Housing and Capitalization
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SteveHousing and Capitalization
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SteveLecture 7: Housing & Capitalization
Danny Shoag
Overview
We are looking for a framework for how regional economies work
We attack this by attacking the first order fact big income gaps
We saw that capital was pretty mobile within countries: unlikely that
capital accumulation is cause
Looked at the evidence for two kinds of immobile inputs:
agglomeration (knowledge, labor pooling) and market access
We looked at the spatial equilibrium model both within and across cities
We saw that labor migration was responsive to unemployment, though it
hasnt closed income gaps
Today we explore how housing prices are set and the role they play in
this framework
Last time
Utility = Wages Rent + Amenities Transportation Costs
City line divides a NH street:
Fischel
House in Bow
House in Concord
Property Tax Rate
2%
5%
Price
$200,000
$160,000
10% Mortgage
Property Tax
Annual Cost
Last time
Utility = Wages Rent + Amenities Transportation Costs
Fischel
House in Bow
House in Concord
Property Tax Rate
2%
5%
Price
$200,000
$160,000
10% Mortgage
$20,000
$16,000
Property Tax
Annual Cost
Last time
Utility = Wages Rent + Amenities Transportation Costs
Fischel
House in Bow
House in Concord
Property Tax Rate
2%
5%
Price
$200,000
$160,000
10% Mortgage
$20,000
$16,000
Property Tax
$4,000
$8,000
Annual Cost
Last time
Utility = Wages Rent + Amenities Transportation Costs
Fischel
House in Bow
House in Concord
Property Tax Rate
2%
5%
Price
$200,000
$160,000
10% Mortgage
$20,000
$16,000
Property Tax
$4,000
$8,000
Annual Cost
$24,000
$24,000
Questions
Why dont developers just build in Bow and earn $200,000
per house rather than $160,000?
Would it matter if you paid cash instead of a mortgage?
What assumptions does this result depend upon?
Numerous Studies on Capitalization
Housing prices often treated as a sufficient summary statistic
for the welfare effects of a policy:
Taxes
Environment
Crime
Traffic
Development policies
etc
But wait
Theres a supply side to housing too.
Why does housing ever deviate from the cost of
construction?
Inelastic Housing
When the supply of housing does not respond to the price,
we say its inelastic.
When this is true, all amenity differences are capitalized
Perfectly Elastic Housing
When the supply of housing is infinite, we say its perfectly
elastic
Welfare distribution
Suppose an amenity raises the value of a house by $1.
This is that upward shift in demand
What is the increase in welfare:
For existing owners?
For people moving in?
What is welfare? Inelastic case
How does the shock change welfare?
Who benefits?
What happens to Prices?
What is welfare? The elastic case
How does the shock change welfare?
Who benefits?
What happens to prices?
Trade Off of Housing Supply
Benefit:
More people enjoy
amenity
Con:
Existing owners do not
enjoy increase in prices
May not invest in amenity
Concrete Example
Should I pay taxes to build a really nice city pool:
Inelastic
Elastic
Cost
$1,000,000 $1,000,000
Benefit
Enjoy until I Enjoy until I
move
move
Higher price
when I sell
If a developer can build more houses, then more people will enjoy
the pool. But Im less likely to build it.
Existing land use and welfare
Measure welfare through development and prices
Own lot, external, and supply effects are all negative.
Identification worries?
Learning from Recent Data:
Housing Prices and School Quality
Parents are willing to pay 2.5% more for a 5% increase in test scores
Hard to pin down causes
Hilber and Mayer
Hilber and Mayer
Housing prices are more responsive to amenities when
supply is less elastic
Hilber and Mayer
When faced with an exogenous cap on rates, places with less
open land overrode the provision more frequently and spent
more
Places with old people or homeowners that have little
undeveloped land spend more than similar places with lots of
undeveloped land
Capitalization, Property Taxes, and
Government Discipline
Why do local governments rely on a property tax?
Traditional answer : low elasticity of supply reduces deadweight
loss.
Ed Glaeser argues that property taxes can discipline corrupt
governments:
Will need to maintain good amenities values
People and prices are forward looking, so governments need to
invest in the future
A quick aside: Housing and Unemployment
Housing can slow adjustment/increase unemployment if it
reduces mobility
Relationship within the USA
Underwater homes and rising interest
rates
Both are linked to lower mobility, though the evidence is not
perfect
Back to our framework
Our Puzzle Part 1:
Why are some still so much richer?
Our Answer Part 1:
They have some fixed, non-exportable features
Our Puzzle Part 2:
Why dont people move to eliminate these income
differences?