This is timely considering the discussion on rents, how much is too much of an annual rent increase, and why shouldn’t landlords be able to raise rents larger percentages when the economy is good to make up for the leaner times. Vox has a piece on the recently released report from the White House detailing the role of rents on inequality. So, I’ll admit a lot of the economic speak was a lot over my head so it would be helpful for the economists type folks in the house (I know there’s at least two of you in the audience, maybe more) to help layspeak it for the rest of us. I mean I understand it on the level of “hey this is in English and I have good comprehension skills” but that’s about it. Except for Box 1, I totally understood Box 1 and I’m going to fixate on that after excerpting the Vox piece.
This phenomenon — a decline in the labor share of income — hadn’t really happened before. In fact, economists had kind of convinced themselves that it couldn’t happen, and that the labor share was something like a fixed property of the economy.
But obviously that was wrong. And the most natural interpretation of why it’s wrong is that the bosses are getting one over on the rest of us. Maybe it’s globalization, maybe it’s automation, maybe it’s the decline of labor unions, maybe it’s neoliberal hegemony (why not), or maybe it’s something to do with workplace skills. But whatever it is, it means that the American worker’s power to bargain for wages and benefits has declined, hence the declining share of income going to workers’ wages and benefits.
Except that’s wrong, too. Check out this chart — it shows that the rise in the share of national income going to the owners of businesses has only nudged up very slightly. The rise is in the share of income going to the owners of houses.
That’s something people definitely used to think couldn’t happen. After all, if owning houses becomes more lucrative, then people should respond to market incentives by building more houses. There’s no way houses could just get more and more and more valuable. Except, of course, a house isn’t just a house. It’s also a place. Location, location, location, as the realtors say. A house that’s within a decent commuting distance of Google or JP Morgan is worth a lot more than a similarly sized house in San Antonio or Memphis or Cleveland. You can always make more houses, but you can’t make more land.
Except across the vast majority of America’s valuable land we’ve made it illegal to build rowhouses or apartment buildings. And so the land’s value only increases, the rents going to its owners accumulate, and workers lose out.
From the report explaining broadly about previous research on land use restrictions aka Box 1 referenced in the introduction:
Glaeser and Gyourko argue that land use restrictions largely explain occurrences of prices substantially exceeding construction costs. In other words, land use restrictions facilitate the existence of economic rents in housing markets. Glaeser and Gyourko find a strong positive association between cities where housing costs exceed construction costs and those with more land use restrictions
Land use restrictions are a particular example of rents created when policies confer benefits on insiders. One specific set of examples are zoning rules that protect existing property owners.
More broadly, while it is difficult to compare land use regulations and zoning laws across cities and geographies, academic studies have found that land use regulations lead to higher housing prices, lower rates of new construction, and lower elasticity of housing supply [emphasis added]
Land use restrictions, like, say, a nearly 40 year old ban on multifamily housing. More:
The mechanism by which zoning creates rents is straightforward. Zoning regulations are best interpreted as real estate market supply constraints. Taking various forms—limiting height restrictions, highly restrictive minimum lot sizes, complicated permitting processes, or prohibitions on multifamily structures, to name just a few—such regulations effectively limit the number of housing units or non-residential buildings that can be built in a given area. This is accomplished either through direct categorical restrictions or imposing prohibitive costs on investors.
And speaking directly about the high rents in regions like ours:
The demographic trend of urbanization, for example, may confer rents on housing owners in places like New York and San Francisco, where housing values far exceed construction costs. Such trends are likely exogenous to the housing market itself, reflecting cultural shifts that boost demand for urban living. But they certainly provide returns to landlords well above their reservation price. These housing rents would take the form of increased producer surplus in response to an exogenous positive demand shock, rather than the negative supply shock induced by land use restrictions. [emphasis added]
I always find it fascinating, and a little ironic, when some folks urge allowing the “market” to do its thing when speaking about the increase in rents. The “market” is the one driving up rent costs, not landlords. The “market” makes it difficult for landlords to turn away from listing one bedroom apartments for $2300, $2490, and $2600 by emptying those units by any means necessary. But have absolutely no problems with constraining the supply of housing being built through land use regulations and artificially constraining the same “market.”
The same fascination and irony comes from folks lamenting the possibility of a decrease in their “quality of life” if new units were to be built, but the same regard for the “quality of life” of actual renters being actually displaced from their homes and from Alameda experiencing an actual degrading of their “quality of life” doesn’t even resonate.
Equally fascinating and ironic are the folks who worry about the inability to travel freely and quickly if more units were to be built in Alameda but have no issues with Bay Area workers joining the ranks of mega commuters with five or six hour commutes in order to maintain their well paying Bay Area job, but actually find an affordable place to live. This one also goes under the “quality of life” thing too because 4:30 a.m. to 8:15 p.m. is something that the majority of us could not comprehend if we cannot be inconvenienced a few extra minutes in Alameda traffic. If this doesn’t break your heart, well…
“I’m exhausted. I love my job, but I’m almost at the point where I can’t wake up in the morning.” When she arrives back home around 8:15 p.m., she has “to review the kids’ homework, give them their baths. They don’t understand that I’m tired and I don’t like to show them that I’m tired.