Unbalanced Growth Inevitably Leads to Land Overvaluation

核心概念

In economies experiencing unbalanced growth, where labor productivity grows faster than land productivity, land will inevitably become overvalued, exceeding its fundamental value determined by land rents.

摘要

• Bibliographic Information: Hirano, T., & Toda, A. A. (2024). Unbalanced Growth and Land Overvaluation [Working Paper]. arXiv:2307.00349v4.
• Research Objective: This paper investigates the long-run behavior of land prices in modern economies, particularly focusing on the conditions under which land becomes overvalued relative to its fundamental value.
• Methodology: The authors develop a two-period stochastic overlapping generations (OLG) model with land as a factor of production and a store of value. They analyze the equilibrium dynamics of land prices, wages, and rents under different productivity growth scenarios.
• Key Findings: The study finds that when labor productivity grows faster than land productivity (unbalanced growth) and the elasticity of substitution between land and labor exceeds one, land overvaluation inevitably emerges in equilibrium. This overvaluation is characterized by the land price exceeding the present value of future land rents.
• Main Conclusions: The paper concludes that land overvaluation is not merely a short-term phenomenon but a necessary consequence of unbalanced growth in the long run. This finding challenges the conventional view that land prices should ultimately reflect their fundamental value.
• Significance: This research provides a novel theoretical framework for understanding the persistent overvaluation of land in modern economies. It highlights the crucial role of unbalanced growth and elasticity of substitution in driving this phenomenon.
• Limitations and Future Research: The model simplifies reality by abstracting from factors like land as collateral, heterogeneous agents, and government policies. Future research could explore the implications of these factors on land overvaluation.

统计

Real estate comprises more than 50% of household wealth in 27 out of 29 OECD countries.
The employment share of agriculture in the United States has significantly declined over the past three centuries.
The elasticity of substitution between land and non-land factors for producing housing service is 1.16 for residential properties and 1.39 for commercial properties in Allegheny County, Pennsylvania.
The elasticity of substitution between land and non-land factors is around 1.25 for Chicago and Berlin.

引用

"Historical trends suggest the decline in importance of land as a production factor but its continued importance as a store of value."
"Unbalanced growth together with the elasticity of substitution between production factors plays a critical role."
"Around the trend, land prices exhibit recurrent stochastic fluctuations, with expansions and contractions in the size of land overvaluation."

从中提取的关键见解

Unbalanced Growth and Land Overvaluation

by Tomohiro Hir... 在 arxiv.org 11-12-2024

https://arxiv.org/pdf/2307.00349.pdf

更深入的查询

How might government policies, such as property taxes or zoning regulations, influence land overvaluation in the context of unbalanced growth?

Answer:
Government policies can significantly influence land overvaluation, especially in the context of unbalanced growth where the demand for land as a store of value can outpace its productive use. Here's how property taxes and zoning regulations play a role:
Property Taxes:

Mitigating Overvaluation: Property taxes levied on the market value of land can potentially curb overvaluation.

Increased Holding Costs: Higher taxes increase the cost of holding land, discouraging speculative purchases and potentially dampening price increases beyond their fundamental value.
Shifting Returns: By taxing the value rather than just the rental income, property taxes can shift returns from speculative capital gains towards productive use.

Exacerbating Overvaluation (Unintended Consequences):

Supply Constraints: If property taxes are primarily used to fund local services and infrastructure, but these funds are insufficient due to other fiscal pressures, it can limit the government's ability to expand infrastructure and housing supply. This can worsen the imbalance between land supply and demand, potentially exacerbating overvaluation.
Inelastic Supply: In areas with inelastic land supply (e.g., geographically constrained cities), property taxes might not effectively deter speculation. The fixed supply, coupled with high demand, can mean that even with higher taxes, investors are willing to pay a premium for land.
Zoning Regulations:

Mitigating Overvaluation:

Increased Density: Zoning regulations that allow for greater density (e.g., taller buildings, mixed-use development) can increase the supply of usable space on a given plot of land. This can help alleviate the pressure on land prices driven by a limited supply.

Exacerbating Overvaluation:

Restrictive Zoning: Regulations that limit density (e.g., single-family zoning, height restrictions) can artificially constrain land supply. This can lead to higher prices for the limited developable land, fueling overvaluation, especially in high-demand areas.
Regulatory Delays: Lengthy and complex zoning approval processes can discourage development and slow down the increase in housing supply. This lag between demand and supply can contribute to land price inflation.
Key Considerations:

Policy Interaction: The effectiveness of these policies depends on their design, implementation, and how they interact with each other. For example, a well-designed property tax system coupled with flexible zoning regulations might be more effective in mitigating overvaluation than either policy in isolation.
Local Context: The impact of these policies can vary significantly based on local factors such as the existing housing market, population growth, and economic conditions.

Could the increasing role of technology and automation in various sectors potentially mitigate or exacerbate land overvaluation in the future?

Answer:
The increasing role of technology and automation presents a complex and multifaceted influence on land overvaluation, with the potential to both mitigate and exacerbate it, depending on how these forces interact with economic structures and land use patterns.
Potential Mitigating Factors:

Decentralization of Work: Remote work, facilitated by communication technologies, could reduce the concentration of jobs in expensive urban centers. This could lead to a more geographically dispersed demand for housing and potentially ease price pressures in overheated markets.
Increased Productivity in Land-Intensive Sectors: Precision agriculture, vertical farming, and other technological advancements could boost productivity in traditionally land-intensive sectors like agriculture. This could increase the supply of food and other agricultural products without requiring a proportional increase in land use, potentially dampening demand for agricultural land.
New Forms of Space Utilization: Technologies like 3D printing and modular construction could enable more efficient use of existing urban spaces. This could increase housing supply within existing urban footprints, potentially moderating land price growth.
Potential Exacerbating Factors:

Skill-Biased Technological Change: If technological advancements disproportionately benefit skilled labor in specific sectors or geographic locations, it could lead to increased income inequality and further concentrate wealth in the hands of a few. This could fuel demand for luxury real estate and high-end residential land in desirable areas, potentially driving up prices.
Automation and Job Displacement: Widespread automation could lead to job displacement in certain sectors, potentially reducing overall economic growth and the demand for land in some areas. However, if this displacement is concentrated in specific regions or industries, it could create pockets of economic decline while other areas continue to experience growth and land overvaluation.
Increased Demand for Data Centers and Infrastructure: The growth of digital technologies requires significant physical infrastructure, including data centers and server farms. This could increase demand for land in specific locations suitable for these facilities, potentially driving up prices in those areas.
Key Considerations:

Distribution of Benefits: The impact of technology on land overvaluation will depend heavily on how the benefits of technological progress are distributed across society. If these benefits accrue primarily to a small segment of the population, it could exacerbate existing inequalities and fuel demand for land in already expensive areas.
Government Policies and Regulation: Government policies will play a crucial role in shaping the impact of technology on land markets. Policies that promote equitable access to technology, support workforce development, and encourage sustainable land use practices will be essential to mitigate potential negative consequences.

If land is inevitably overvalued in modern economies, what are the implications for wealth inequality and social mobility?

Answer:
The inevitability of land overvaluation in modern economies, as suggested by the paper's findings, presents profound implications for wealth inequality and social mobility, potentially exacerbating existing disparities and creating significant challenges for equitable economic opportunity.
Exacerbating Wealth Inequality:

Asset Price Inflation and Wealth Concentration: As land is a primary store of value, its overvaluation disproportionately benefits existing landowners. This can lead to a concentration of wealth in the hands of those who already own land, often those from higher socioeconomic backgrounds.
Unequal Access to Housing and Opportunity: Overvalued land translates into higher housing costs, making it increasingly difficult for lower and middle-income households to afford housing in desirable areas with access to good jobs, education, and amenities. This can create spatial inequality, where the wealthy reside in high-opportunity areas while others are priced out.
Intergenerational Wealth Transfer: Overvalued land can perpetuate wealth inequality across generations. Those who inherit land benefit from its inflated value, giving them a significant head start compared to those who do not inherit such assets.
Hindering Social Mobility:

Barriers to Entry for New Businesses and Entrepreneurs: High land costs can pose a significant barrier to entry for new businesses, particularly those that require physical storefronts or operate in land-intensive sectors. This can stifle innovation and limit economic opportunities for aspiring entrepreneurs from less privileged backgrounds.
Reduced Labor Mobility: High housing costs in thriving economic centers can discourage workers from relocating to areas with better job opportunities. This reduced labor mobility can limit individuals' ability to improve their economic prospects and contribute to regional economic disparities.
Debt Burden and Financial Vulnerability: Overvalued land can lead to higher mortgage debt for homeowners. This increased debt burden can make households more financially vulnerable to economic shocks and limit their ability to invest in education, healthcare, and other forms of human capital that are crucial for upward mobility.
Policy Implications:
Addressing the implications of land overvaluation on wealth inequality and social mobility requires a multi-pronged approach:

Increasing Housing Supply: Implementing policies that encourage the development of affordable housing, such as relaxing restrictive zoning regulations, promoting mixed-income housing projects, and investing in public transportation, can help alleviate pressure on land prices and improve housing affordability.
Taxing Land Value: Property taxes levied on the market value of land, rather than just the rental income, can help curb speculative investment and generate revenue that can be used to fund public services and infrastructure, potentially mitigating some of the negative consequences of overvaluation.
Promoting Inclusive Economic Growth: Policies that promote broad-based economic growth, create good-paying jobs, and invest in education and skills training can help ensure that the benefits of economic progress are more equitably shared and that opportunities for upward mobility are available to all members of society.