Jacobin, our second favorite leftist rag (following Current Affairs), has an article about “The Problem with YIMBY Economics”. It is, as one would expect, bad economics.

Rule I:

Land as a factor of production

After some throat clearing in the introduction, the author gets to his first point.

In the Econ 101–inspired picture of housing markets, the problem of housing scarcity is almost trivially simple: local metro-area governments have made it illegal to build more than a certain number of housing units on each section of urban land; this cap on supply, combined with rising demand, results in a bidding up of the price of the “product,” just as you’d expect in any “normal” industry. Lift the cap, and market incentives will send new housing supply rushing in. But there’s a problem with this logic: it glosses over the critical role of land.

Central to this Jacobin article is the idea that YIMBYs and housing economists are completely oblivious to the role of land as a factor of production.

This is of course completely wrong. Adam Smith wrote extensively about land and “ground rents”, and Henry George regurgitated Smith (and other early economists) in the late 1800s which popularized the idea of a land value tax. While land became a less important factor of production during the Industrial Revolution and the post-War era, economists have known about land as a factor of production for as long as the discipline has existed.

Urban land, whose value accounts for about 80 percent of the geographic variation in residential property prices, is what makes housing fundamentally different from other sectors of the economy.

The claim that urban land is 80% of the geographic variation in residential property prices is absurd and without citation.Glaeser and Gyourko (2017) note that industry standards of the proportion of property production costs for land is roughly 20% of production costs, which is what they also have found in the past. In much older research, the authors found that there is a lot of variation in land prices (here and here) and the proportion of housing cost that is land prices, depending on the city. The research that I can find does not suggest that land prices are 80% of the variation in residential prices. Note: land prices are notoriously hard to estimate, and some of the estimates are a mix of not just land price but regulatory barriers to entry (zoning). Regardless, 80% is far too high and paints a poor picture of the costs of housing (regulatory hurdles and cost of labor and materials).

At the risk of getting into a semantic debate where different definitions are being used, the author is confused about what “productivity” is (to economists) and how prices for factors of production are determined.

In a competitive market, the real interest rate is related to the marginal product of capital (high MPK = high interest rate), the wage is related to the marginal product of labor (high MPL = high wages).

In “normal” industries, the cost of production is driven by productivity: the more output can be squeezed out of a given amount of labor and capital, the less the product costs.

This is the author’s understanding of “productivity” which is confused. What is described here is increasing returns to scale. This is a description of a type of production function a firm has, where the cost of a good falls as the quantity it produces increases. This is not always the case: constant returns to scale may also categorize a firm’s production function. For instance, an Italian restaurant probably does not decrease the cost of making carbonara simply by making more carbonara.

So “productivity” is not when the price per unit falls. “Productivity” is more generally described as using less inputs (factors of production) to get more outputs.

It is more helpful to think about the marginal product of capital, labor and land. Once you think this way, “land” ceases to be a “problem” for YIMBYs

[Land is] unique among production inputs, for at least two reasons. For one thing, unlike machine tools or office supplies, it’s a speculative asset; its value fluctuates according to investors’ shifting guesses about future developments….

The first point to note, then, is that when a city “upzones” — that is, when it allows denser development by lifting the cap on the number and size of housing units that can be built on a given piece of land — the price of land actually goes up, which makes it more expensive, all else equal, to build housing there. Some may find this paradoxical: How can eliminating a restriction on the supply of something make it more expensive?

Let’s refer back to wages and real interest rates. These are both determined by the marginal product of labor and capital (respectively). When the marginal product of these inputs rise, we should expect the wage and real interest rate to rise. By ending zoning restrictions, we make the marginal product of land go up. This means the price of land goes up. That’s an entirely expected result, and one that isn’t paradoxical. By allowing someone to build improvements on land that fetch higher cash flows, this makes the land more productive.

So if upzoning increases the price of land, and if land is the decisive determinant of housing costs, does that mean upzoning — touted as a way to make housing cheaper — actually makes it more expensive?

The remainder of the piece seems to rely on the idea that housing costs are primarily driven by land prices (the 80% from before). This is empirically false, and basing your beliefs on empirically incorrect claims is bad.

Of course, starting on empirically false claims is par for the course for leftists. That’s like, their whole schtick.

Land speculation

Let’s take a concrete example…

This next part lacks a good section to block quote. I’d suggest reading it in full. The tl;dr of it is that the author suggests that owners of property will not sell their land because they expect the land to be worth more in the future, so the only rational thing to do is to never sell property. The author also relies on a working paper that “proves” this point using a real options model.

Firstly, there are no empirics to back up the author’s claim and the author’s model. Let’s think about the covid-related spike in housing prices in residential single family homes. Prices were rising month over month. By the author’s logic, prices should’ve gone up but sales should’ve plummeted. But, they didn’t - instead we saw a flurry of buying and selling. Since the stock of homes is fixed in the immediate short run, most of the housing stock sold was already owned by someone else (that is, relatively few new homes).

Here is an example from Philadelphia. The number of sales in 2021 jumped a lot, especially relative to years prior. But, critically, the number of sales were flat during the times of rising home prices in Philadelphia. This runs counter to the argument made by the author: sale prices should rise but sales should fall or be roughly zero. That’s not happening.

https://imgur.com/a/siRMLJE

Now, the paper the author cites is admittedly a bit over my head. By trade and training, I am a causal inference bro. I glossed over it, and the paper seemed to argue about vacant land and whether or not to build or wait. There were critical values in their model about whether to build or to wait, that seemed tied to some expected growth rate. In any case, the model is more nuanced than the author implies (the author did not read this paper, the author found this paper to justify their argument). But hey, let’s take a look at Philadelphia again and look at vacant land sales.

I also show the number of sales and the mean log price of the sales each year. We can see that as prices were rising in the mid 2010s, vacant land sales went up. Notably, this coincided with an overhaul of our zoning code in roughly 2012, which allowed more by-right construction.

I’ve split each of the vacant land sales by their zoning type. CMX is mixed use commercial, RM is multifamily residential and RSA is single family. Across the board, as prices went up, vacant land sales went up. Of course, vacant land is scarce, so the number of sales of vacant land has dropped.

So the author is again incorrect that vacant land sales will just not occur while price growth in real estate is occurring. And the real options paper at least doesn’t explain my city.

Now, you in the crowd might be thinking “hey, what about the counterfactual?”. Yes, you’re right - my graphs do not show the counterfactual world. My graphs might reflect the author’s mental model: we should’ve had more sales of vacant land and single family homes than otherwise.

Let’s do a rough difference-in-differences analysis.

Auckland, NZ, did a large zoning reform in 2016. Brookings graphs out the permits issued for attached and detached houses and we see that relative to non-upzoned areas, housing permits have exploded. The pre-trend difference is relatively stable, too. So yes, in fact, upzoning encourages more development. This is simply true and no amount of leftist mental gymnastics can get you around this One Simple Trick to fixing your housing crisis.

Home prices are a function of rich people

YIMBY economics must, then, be based on a kind of circular reasoning: upzoning causes rents to fall because rents are expected to fall, due to the fall in rents.

The author is clearly not familiar with any theory of expectations because, yes, expectations create self-fulfilling prophecies.

But in any case, this is not what “YIMBY economics” - i.e. econ 101 and/or price theory - says. Econ 101 says that competitive markets have prices that are close to (marginal) cost. Currently, prices for housing units are not close to cost - they are often way above cost, especially in coastal cities. Prices above costs are considered “monopoly pricing”. The reason for prices exceeding cost is because we don’t allow new entry into the housing market due to restrictive zoning regulations mandating that only certain types of housing (generally, single family homes often with wasteful lot size requirements) are allowed to be built. This allows incumbent landlords to have monopoly power in pricing. If we allow more competition, prices should fall close to costs

Indeed, the Auckland upzoning is a good example of the above mechanism. In a working paper (pdf download) released by the University of Auckland’s business school found that rents in Auckland are 14-35% lower depending on size of dwelling and model specification. Unlike the Brookings memo, the author here uses synthetic control, a somewhat similar method to difference in differences. Overall, it’s a good paper in my opinion that passes all robustness checks thrown at it.

So, “YIMBY economics” is straightforwardly correct and we have good evidence of this.

What’s the author’s model of housing prices? I am not even going to tackle his nonsense graph that is just fundamentally an endogenous regression, and quite hard to understand visually. But the argument here is that housing prices are high where rich people live and low where rich people don’t live. But this really isn’t true. Obviously a mix of income and construction costs will determine the price level of housing, but as /u/flavorless_beef pointed out rental price levels in the long-term are closely related to long-term vacancy rates.

What are vacancies? They’re the amount of rental units that are for-rent but not occupied. When there are more (less) rental units than people looking to rent, rents are lower (higher).

Conclusion

Economists do know what land is, and they understand that land is a factor of production. Supply and demand is, in fact, real. Empirical evidence rejects all the claims made by the author.