The Value of Land

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Interesting point from Matt:

If I were to pick something to quibble with in Ryan Avent’s The Gated City it’s a perpetuation of the American habit of mixing up discussions of the price of houses with discussion of the price of land…

Five years from now, your house, like your bulldozer, is going to be older, more broken, and cheaper than it is today. It’s the land the house/bulldozer is on that might be more expensive. That might be because it becomes more desirable as a place to live, or because climactic shifts make the lend better-suited for high-value agriculture, or because oil is found on the property, or because it acquires a better road connection, whatever. There are lots of perfectly ordinary reasons for land to go up or down in price. A house, by contrast, is a large decaying physical object.

He’s right that I don’t draw out this distinction in my book. I’d say it’s implicit in my argument. High housing costs reflect the high value of access to productive cities — you can’t take advantage of the high wages in Silicon Valley unless you live in a housing unit that provides you with reasonable access to Silicon Valley. When broader shifts increase the economic potential of a place like Silicon Valley, land with easy access to that place also rises in value. The natural market response is to maximize the return on valuable landholdings by using them to provide shelter to the many people who’d love to have access to the local job market.

Unfortunately, the response in many productive cities is to try to circumvent this response. Residents use lots of different tools to prevent landholders from providing the access to the local economy that the market demands. As a result, we fail to take full advantage of the productive city’s economic potential, jobs in productive industries that would otherwise be created are not, and the economy as a whole is worse off.

When you see rapidly rising home prices in a rich city, that’s the process you should be imagining to yourself; it’s lost economic growth and lost jobs made manifest.

Comments

  1. jonathan says:
    September 8, 2011 at 1:25 pm

    I love density.

    I have not yet read the book so excuse this note.

    To me, the issue is not competing with Phoenix but increasing the economic value of a higher cost, higher wage, higher skill city. I think we miss the boat when we think of lots of land on the edge versus suburban NYC or Boston. I’m not even sure increased density will lower housing costs much, but increased density will bring more people into these productive clusters, more businesses to serve the density, etc. A city is a cluster, a bunch of clusters, and density is nourishment.

    LA is an interesting example. It is actually quite dense, much denser than a suburb, with that density extending over a very large area. It is not dense in a core, in an area of very high density, but is instead moderately dense all over. This density seems to contribute to the overall level of economic activity. Again, it isn’t right to compare that kind of density with edge development of Houston. LA needs more dense cores and is well suited to take advantage of the increased activity level generated by that density because it is already dense.

    Boston is a highly gated city. Part of that is extreme resistance to density, but part is also a blunt restriction which is obviously harmful but is entrenched: legally binding non-compete contracts. CA doesn’t allow them so people move around Silicon Valley. MA enforces them – and in every field – and the state pays the price in lost economic activity. One can say this is a law so it’s government but the law exists because business interests want to quash competition. The region suffers for it.