Macro Roundup

"...City dwellers around the world pay $650bn more in housing costs than they can afford yearly, as rapid urban growth meets a constrained supply, according to a new report....McKinsey looked at the cost ofhousing as a proportion of household incomearound the world, showing the extent to which a city’s residents are under financial pressure...."

1. Life & Arts›
2. Arts
3. Magazine
4. Food & Drink
5. House & Home
6. Lunch with the FT
7. Style
8. Books
9. Pursuits
10. Travel
11. Columns
12. How To Spend It

LATEST ARTICLESWorld’s city dwellers paying out $650bn more than they can afford

Allen, Kate, "World’s city dwellers paying out $650bn more than they can afford,"The Financial Times, October 24, 2014. Available at:http://www.ft.com/cms/s/0/3df85be6-5abf-11e4-b449-00144feab7de.html

“It is not fully effective in Seoul because it has greenbelt around it but in the country as a whole prices have been stable,” Mr Muellbauer said.

Mr Muellbauer cited South Korea as an example of a country that has avoided housing affordability problems through government action. Its state-run land bank helps to smooth the supply of new housing, while macroeconomic regulations on mortgage lending, including loan to value ratios, have had a damping effect on demand.

“People look at recent rises in house prices and tend to extrapolate forward, so some price appreciation tends to create further appreciation,” he said.

John Muellbauer, an economist at Oxford university, said one of the factors behind the affordability crunch was speculative investment.

Andy Martin, chairman of ULI UK, said cities such as London and New York were “victims of their own success”. “These cities are under significant pressure because they are engine rooms for growth. Cities cannot survive unless they have adequate provision for key workers like teachers, nurses, bus drivers and cleaners to live within commuting distance of their work.”

The Urban Land Institute, a US-based think-tank, said global “gateway” cities, the world’s leading urban areas, were struggling to provide affordable housing for their workforces.

Some cities are taking steps to mitigate housing costs, Mr Mischke said, singling out New York mayorBill De Blasio’s planto build 200,000 new homes in the next decade, andGermany’s system of rent controls.

“This is not by any means an effective, well-functioning market,” he said. “Land markets tend to be government-controlled, either directly, for example Singapore, or as in London and New York where the government is a significant landowner and the prime actor in regulating land use.”

Governments should also do more to free up sites for development, with land costs in leading cities accounting for up to 60 per cent of the cost of building a new home, Mr Mischke said.

The study recommends reducing building and maintenance costs and cutting the cost of finance for both home buyers and housing developers.

Around the world, 330m urban households lack decent housing or are cutting back on basic spending to cover housing costs, McKinsey found. By 2025, this number will grow to 440m - a third of the world’s urban population - unless governments do more to build and subsidise housing, the report said.

Housing affordability has become “a huge social and economic issue affecting billions”, said Jan Mischke, a senior fellow at McKinsey Global Institute and one of the report’s authors. “More and more cities are growing fast, they are quite likely competing for talent and workers.”

McKinsey looked at the cost ofhousing as a proportion of household incomearound the world, showing the extent to which a city’s residents are under financial pressure. For the first time in human history more thanhalf the world’s population live in urbanareas and the proportion is set to rise to two-thirds by 2050 according to the UN.

Some of the world’s leading urban areas face the biggest housing cost problems, withNew York, TokyoandLondonamong the worst affected, the McKinsey Global Institute said.Beijing, São Paulo and Buenos Aires are among those facing the biggest crunch amid lower income cities.

City dwellers around the world pay $650bn more in housing costs than they can afford yearly, as rapid urban growth meets a constrained supply, according to a new report.

Kate Allen in London

"...There is no contradiction in a model where both aggregate demand and aggregate supply curves shift in unfavorable directions! And in the medium run, each of these shifts pushes the other curve around too...." In the medium-run, supply- and demand-side stagnation stories are very similar

It’s not either/or. Circa 2008-2009, we should have had a higher inflation or ngdp target. We could do structural reform too, whatever you might think that means, obviously opinions will differ. We could build productive infrastructure, boosting both supply and demand, and with little risk of default on the debt. And yes, we might wish to cut some other government expenditures in the process (farm subsidies anyone?), with looser money to pick up the slack. What we shouldn’t do is all that Keynesian ditch digging. Even if you agree with the argument for it (and I don’t), it so hurts the reputation of legitimate government investment that we shouldn’t be going near it. There are many, many other better things to do, including giving our government a reputation for careful project selection looking forward.

Simple textbook economics indicates that the AD-AS distinction makes the most sense in the short run. Of course hysteresis is a mechanism by which low AD can over time translate into low AS as well, but the causation runs both ways, don’t forget that.

But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time). Cowen, Tyler, "In the medium-run, supply- and demand-side stagnation stories are very similar, Marginal Revolutions, October 29, 2014. Available at:http://marginalrevolution.com/marginalrevolution/2014/10/in-the-medium-run-supply-and-demand-side-stagnation-stories-are-very-similar.html

If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.

Krugman is worried about policy implications:

Let’s not forget that economies have real wage and price stickiness in addition to nominal stickiness. That is another channel through which negative supply shocks can hurt aggregate demand and throw people out of work.

There is no contradiction in a model where both aggregate demand and aggregate supply curves shift in unfavorable directions! And in the medium run, each of these shifts pushes the other curve around too.

If there is less produced, there are eventually perceived negative wealth effects. What happens to demand? It goes down, in this case with a lag because of credit. Yes, it is a big mistake to assume Say’s Law always holds but it is an even bigger mistake to think it never holds. Supply slowdowns are bad for demand, and they likely are bad for credit creation too, which hurts demand further yet.

Paul Krugman argues the contraryhere. But let’s say there was a supply slowdown starting in 1999 or so, as reflected in wage and jobs data, masked a bit by the real estate bubble of 2004-2006 and with some of the productivity figures inflated for domestic purposes due to outsourcing.

byTyler Cowenon October 29, 2014 at 7:40 am