Is housing more expensive in Manhattan because land is more valuable there? Edward L. Glaeser, Joseph Gyourko, and Raven Saks argue that housing is more expensive because of regulation.
In twelve out of the twenty-one markets that we examine, on average home costs no more than ten percent more than the costs of the physical structure and the land. However, in Boston, New York, Newport News, Salt Lake City and Washington, D.C., the gap between construction costs and home prices is between ten and thirty-three percent. In Los Angeles, Oakland, San Francisco, and San Jose, the gap is from one-third to one-half of typical house value.
The authors say that land prices cannot explain the high price of apartments relative to the marginal cost of production in Manhattan. They point out that there is the option of making buildings taller. They write
Land shortages well may limit certain types of development in Manhattan, but builders always can add an extra floor if that would be profitable…
We conservatively estimate that market prices in Manhattan are at least double the marginal cost of production on a per square foot basis.
For Discussion. The authors argue that regulation is the most likely explanation for their results. What other explanations come to mind?
READER COMMENTS
Eric Krieg
Nov 24 2003 at 2:15pm
Yes and no.
As a former New Yorker now living in Chicago, it amazes me how dynamic the Chicago market is compared to New York City (not just Manhattan). There is no comparison, really. New construction in Chicago leads New York at every price point (even Trump’s new development in Chicago has seen very strong sales).
Chicago has even seen the development of entirely new neighborhoods where nothing but train tracks existed before. There hasn’t been a new neighborhood developed in New York since Roosevelt Island in the 1970’s, and even that was more of a public works than a private development.
Why the discrepancy? Chicago is pro-development and New York is as Communist as Cuba.
And it’s pretty scary to say that your city has MORE regulation than Chicago. It’s not like Chicago is an especially capitalistic place. It isn’t Houston, for example.
God knows why anyone would want to live in NYC. Of course, according to the Census, NYC did lose native born population in the 1990’s.
Mcwop
Nov 24 2003 at 3:04pm
You mean the CEO that pays $1 million for a co-op with a view of Central Park after out-bidding another CEO is because of regulation? Or is it because there are a limited number of units with a Central Park view, and only so many that could be built? I will divulge that that potential may not be reached yet, but there is a physical limit.
Don Lloyd
Nov 24 2003 at 3:18pm
Arnold,
In the other possible explanations area, it seems to me that if I were interested in holding a portfolio of income producing properties a decade from now, the last thing that I would want to do is build new now.
The real market value of property ten years from now will depend on its income generating capability at that time. The discounted present value of that future value has been greatly magnified by the historic suppression of interest rates by the FED. When this reverses, as inevitably it must, present values will fall and current owners will become distressed sellers in large numbers at large discounts.
I would be surprised if the net result of building new now will prove to be superior to borrowing now at low rates and waiting for distress sales.
Regards, Don
gerald garvey
Nov 24 2003 at 3:57pm
Don: You may be right but your point has nothing to do with inter-regional differences.
McWop: the point of the original article is that NY is indeed nowhere near its physical limits. The limits are instead due to regulation
Don Lloyd
Nov 24 2003 at 4:29pm
Gerald,
The point that I was addressing was why supply didn’t come in to drive value down to marginal cost.
Regards, Don
Mcwop
Nov 24 2003 at 4:48pm
McWop: the point of the original article is that NY is indeed nowhere near its physical limits. The limits are instead due to regulation
Posted by gerald garvey on November 24, 2003 03:57 PM
I agree partially. However, if one wants to make a building taller, absent regulation, then the owners of that building or property must agree to make it taller. If the owners of a co-op apartment complex, with a Central Park view, refuse to expand their complex then there will not be additional supply for that particular location. If the same is the case for every building around Central Park, then there will be no supply for that local. In the end dwellings with the desired view can be entirely market driven. The paper also seems to discuss, but dismiss factors like congestion.
I do understand that in NYC, that additional supply is still possible in many parts, so long as things like congestion don’t become an issue. After all many pay through the nose to escape congestion, crime, etc… You can make them taller, but that does not equal people’s desire to live there.
Boonton
Nov 24 2003 at 6:28pm
Even with a co-op, though, if the owners say no to adding more levels then they are giving up the additional windfall they can receive when those new apartments are sold. If the price is high enough it will take a strong will for them to say no.
I remember reading a long time ago a fascinating economics article on Slate that explored why cities will have a handful of skyscrapers with short buildings around it. Why not have all the buildings be the same height? If anyone wants to find it, it may make for some interesting reading.
Lawrance George Lux
Nov 24 2003 at 9:13pm
The ingestion of new Population with high income from the hinterland keeps Housing costs higher than the marginal cost of production. This is due to heavy conjestion of Employment opportunity around certain locales. It has nothing to do with regulation. Contractors and Owners seize the economic profits to be gained, and possess the Capital assets to wait upon these economic profits. lgl
David Thomson
Nov 24 2003 at 9:51pm
“You mean the CEO that pays $1 million for a co-op with a view of Central Park after out-bidding another CEO is because of regulation?”
A million dollars? That’s pocket change. This amount might not even be enough for a down payment for a great view of Central Park.
Mats
Nov 25 2003 at 3:26am
>>Land shortages well may limit certain types of development in Manhattan, but builders always can add an extra floor if that would be profitable…>>
Ooops, this is wrong. Builders cannot add an extra floor because of ground conditions. The geographical variations of height of the houses across Manhattan is directly caused by the varying strength of the ground.
Eric Krieg
Nov 25 2003 at 9:49am
>>Ooops, this is wrong. Builders cannot add an extra floor because of ground conditions. The geographical variations of height of the houses across Manhattan is directly caused by the varying strength of the ground.
While it is true that the larger buildings in Manhattan are downtown and in midtown, both areas that have bedrock very close to the surface, this by no means restricts large buildings to these locations.
Chicago used to be a swamp. Bedrock is no where near the surface. Yet we have the tallest building in the US, and two others in the top five.
As long as there is a market for tall buildings (an open question after Sept. 11th) there is really no engineering limitation to their construction.
Bernard Yomtov
Nov 25 2003 at 2:32pm
The paper seems to take the marginal costs of adding an extra floor to be only the physical construction costs.
But in any case where the floor is added to an existing building there are costs imposed on the residents in terms of disruptions and the general inconveniences generated by the construction.
And in a new building there are some costs that possibly are being overlooked. Does anyone have an estimate of how much time an extra floor adds to the construction? This is time during which capital costs on the entire building are being incurred.
In addition, the pricing data does not reflect substantial transaction costs.
Eric Krieg
Nov 25 2003 at 2:46pm
Is it the marginal cost of adding another floor to an EXISTING building, or the marginal cost of adding another floor to a new building?
I don’t know about adding extra floors to existing buildings. Existing buildings generally do not meet modern building codes, so in many cases they would need to be brought into compliance, itself a substantial cost.
A gut rehab of an existing building would have marginal economics similar to new construction. New floors could probably be added for similar costs.
Boonton
Nov 25 2003 at 4:08pm
The paper I remember reading on Slate centered on the question of why a neighborhood would have one tall building (think Empire State Building) but then small buildings of all different heights. The logic was if the economic condition merited a certain height building in that area then why such great variation?
I’m still searching for it and will post it as soon as I can find it.
Boonton
Nov 25 2003 at 4:12pm
Found it!
http://www.slate.com/id/114795/
Only partially relevant to the topic on hand but at the time I thought it was an interesting examination.
Eric krieg
Nov 25 2003 at 4:37pm
I was just in Seoul last week, and I wonder why a city like that, perhaps the most congested on earth, wouldn’t have more tall buildings.
Most are in the 10 story range. A few are in the 30 story range. One is 60 stories.
Maybe they are worried about North Korean artillery! I’d hate to be in the 60 story building when the No-Kos open up across the border. I think Seoul is like 30 or so miles from the DMZ.
Eric Krieg
Nov 25 2003 at 4:43pm
The design of buildings is not only done with economics in mind. There are these people called architects, and they have some VERY peculiar ideas about buildings.
You could explain all the difference in building types by the fact that they are all designed by architects (their asthetics are designed by architects, that is. Their structure is designed by engineers, of course. If architects did the structure, buildings would fall down regularly.)
Mats
Nov 26 2003 at 10:21am
>>[soft ground] by no means restricts large buildings to these locations…Chicago used to be a swamp.>>
You don’t suppose there is a cost attached to builing on soft ground, do you?
Bernard Yomtov
Nov 26 2003 at 12:01pm
Just to add to my previous comment, which was cut somewhat short, there may be other costs involved as well. For example, when you add floors you at some point have to add another elevator. This subtracts square feet from all the flors below.
I don’t want to claim that all the rules make sense, because I don’t even know what they are. My main point is that in reading the paper it strikes me that the the authors have seriously underestimated the actual cost of building space, so the “regulatory tax” is probably less than they calculate.
Boonton
Nov 26 2003 at 12:31pm
The Slate article, for those who didn’t read it, notes that there are certain barriers beyond which buildings cannot go. For example, a wood frame building can only go 3 stories high. If the owner wants to make the building 5 stories he will have to tear the whole thing down and build from scratch. Beyond 7 stories regulations governing high rise buildings kick in and beyond 15 engineering for wind and seismic bracing become increasingly complicated.
So a city of 14 story buildings will not leap to 15 stories because there is a modest increase in demand for space. There will have to be a huge increase in demand to justify the quantum jump.
David Thomson
Nov 26 2003 at 2:38pm
“As long as there is a market for tall buildings (an open question after Sept. 11th) there is really no engineering limitation to their construction.”
Why in heaven’s name is there a market for skyscrapers? It apparently took around fifty minutes to up and down the Twin Towers! Excuse me, does that make any sense? Isn’t this a gross waste of time? Aren’t these tall buildings merely a nice place to visit for tourists? Also, do the big bosses actually work on the top floors —or just the hoi polloi?
Eric Krieg
Nov 26 2003 at 2:45pm
>>You don’t suppose there is a cost attached to builing on soft ground, do you?
I am sure that there is. But it cannot be a deciding factor. The skyscraper was invented in swampy Chicago. And we have 2 buildings larger than anything in New York (now that the Twin Towers are gone).
The optiumum size for a skyscraper is between 50 and 60 stories. Beyond that, the space taken up by elevators is a concern, as are water utilities (the pipes get extremely large at grade to deal with the hydrostatic pressure. Also, the cost to pump water up to the higher floors is high.)
With regards to New York, besides regulation, you have some of the most corrupt building trade unions in the world. The cost of new contruction just due to labor is astronomical.
Eric Krieg
Nov 26 2003 at 5:16pm
>>Why in heaven’s name is there a market for skyscrapers?
HDTV! Now that broadcasting in high defintion is becoming more popular, there is a need for big antennas in high places. There is no better place for an antenna than at the top of a very tall building.
I always thought that Windows on the World on a clear evening was the coolest place in NYC to take a date.
So those are 2 uses for tall buildings.
But everyone pretty much knows that really tall buildings are built for ego. That’s why so many of them are being built in Asia, to show that China, Taiwan, and Malaysia have “arrived”.
dsquared
Nov 27 2003 at 3:42am
It apparently took around fifty minutes to up and down the Twin Towers!
No it didn’t. Nowhere near that long.
David Thomson
Nov 28 2003 at 8:39am
“It apparently took around fifty minutes to up and down the Twin Towers!”
My mistake. It was actually around fifteen minutes. That’s still a lot time. Someone must spend an hour and fifteen minutes of their working week merely going up and down the elevators. And God forbid if you left something in the car—or had to leave the building during the day. I would think that sixty floors is the maximum number which makes sense.
Robert Schwartz
Nov 29 2003 at 9:34pm
“In the other possible explanations area, it seems to me that if I were interested in holding a portfolio of income producing properties a decade from now, the last thing that I would want to do is build new now.”
And that is why you are not a developer. If a producer can sell that which he produces for twice the cost of making it. he can make a big profit and quickly.
Further, the congestion business is not a real issue. Take Harlem for example. The land north of Central Park is almost unocuppied and has been so for almost 30 years. Why isn’t this land, most of which has been taken for taxes by the City, being auctioned off for development?
I rest my case.
Comments are closed.