Excel):

What's the relevance of this, you may ask (except for BenJamin' who put me onto this in the first place).

The point is that larger populations push up rents (agglomeration effects). If you build more homes in large cities, the simplistic supply-demand assumption is quite simply incorrect (unless you prevent any immigration into the city, which is impossible). Build more homes = more people = even higher rents. Rinse and repeat.



benj said...

@ MW

"What's the relevance of this, you may ask (except for BenJamin' who put me onto this in the first place)."

Would love to take the credit, but it was you and Bayard who started all this. I just stumbled over Prof Geoff West on a BBC programme about maths who confirmed what you were saying with his theory of networks and scale aka agglomeration effects.

The whole Tokyo thing is puzzling, as we've been recently bombarded by the Faux-libs who about keep banging on about just how cheap it is to live there compared to London, due to its relative lack of planning regulations.

As you say, between country comparisons is a bit apples and oranges. No doubt however your results would be the same, or even more robust within each country.

benj said...

"If you build more homes in large cities, the simplistic supply-demand assumption is quite simply incorrect (unless you prevent any immigration into the city, which is impossible)."

Even if you did that, it wouldn't necessarily make housing cheaper.

Take somewhere sprawling like Houston and fixed the population. Supply more homes/development into the centre, and turn it into something more like Hong Kong. You'd simply shrink the footprint, leaving a load of vacant property on the outskirts no one would want to live.

If anything, the cost savings would lead to higher aggregated rental values.

The opposite would be true of Hong Kong, natural boundaries notwithstanding. Sprawl adds costs and reduces prices.

Mark Wadsworth said...

BJ, ok, in that case Bayard gets the credit.

As to Tokyo, @londonyimby quotes a different source saying Tokyo rents are half as much as what the BBC says. So the jury's out on that one.

Second comment, agreed, but that's even more arcane and @londonyimby will flatly deny such a possibility.

benj said...

@ MW

Regarding Tokyo, as you know land values are governed mainly by wages, but other things too.

The faux-libs say that rents have remained low compared to the UK. But as per my last post, wage growth as been pathetic. UK wages have increase by nearly ten times as much, in real terms, over 25 years in comparison. So of course Tokyo rents are going to flatline,

Secondly, although its clean, I've been told Tokyo is not pretty and a bit shabby in places. Yes they are building a lot, but then unlike in the UK, many of their homes were only designed to last 30 years. There are >850,000 empty homes in the capital alone. Hardly a great allocation of resources.

Thirdly, if renting/cost of living really was so good, then discretionary incomes in Tokyo would be higher. In which case, why are there ten times the number of foreigners in London than there?

People vote with their feet.

I've put all these points to the ASI, Capex, IEA when ever they trot out the Tokyo outlier. But they never respond, and print the same crap week after week. Why? Because they are dishonest c**ts.

George Carty said...

Japan is a xenophobic country with a very difficult language: that probably explains why so few foreigners live there.

benj said...

@ GC

Its my understanding that Japanese is easy to pick up in order to communicate, but difficult to read and write in.

As for foreigners not being liked, since when has that put off economic migrants?

If discretionary incomes really were higher to any significant degree people would go simply to send the money back home. Just as plenty do now in London. Language and a bit of anti-foreigner hostility wouldn't get in the way higher incomes.

Bayard said...

"Japan is a xenophobic country"

My understanding from someone who lived there is that the Japanese are not xenophobic in that they are hostile to foreigners, but that you will always be a foreigner, there is no possibility of even the slightest bit of integration.

George Carty said...


The US Defense Language Institute has ranked languages in levels of difficulty (for English speakers), and put Japanese in the most difficult level along with Arabic, Chinese and Korean. (The easiest languages being the Romance and Germanic languages, with German proper being slightly harder than the rest due to its case system.)

And I wonder if just as land values are depressed in American sprawl by the cost of owning and running cars, I wonder if Japanese land values are suppressed by the cost (in time and money) of commuting to work by train?