The housing crisis: an act of devastating economic self-harm

The housing crisis: an act of devastating economic self-harm, by John Myers.

In 2015, two talented professors, Enrico Moretti at Berkeley and Chang-Tai Hsieh at Chicago Booth, decided to estimate the effect of shortage of housing on US productivity. They concluded that lack of housing had impaired US GDP by between 9.5 per cent and 13.5 per cent.

In a follow-up paper, based on surveying 220 metropolitan areas, they revised the figure upwards — claiming that housing constraints lowered aggregate US growth by more than 50 per cent between 1964 and 2009. In other words, they estimate that the US economy would have been 74 per cent larger in 2009, if enough housing had been built in the right places.

How does that damage happen? It’s simple. The parts of the country with the highest productivity, like New York and San Francisco, also had stringent restrictions on building more homes. That limited the number of homes and workers who could move to the best job opportunities; it limited their output and the growth of the companies who would have employed them. Plus, the same restrictions meant that it was more expensive to run an office or open a factory, because the land and buildings cost more.

In other word, considerable money (aka claims on goods and services) is being diverted to a bunch of artificially swollen industries, and inefficient allocations of capital are being made due to the housing situation. We’d all be materially better off if it weren’t so inefficient. This is the first time I’ve seen someone try to quantify the sheer scale of the damage — it’s vast.

Most of the damage could be avoided if government got out of housing regulation and money regulation — simply let the marketplace deliver housing and money in the ways people find best. But vested interests make a profit from the current inefficient ways of doing things, and we all pay.

The biggest losers currently are people in their 20s and 30s who cannot break into the housing markets — and in the end society weakens because they do not have as many kids. Crazy.

The housing market is also, as Matthew Rognlie of MIT has pointed out, the biggest single driver of wealth inequality.

The authors estimate the effect in the UK:

You can easily see that the red area, showing the estimated damage caused by the housing crisis, is far larger than the areas showing the GDP impairment from either world war.

There is, in other words, a prima facie case that the housing crisis has caused more damage to GDP than any single event since the Black Death – when two-fifths of the population died.

A suggestion from days gone by, when the market ruled and government mainly just confined itself to justice and defense and there was no income tax:

To give just one example, the Georgians managed to build far more homes per acre, often producing better-looking streets — think of the prettier parts of Bloomsbury or Pimlico. The Victorian mansion blocks of Chelsea have even more homes. If homes in London as a whole were built more like that, land would be much cheaper. Instead, half of the homes in London are in buildings of only one or two floors, often surrounded by expanses of concrete.

Upgrading a single plot from 1930s-style to Georgian land use can easily increase the square footage by a factor of five, creating several new homes and, with the right design code, making for better, more liveable and more walkable places. Yet this country has, with the best of intentions, nearly frozen the path of gentle improvement within cities that worked to supply many new homes for hundreds of years.

hat-tip Matthew