I am confused by your number 3. Edited for what I think you mean, and using NYC (high cost) and Tulsa (low cost) to make your example more vivid:
”Building more in [NYC] causes people to move [to NYC because now it’s cheaper to live there,] which causes jobs to move [to NYC], which causes more housing to be unused in [Tulsa, which causes housing costs to drop in Tulsa].”
If my understanding is correct, then housing prices drop in NYC, and housing prices drop in Tulsa. Therefore, housing prices drop on a national level. But you say,
″...which means housing costs don’t decrease significantly on a national level …”
But clearly they do.
Unless you’re saying that the average American’s housing cost doesn’t drop. That’s possible; it’s just Simpson’s Paradox. Housing is cheaper in NYC than before, and housing is cheaper in Tulsa than before. But housing is more expensive in NYC than Tulsa. Because you now have a higher population ratio NYC:Tulsa, the average housing cost might not drop.
But I would argue that kind of “housing costs don’t decrease” is misleading. If the price of both types of housing drop, and that leads people to choose more expensive housing because it’s now more affordable, that’s not the cost increasing. That’s people spending more money for a higher quality/quantity of product.
For instance, suppose the quantity of all types of housing increases 50%, and the price per square foot drops 33.3%. Now, everyone gets 50% more square feet for the same price as before. The total expenditure on housing is the same, but housing is definitely cheaper. Any apartment size that was $1500 before is $1000 now. Any house size that was $3000 before is $2000 now.
Substitute “in New York instead of Tulsa” for “50% more square feet” and it’s obvious the cost has dropped, which makes the quantity demanded increase.
The fact that people spent 100x as much on face masks in 2020 doesn’t mean that the cost of face masks increased 100x. People just bought 100x as many of them because the benefits increased by 100x. It’s the total amount spent on face masks that increased 100x.
It seems to me that your argument conflates two different senses of “cost.” One, cost per unit of housing; second, total amount spent on housing. If the first decreases, the second can increase, decrease, or stay the same. But it’s the first that’s the important one for the argument. Because the issue is, does building more housing change the cost per unit.
Having said all this, it’s possible that I’ve misunderstood your argument.
The price in NYC is set by the equilibrium of people coming and leaving. Building more in NYC doesn’t mean the price goes down any significant amount.
In Tulsa, what you see before price decreases is new construction completely halting. Prices get pinned at the cost of new construction even when there’s very little.
Here’s the basic sequence:
More construction starts in NYC. (NYC population has dropped recently, but we’re using it as a standin for “all 1st-tier cities”)
Adam works in Tulsa for MegaCorp, which has headquarters in NYC. With the new construction happening, Adam’s boss decides to move Adam to NYC so he’s easier to manage, or maybe his whole department moves to NYC so his boss can move to NYC and be closer to executives. Adam doesn’t want to move but has little choice. (Alternatively, Adam loses his job and finds that such jobs have moved from Tulsa to NYC.)
Adam’s house in Tulsa goes up for sale, which reduces construction in Tulsa by 1 house. Adam had a good job, and with him leaving the average income in Tulsa goes down.
Why didn’t Adam’s bosses move him to NYC before the new construction? Because, I assume, the bosses knew Adam and his colleagues wouldn’t move because rent is so expensive. Or, which amounts to the same thing, they knew they couldn’t attract enough talent in NYC because of the high housing prices.
This implies Adam and his colleagues DO have a choice. It’s just that the new, lower housing prices in NYC provide enough incentive to make the move that Adam chooses to make the move, although perhaps reluctantly.
It seems that your argument, therefore, depends on housing prices being lowered in NYC. Otherwise, why wait for new housing before making the move?
You’re assuming a perfectly liquid market here. There can be a lot of friction when trying to move in a bunch of people or buy a bunch of office space in one place. New construction can avoid that issue.
If there is no friction, and things are perfectly liquid, then the amount of price change required to cause big moves is very small.
Also, if income is lowered in Tulsa, housing prices must drop, because you have fewer dollars chasing the same amount of housing.
Perhaps your argument is that, with lots of new housing built in NYC, prices drop in NYC and Tulsa, but consumers of housing are not necessarily better off because (for instance) they might be “forced” to move from Tulsa to NYC, making them less happy than they would have been otherwise, despite the lower housing prices in both cities.
But that’s a completely different argument.
I may have erected a straw man here. But to that argument I would respond by noting that any kind of change makes some people worse off and some people better off, but market-based change almost always (in theory) results in more positives than negatives. The drop in price of word processors means that Adam may lose his job at the typewriter factory, but economic theory says that in the absence of anything unusual, the change is a benefit to the world as a whole.
This is especially true when changes are an increase in the abundance of a beneficial consumer good, like housing space.
Perhaps your argument is that, with lots of new housing built in NYC, prices drop in NYC and Tulsa, but consumers of housing are not necessarily better off because (for instance) they might be “forced” to move from Tulsa to NYC, making them less happy than they would have been otherwise, despite the lower housing prices in both cities.
But that’s a completely different argument.
That is my argument. That’s the whole point! I just also don’t think that it means prices necessarily go down in Tulsa (because people leaving for NYC shows up mainly as less construction, and prices in Tulsa are pinned to construction costs there) or necessarily go down significantly in NYC (because the price changes involved may be very small, or maybe there’s just reduced friction for companies moving because of new construction rather than an actual price decrease).
I am confused by your number 3. Edited for what I think you mean, and using NYC (high cost) and Tulsa (low cost) to make your example more vivid:
”Building more in [NYC] causes people to move [to NYC because now it’s cheaper to live there,] which causes jobs to move [to NYC], which causes more housing to be unused in [Tulsa, which causes housing costs to drop in Tulsa].”
If my understanding is correct, then housing prices drop in NYC, and housing prices drop in Tulsa. Therefore, housing prices drop on a national level. But you say,
″...which means housing costs don’t decrease significantly on a national level …”
But clearly they do.
Unless you’re saying that the average American’s housing cost doesn’t drop. That’s possible; it’s just Simpson’s Paradox. Housing is cheaper in NYC than before, and housing is cheaper in Tulsa than before. But housing is more expensive in NYC than Tulsa. Because you now have a higher population ratio NYC:Tulsa, the average housing cost might not drop.
But I would argue that kind of “housing costs don’t decrease” is misleading. If the price of both types of housing drop, and that leads people to choose more expensive housing because it’s now more affordable, that’s not the cost increasing. That’s people spending more money for a higher quality/quantity of product.
For instance, suppose the quantity of all types of housing increases 50%, and the price per square foot drops 33.3%. Now, everyone gets 50% more square feet for the same price as before. The total expenditure on housing is the same, but housing is definitely cheaper. Any apartment size that was $1500 before is $1000 now. Any house size that was $3000 before is $2000 now.
Substitute “in New York instead of Tulsa” for “50% more square feet” and it’s obvious the cost has dropped, which makes the quantity demanded increase.
The fact that people spent 100x as much on face masks in 2020 doesn’t mean that the cost of face masks increased 100x. People just bought 100x as many of them because the benefits increased by 100x. It’s the total amount spent on face masks that increased 100x.
It seems to me that your argument conflates two different senses of “cost.” One, cost per unit of housing; second, total amount spent on housing. If the first decreases, the second can increase, decrease, or stay the same. But it’s the first that’s the important one for the argument. Because the issue is, does building more housing change the cost per unit.
Having said all this, it’s possible that I’ve misunderstood your argument.
The price in NYC is set by the equilibrium of people coming and leaving. Building more in NYC doesn’t mean the price goes down any significant amount.
In Tulsa, what you see before price decreases is new construction completely halting. Prices get pinned at the cost of new construction even when there’s very little.
Here’s the basic sequence:
More construction starts in NYC. (NYC population has dropped recently, but we’re using it as a standin for “all 1st-tier cities”)
Adam works in Tulsa for MegaCorp, which has headquarters in NYC. With the new construction happening, Adam’s boss decides to move Adam to NYC so he’s easier to manage, or maybe his whole department moves to NYC so his boss can move to NYC and be closer to executives. Adam doesn’t want to move but has little choice. (Alternatively, Adam loses his job and finds that such jobs have moved from Tulsa to NYC.)
Adam’s house in Tulsa goes up for sale, which reduces construction in Tulsa by 1 house. Adam had a good job, and with him leaving the average income in Tulsa goes down.
Why didn’t Adam’s bosses move him to NYC before the new construction? Because, I assume, the bosses knew Adam and his colleagues wouldn’t move because rent is so expensive. Or, which amounts to the same thing, they knew they couldn’t attract enough talent in NYC because of the high housing prices.
This implies Adam and his colleagues DO have a choice. It’s just that the new, lower housing prices in NYC provide enough incentive to make the move that Adam chooses to make the move, although perhaps reluctantly.
It seems that your argument, therefore, depends on housing prices being lowered in NYC. Otherwise, why wait for new housing before making the move?
You’re assuming a perfectly liquid market here. There can be a lot of friction when trying to move in a bunch of people or buy a bunch of office space in one place. New construction can avoid that issue.
If there is no friction, and things are perfectly liquid, then the amount of price change required to cause big moves is very small.
Also, if income is lowered in Tulsa, housing prices must drop, because you have fewer dollars chasing the same amount of housing.
Perhaps your argument is that, with lots of new housing built in NYC, prices drop in NYC and Tulsa, but consumers of housing are not necessarily better off because (for instance) they might be “forced” to move from Tulsa to NYC, making them less happy than they would have been otherwise, despite the lower housing prices in both cities.
But that’s a completely different argument.
I may have erected a straw man here. But to that argument I would respond by noting that any kind of change makes some people worse off and some people better off, but market-based change almost always (in theory) results in more positives than negatives. The drop in price of word processors means that Adam may lose his job at the typewriter factory, but economic theory says that in the absence of anything unusual, the change is a benefit to the world as a whole.
This is especially true when changes are an increase in the abundance of a beneficial consumer good, like housing space.
That is my argument. That’s the whole point! I just also don’t think that it means prices necessarily go down in Tulsa (because people leaving for NYC shows up mainly as less construction, and prices in Tulsa are pinned to construction costs there) or necessarily go down significantly in NYC (because the price changes involved may be very small, or maybe there’s just reduced friction for companies moving because of new construction rather than an actual price decrease).