Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
As a general rule, road pricing isn’t popular. But that’s not because it doesn’t work. The problem is that it works too well, and people don’t like the idea of driving less and paying for roads (that currently have a zero marginal cost).
Here’s a recent study by Robert Bain and Deny Sullivan that looked at just how well it can work. In it, they examine 76 data points from 16 countries, including roads, bridges, tunnels, and cordons (areas).
The question: What happens to demand once the marginal cost of using a road goes from $0 to some cost greater than zero? (As part of this, they also looked at whether the road or bridge in question has viable alternatives.)
The results:
The median traffic reduction was 25%. But the interquartile range was -17% to -44%. This is all very significant. Said differently, the traffic impact in nearly a quarter of the examples was -45% or more. So almost a halving of traffic congestion.
These reductions are obviously a function of the cost of using each road, but regardless, the overarching takeaway remains the same: You may not like or want road pricing, but it totally works.
Here is a study by three researchers out of California that asked Americans to predict the impact of a supply shock on various things, such as durable goods, commodities, labor, trade, and yes, housing.
For basically all of these items, people tended to answer correctly. Usually by a factor of at least two to one. In other words, when asked what reducing the supply of new cars would do to the prices of used cars, the majority of people responded saying that it would lead to an increase in prices.
However, when asked about the impact of a 10% increase in housing supply, about 40% said that it would cause prices and rents to rise. Only about a third believed they would fall (the correct answer). This is fascinating because it shows that housing seems to be an outlier. Most people don’t have the same intuitive sense.
Why is this? Well, one commonly held belief is that building market-rate housing leads to gentrification, and that this ultimately leads to the displacement of existing residents. This might have been why some people responded saying that new housing will cause an increase in prices and rents. It’ll lead to all housing going up.
However, there’s research to support that this isn’t the case. The problem isn’t outward displacement following new market-rate housing. The greatest driver of gentrification is actually “exclusionary displacement”, which is the inability of people to move into areas because of a lack of housing. (This study was based on 2010-2014 housing data from the UK.)
The thing about housing supply is that it relieves pressure across the entire market. Instead of a high-income person buying an old home to renovate (and causing outward displacement), they can instead choose to buy a new home (and not cause any outward displacement).
By doing this, they also leave behind a home that can then be absorbed by lower earners. One US study found that for every 100 new market-rate homes that are built, somewhere between 45 and 70 people move out of a below-median income neighborhood.
It is for reasons like these that, time and time again, increased housing supply has been shown to moderate home prices and rents (see above regarding Minneapolis and the Midwest as a whole). So if you’re worried about the cost of housing, the answer is to build more. And if you’re worried about gentrification, the answer is also to build more.
Our intuitions are telling us that this is true for most things. But for whatever reason, housing feels different. It’s not, though.
Source: The charts and studies in this post are from this great FT article by John Burn-Murdoch.
Here is a housing study that looked at housing supply — in the US from 2000 to 2020 — relative to median housing values. And here is the key takeaway:
What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn’t work.
However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.
But something interesting happens in the highest-value cities — housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.
Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn’t change. This has the effect of both limiting supply and enshrining values.
So when it comes to housing supply, what you don’t want are low-cost areas. But you also don’t want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.
Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn’t do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing — let’s call it the 110 to 130% band — to deliver more affordable housing.
The research isn’t absolutely conclusive, but Matt Clancy — who is an assistant teaching professor of economics at Iowa State — makes an interesting case (over here) about entrepreneurship being mostly contagious.
The article cites a long list of studies that have more or less found that being around entrepreneurs can have a measurable positive effect on whether you yourself might also become one.
There is evidence to suggest that this is true whether you’re a scientist working with someone who has previously commercialized a piece of research, a community with entrepreneurial neighbors, a student with an entrepreneurial mentor, or a child with parents who have started their own business(es).
According to one Swedish study, the children of entrepreneurs are about 12 percentage points more likely to start a business at some point in their life compared to people with non-entrepreneur parents.
But as I said at the beginning of this post, the research isn’t entirely conclusive. Could a proclivity for risk and independence be instead genetic? Could it be that entrepreneur types simply seek out other entrepreneurs to hang out with? Perhaps these associations aren’t causal. Maybe.
But my gut tells me that there has got to be some contagiousness. Here’s an excerpt from Matt’s article:
…being around someone who has done it plants the seed in your mind that it’s a possibility, something you really could do. For most of the studies, the population exposed to entrepreneurship is a population that wouldn’t normally consider it. For them, exposure has a measurable positive effect.
What this once again tells me is that there’s immeasurable value in people clustering in cities, local communities, offices, coffee shops, and many other spaces. It’s a hard (probably impossible) thing to replace. And it could be the difference between taking initiative and starting a business, and not doing that.
I don’t think I’m supposed to take any action or feel particularly alarmed after reading about this global mapping of urban subway microorganisms, but it is kind of neat nonetheless. A team of researchers recently spent over 3 years collecting “metagenomic samples” from the transit systems of 60 cities around the world. Everywhere from Stockholm’s handrails to Shanghai’s subway poles.
The process involved nearly 5,000 samples and the result is this research paper, providing a full atlas of the microbial strains that live throughout our subway systems. Supposedly, none of the findings are anything that we should be worried about though. So carry on riding the subway.
But it is interesting (and very geeky) to note that the researchers discovered something that they are calling a “core urban microbiome.” What this means is that they identified 31 different species of bacteria that show up in pretty much all of the cities that they surveyed — some 97% of their samples.
At the same time, each city, because of things like climate and geography, also has its own microbial profile. In fact, these profiles are so distinctive that the geneticist who lead the study is quoted in the New York Times saying that if you gave him a shoe that was a worn in a particular subway system, he could sequence it and tell you the city with 88% accuracy.
Benjamin Dachis and Rhys Godin of the C.D. Howe Institute have a new report out talking about the effect of COVID-19 on the future of public transit in Canadian cities. In it, they make the argument that public transit is a key enabler of the agglomeration economies that make cities so valuable. And right now, most people aren’t using it (see above).
Why are agglomeration economies so important?
According to some studies, doubling the population of an urban area has tended to increase mean incomes by between 3-8%. In the Canadian context, similar research has found that people living in more populated regions (cities) tend to have incomes that are between 3-5% higher than those living in more rural areas. So when it comes to average incomes, bigger cities tend to be better. (Does Zoom change this? I’m not convinced.)
Of course, to make bigger cities function properly, you generally need public transit. And when you do have fast and reliable transit, that, they argue, is going to help drive the agglomeration economies which ultimately help to increase incomes. Because of this important relationship, Dachis and Godin argue that Canadian governments have a habit of systematically undervaluing the importance of transit investment.
If you’re interested in reading the full report, click here.
Michael Bohmeyer is the founder of a Berlin-based startup called “Mein Grundeinkommen” or “My Basic Income.” In the six years since he first asked for donations, his company has given more than 650 people a no strings attached stipend of 1,000 euros a month for one year.
The idea has been to test whether or not a basic income payment could, among other things, improve people’s happiness and improve the way that governments manage their social welfare systems. According to this recent NY Times article, Germany spends almost a third of their GDP on social welfare.
Since founding “My Basic Income,” Michael has gone on to publish a book and also partner with the German Institute for Economic Research in Berlin. And so far, his findings seem fairly positive. Instead of valuing the money itself, people seem to really value the sense of security that it brings.
Few people quit working, because a basic income is exactly that — basic. Instead, people seem to be using it to do things like quit that job they hate in order to find a better one. The payment provides some downside protection and that can be empowering.
This is obviously not a new concept. It’s been tested and even implemented in many places around the world, and it has become increasingly popular as an idea in recent years. So here are some additional data points. If you’re interested in this topic, you may want to check out what Michael has been up to since 2014.
Picking a name for someone or something can be a daunting task. I have never had to name a newborn baby (though I’ve witnessed lots of people go through that process). But I am often involved in the naming of new buildings. Sometimes that process involves sitting in a room with a list of possible names in front of you, and having to decide which one is optimal. I don’t love this approach. Nowadays, I find it’s better to have the name naturally emerge early on in the development process, well before there’s an actual brand and identity for the project. You want it to accurately embody the vision for the project, the site’s history and context, and you want to know that it has some durability over time. Or at least, that’s the goal.
On a related note, the New Yorker recently published an interesting piece on why your name matters. In the middle of the 20th century, research suggested that our chosen names were hugely impactful to life outcomes, and that more typical names were better than unusual ones. The theory was something known as the implicit-egotism effect, which basically states that we like things, including names, that most resemble ourselves. We want familiar. Which to me, immediately suggests that this effect must depend on cultural context. What is considered “typical” obviously changes depending on where you are in the world.
Our thinking has advanced since then. More recently we have found that it’s not the name itself that creates the better life outcomes. Because if you control for a child’s background and upbringing, any sort of name effect seems to disappear. However, names do in fact signal who we are. They imply certain things. Many of us have heard about the studies that use resumes with different names to test how people respond. Names just aren’t inherently deterministic. You probably aren’t more likely to become a doctor simply because of your name.
Although, I’m not sure that takes much of the pressure off of picking the right one.
People move to cities for a whole host of reasons, whether it be for more money, more affordable housing, and/or better weather. The fastest growing cities in the US, for example, tend to be in the south where it’s warmer and where housing supply is more elastic. However, we also know that “consumer leisure amenities” increasingly factor into this decision.
A new research paper by Gerald A. Carlino (Federal Reserve Bank of Philadelphia) and Albert Saiz (MIT) has tried to quantify this relationship by looking at the perceived beauty of a place. To do this, they analyzed the number of tourist visits and the number of “crowdsourced picturesque locations” in a metro area. Read: Instagrammable moments.
What they found was that beauty, not surprisingly, matters (much like it does in other facets of life). Between 1990-2010, metro areas that were perceived as being “twice as picturesque” experienced greater population growth — about 10 percentage points higher. These metro areas also attracted a higher percentage of educated individuals and experienced greater housing appreciation.
If you’d like to download a copy of Beautiful city: Leisure amenities and urban growth, click here.
Since 2012, a team at New York University has been working on something called the Atlas of Urban Expansion. What they are doing is collecting and analyzing data related to the quantity and quality of urban growth around the world. Everything from population densities to how well the streets were laid out during each geographic expansion.
The Atlas defines a city as having at least 100,000 people, which is a commonly used benchmark. According to this definition, there were 4,245 cities on the planet as of 2010. Included in their study is a representative sample of 200 of them, all of which can be found here.
They are also, rightly, looking at each city in terms of its extrema tectorum — the limits of its built-up area. This is as opposed to using administrative boundaries, which wouldn’t be as relevant in a study like this.
I really like the animations that they created depicting urban growth from 1800 to 2014, because they show: (1) where each city started (the dark nucleus); (2) how different urban shapes emerge as a result of geography, transport, and other factors; and (3) how land consumptive many of our cities have become in recent years.
