remembering supply: gotham and pleasantville
July 11, 2011, 9:46 pm
Filed under: betaCITY, Cities, Suburbs | Tags: , , , ,

There is evidence that demand for city living is increasing dramatically in America.  But some experts are claiming that this new evidence of demand is false because more Americans are moving to the suburbs than to cities.  But what these experts fail to tell us is that suburbs are making housing and amenities available while cities are drastically increasing prices.  These are supply side activities which play a big role in where people decide to live.  By reporting only the demand side – the movement of populations – and not the supply side – relative prices etc – we get a very inaccurate picture of where people want to and do live.

Following is an excerpt from an important article that explains these dynamics.  There are many dimensions to the supply side of the settlement equation, but one worth mentioning in this context is the use of public money in these respective environments: suburban and city.  There is mounting evidence that much more public money per capita is required to sustain life in exurban areas than in urban, in the form of infrastructure, roads, utility grids, energy subsidies, etc.

So, in a very real sense, not only are the pundits not reporting how markets draw people from one environment to another, but also that these markets, especially in the suburbs, aren’t really markets at all because of their heavy reliance on government and debt financing.

Here is the excerpt from the Economist:

But of course, population growth is an unreliable indicator of demand, because of the all important supply side of the market. Imagine two areas: Gotham and Pleasantville. Say the demand to live in Pleasantville increases a little while the demand to live in Gotham soars. And say that due to differences in land use restrictions, housing supply responds dramatically in Pleasantville and very little in Gotham. Then what we’ll observe in Pleasantville is a rapid increase in population and slower growth in prices, and what we’ll observe in Gotham is rapid growth in prices and slower growth in population. And this is exactly what we haveobserved in the real world. Suburbs have seen massive housing growth and rapid population growth, but prices in central cities have soared, even in many places where population numbers are level or falling. If no one wanted to live in central cities, prices for homes there would not rise. And indeed, several decades ago, prices for homes in big central cities were dropping. But that trend has clearly reversed. You can’t draw conclusions about demand shifts from population numbers alone. This is a very simple point, and yet its repeatedly ignored.

Supply, Supply, Supply, don’t forget Supply, Ryan Avent, the Economist


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