Bryan Caplan  

The High Cost of Trendy Living: A Slight Variation on the Obvious Explanation

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In The Logic of Life, Tim Harford tries to figure out why rents in New York and other trendy urban locations are so high. You might think that the rents are high because the wages are high. But adjusting for the cost of living, urban living remains a bad deal. Harford cites Glaeser's finding that "[E]ach doubling of city size raises wages by 10 percent but raises prices by 16 percent." So what gives?

Harford considers, then rejects, the idea that people are primarily paying a premium for urban consumption amenities. He estimates that it costs an extra $150 a day to live in Greenwich Village instead of Rock Island, IL, then tells us:

Just how often to people plan on going to the opera anyway? Sure, Manhattan's restaurant scene is better than Rock Island's, but if Manhattan's residents are really paying for access to restaurants then they are paying $150 to their landlord for every evening his nicely located place puts them close to a decent restaurant. You'd need to eat out an awful lot to make these figures seem halfway plausible.
Actually, I think these numbers are easily halfway plausible. If you lived in Rock Island, what would you even spend your extra $150/day on? (Here's the city's website). To overstate the point, many of us don't want to eat McDonald's in a mansion.

But more importantly, Tim misses the most important amenity of all: people. If you're a trendy, successful person, the inhabitants of Anytown, USA are boring. The typical Manhattanite wouldn't want to buy a mansion in a small town in Kansas because he would be bored out of his mind. Opera and restaurants might not be worth $150/day. But if you've got a decent income, $150/day is a small price to pay to not to fall asleep in your soup.

You might reply: "You're forgetting that the typical resident of Rock Island wouldn't want to move to Manhattan because he would be annoyed by their effete, snobby ways." There's some truth in this. But on net, the Manhattan premium still makes sense. A sizable minority in places like Rock Island dreams of living someplace like Manhattan, but almost no Manhattanite dreams of living in Rock Island. So without much higher rents, there would be a net influx into Manhattan.

In high school, many of us would sell our souls to hang out with the cool kids. Manhattan offers the same privilege to anyone willing to pay $150/day. For millions of people, that's a bargain.

P.S. I much prefer Fairfax, Virginia to Manhattan. That's partly because Manhattan gives me claustrophobia. But it's mostly because I want to hang with the coolest kids of all.


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The author at Market Urbanism in a related article titled The High Cost of Trendy Living writes:
    An interesting post discussing why people are willing to pay so much to live in urban places. The High Cost of Trendy Living ... [Tracked on April 15, 2008 6:45 PM]
COMMENTS (24 to date)
Unit writes:

I wonder if there's an age difference too. Younger people flock to Manhattan and pay the premium because they have high expectations for their future wages, while older people have no such expectations and they flock to Rock Island.

Nathan Smith writes:

Suppose you have a choice between a little Manhattan apartment and a big suburban house. There's a sense in which your living space in Manhattan is not just in a hotter location, but *bigger*. In the suburbs, there may be nothing in a half-mile radius except streets and houses that don't belong to you, a few dinky deserted parks that aren't worth the drive, and dismal, utilitarian malls with nowhere to hang out. A few rooms and a yard is all you've got. In Manhattan, your personal space may be tiny, but you've got *the whole city* to roam in. Of course, it's not exclusively yours, but being able to exclude others isn't really so valuable. Of course, if you let people fence off their little plots, they usually will, but they destroy a lot more value for others than they create for themselves. Cities *share* a lot of the land instead of parceling it up into private lots, and as a result they use it far more efficiently, and create a lot of surplus value.

randy writes:

i live in nyc and never thought that i'd like living here, but i do. i am the sort of guy who might otherwise want to live in a shack in the woods.

i live in brooklyn, because the rents in manhattan are truly absurd. i notice that women like manhattan more than men. honestly, i think that it's a status thing, a signalling thing. have you seen the numbers on single women as a percentage of women in manhattan? it's pretty unbalanced. it is NOT like the rest of america. then when you actually go into manhattan, you see the most gorgeous women you've ever laid eyes on...a lot of them unattached.

it is pure evolutionary psychology in action.

i am proud that i did not divulge my vulgar one-liner which explains all of this rent mayhem in nyc. this topic makes the vein in my forehead pop out.

FC writes:

Fairfax? Pfui. If you ask me, it has the culture of Kansas and the traffic of Manhattan.

David Tufte writes:

I've lived in both big and small - although London instead of NYC.

My sense is that there is a lot of inertia in this; I'm not sure if that is irrational though, or just habit.

When I lived in the city, I felt strongly (and there was a lot of objective evidence to support that), that I experienced more of what the city had to offer than just about anyone I knew.

Yet, when we had kids, the boundaries of "our" part of the city drew tighter. As it did, we came to the realization that there wasn't much point in living in the city if we didn't take advantage of what it had to offer. So, we moved to a small (25K), remote (2.5 hours to a big city) college city.

I know no one who has matched that without a lot more complaints. But ... they tend to be complaints on which they don't seem too inclined to act. This makes me think a lot of it is cheap talk, and thus the inertia I mentioned.

Having said that, my late father said something interesting a few years ago. He did nothing that required a city - except follow the local news. His whole life was within 1 mile of his suburban house. Yet, his reason for not liking smaller places was that he felt naked without at least 500K people around him. Perhaps others do to.

GlenSmith writes:

On saving $150.00/day, I could spend every other weekend in Manhattan.

SheetWise writes:

Harford spends a lot of time defending the city as a positive market choice based upon the citizenry.

This seems plausible to me, but diminishing. 25 years ago I would use Jaycees or Mensa or some similar network to maximize the value of interpersonal time in some remote location -- today it's the Internet or some refined subnetwork of the same networks we used to use.

Podunk America isn't that Podunk anymore. We can meet people who are challenging, and we can meet them in the flesh. We meet them where people are computer savvy and people are humble. Now there's a subset of a subset. But, interestingly enough -- it exists almost everywhere.

LemmusLemmus writes:

As a variant of your argument: mating opportunities. This suggests that it's the unmarried people who cluster in urban centers (even if you control for age). I've never seen any numbers, but it sounds about right to me.

dearieme writes:

This little place is a lovely spot even though it is close to the armpit of England.
http://www.great-ayton.org.uk/

Les writes:

The cities (and their suburbs)where housing is most expensive are San Francisco, New York, Los Angeles and Boston. These cities all have very restrictive zoning regulations and regulation of land use. Also a large proportion of land is withheld from housing use because it is public property. These factors reduce the supply of land available for housing, and therefore housing prices are pushed up, compared with less regulated and less restricted cities.

Bernhard writes:

Les: rents might also be high in those cities you mention, not because the zoning regulations create scarcity, but because they create value by reducing external effects of land use on others.

Floccina writes:

But why are more appartments not built and why do people not live in smaller appartments to make up the difference?

BTW There is evenidence that people live longer in rural areas. (The following is Tongue in cheek) - But maybe that is just becuase there is less healthcare available.

Snark writes:

In Manhattan, your personal space may be tiny, but you've got *the whole city* to roam in.

Excellent point. I'm sure many consider Manhattan to be a microcosm worth much more than a rent premium of $150. Nevertheless, I'd rather live as a millionaire in Muleshoe, Texas than as a pauper in Manhattan.

angus writes:

geez Bryan: I did this back in February. even used the word "cool":

"pre-existing property owners are sucking a lot of the consumer surplus out of people with high valuations on cool experiences. There are a lot of experiences that are simply unavailable outside of a big wealthy city"

the post is here:

http://mungowitzend.blogspot.com/2008/02/mr-book-club-special-okie-edition.html

Maniakes writes:

The finding is that across the entire population, prices rise more than wages, but I'd be surprised if that was the case for specific professions.

For example, I am a computer programmer. There are a handful of locations (the SF/San Jose area, Los Angeles/Anaheim, Seattle, New York, Northern Virginia, Raleigh-Durham, and a few others) where there are large clusters of high-paying tech jobs. All of them are expensive areas to live, but my standard of living in a Seattle suburb working at my current job is much higher than it would be somewhere else with little or no tech industry, and thus much lower salaries available to someone with my skills, education, and experience.

Other industries have a similar clustering effect. New York, for instance, is a major cluster for the financial industry.

James writes:

I take some exception to what you are saying. Up until a few years ago I was a physician recruiter in Billings Montana. Contrary to your theory I found it quite easy to recruit high dollar physicians to this small city. Granted, these were not docs looking for opera or Central Park - instead they were looking for good schools, easy access to the country and, yes, lower taxes.

James

mhowell writes:

Re: Snark

Not too familiar with NYC but I have been thru Muleshoe TX and know folks who live there. The town has a large stockyard on its east side. A millionaire in Muleshoe will want to locate upwind if at all possible.

Lord writes:

Clustering and opportunities are very important. So are returns. Property appreciates more leading to higher prices and rents which lead to more appreciation. Expensive to rent and own, but if you own or have rent control, your increase in expenses is limited while your increase in income is not.

Snark writes:

mhowell,

A millionaire in Muleshoe will want to locate upwind if at all possible.

Perhaps. But I recall a conversation many years ago between my mother and grandad, wherein my mother remarked (as we were driving past his meager 50 head of cattle on his meager 63 acres of private land just outside of Stephenville, Tx) how unpleasant the odor was. He simply replied that it smelled like money to him.

Heather writes:

One thing I haven't seen anyone mention is the time saved (typically) by living in the middle of a large city. Assuming your job is nearby, your commute is likely shorter, which may be worth the additional money that you pay. Also, the availability of public transportation can make owning a car unnecessary, a further reduction in costs. I don't think that it's a choice I want to make now, but in the future, I can see paying the premium for those reasons alone.

Max writes:

If big cities are so great, why do big city people organize into small towns? The big opera clique is a small town. Ethnic neighborhoods are small towns. Street gangs are small towns.

Nicole writes:

We chose where we live based on our desires, wants or our career choice. If someone wants to live in Manhattan, typically it’s because they want to be in the city, around millions of people, and the ability to walk to restaurants, and entertainment. For those who wish for these things, price isn’t really an object. They will pay the extra rent to live where they want, or for the career they intend to pursue. The prime location for certain careers would be in Manhattan or cities in general. To use an analogy, I know that if I’m craving cheesecake, I am going to buy the best kind. Yes, I may have to pay a few dollars extra, but it’s worth it because it’s what I prefer. Those who live in Manhattan prefer to be there, and will pay the extra money for their living expenses.

Perry writes:

I think that Harford misses an important point. For those who enjoy the type of street life, restaurants, culture and people of New York the alternatives are few and far between. You could try to pay $150 a day in Rock Island for the amenities but simply may not be available at any price.

In other words, there are a bunch of rock island like places but only one New York.

Dave writes:
Nevertheless, I'd rather live as a millionaire in Muleshoe, Texas than as a pauper in Manhattan.

Hell, I'd rather live as a pauper in Muleshoe than in Manhattan.

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