Solving Housing inequality is key to solve inequality broadly

Constraints on supply have made houses into scarce assets, more like bonds, fine art or precious metals than durable goods like refrigerators or cars. This only feels normal because we’re used to it, and does not happen in places where developers can easily add more homes to an area, such as Tokyo, Seoul, or New York City before the 1920s. In places like these, rising demand leads to more supply, not just higher prices. A fixed supply of housing means improvements in people’s aggregate incomes often partially go to landowners, since people bid up the price of housing with some of their increased income. This is one of the bases for the economist Henry George’s proposal for taxes on land value. George realised that even improvements in a local area – a new park, or better sanitation – would also be captured by local landowners. The new park would make people more willing to pay to live nearby, bidding up the price of housing in that area, so that existing landowners captured much of the value the park created. These effects play out visibly in fights over gentrification. Rising wages let bankers and tech workers bid up the rents on poorer parts of cities that have become fashionable, driving up rents. Many low-income communities have been broken up as people have been forced to move away by these rising rents, and by shops and other services changing to cater to wealthier new customers. Few people object to making a place more pleasant, greener and safer: the biggest concern for current residents is not improvement in the place, but the risk of being priced out of their homes and communities. There is another way. Increasing the supply of housing and commercial space, while ensuring that it benefits existing residents, could turn this zero-sum situation into one where everyone can be better off. This might be done, for example, by allowing them to vote on increased density, and benefit from it directly. The new demand could be accommodated and the financial rewards to development could be shared with existing residents without displacing them. The aggregate, countrywide effect of housing being so limited in supply has been that economic growth in most Western countries has accrued more and more to landowners and less to everyone else. Economist Thomas Piketty famously demonstrated an increase in the share of national income that flows to owners of capital, rather than to labour. But what was less widely acknowledged was that, at least in the US, it was really an increase in the share of income going to landowners, driven by increases in the cost of housing, and that this effect was particularly strong in states that have highly restrictive rules against building more homes. The rising inequality Piketty demonstrated appears to have been largely driven by housing shortages turning, in one economist’s words, ‘houses into gold’. And this is the case across the Western world: housing inequality, not income inequality, primarily determines how much wealth inequality there is in most Western countries. Housing shortages have driven regional inequality as well. Earlier, we told the story of workplaces deprived of lower-skilled staff having to get their star employees to do work that would be better done by someone with less-expensive skills. And the other side of this is that people who cannot earn top salaries are unable to move to high-income cities at all. Consider a cleaner living in Alabama. In 1960 they could move to NYC and earn wages 84% higher, and still end up with 70% higher income after rent. In 2010, they could move to New York City and become 28% more productive, and earn a wage 28% higher – and reduce the surplus of workers back home, letting them demand higher pay. But since housing costs are so much higher, the net earnings and living standards of someone like this would fall if they moved today, and wouldn’t be worth it. The same would be true for plumbers, receptionists and other professions that allow other people to specialise at what they’re best at and minimise the time they spend on things like DIY and answering the phone. By contrast, top lawyers get wage boosts that are still sufficiently higher to justify a move in both 1960 and 2010, even after the higher rents they’ll have to pay. Economists Peter Ganong and Daniel Shoag conclude that this effect, on aggregate, has directly led to a slowdown in the rate at which poorer US states have been catching up with richer ones. Between 1880 and 1980, poorer US states caught up with the richest ones at a rate of around 2% per year; since then, this rate of convergence has halved, to around 1% per year. Where previously people of all income and skill levels would move to more prosperous places, now only well-paid ones at the top do, leaving behind many who are not so lucky in places with a surplus of labour.