Skyscraper Scale Econ

Edward Glaeser says regulation doubles New York housing prices:

The cheapest way to deliver new housing is in the form of mass-produced two-story homes, which typically cost only about $84 a square foot to erect. That low cost explains why Atlanta and Dallas and Houston are able to supply so much new housing at low prices. …

Building up is more costly, especially when elevators start getting involved. And erecting a skyscraper in New York City involves additional costs (site preparation, legal fees, a fancy architect) that can push the price even higher. But many of these are fixed costs that don’t increase with the height of the building. …The actual marginal cost of adding an extra square foot of living space at the top of a skyscraper in New York is typically less than $400. Prices do rise substantially in ultra-tall buildings—say, over 50 stories—but for ordinary skyscrapers, it doesn’t cost more than $500,000 to put up a nice 1,200-square-foot apartment. … At those heights, the land costs become pretty small. If there were no restrictions on new construction, then prices would eventually come down to somewhere near construction costs, about $500,000 for a new apartment. That’s a lot more than the $210,000 that it costs to put up a 2,500-square-foot house in Houston—but a lot less than the $1 million or more that such an apartment often costs in Manhattan.

Glaeser also tosses in this shocking stat:

Driving the 15 miles from the [Mumbai] airport to the city’s old downtown, with its landmark Gateway of India arch, can easily take 90 minutes. There is a train that could speed your trip, but few Westerners have the courage to brave its crowds during rush hour. In 2008, more than three people each working day were pushed out of that train to their death.

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  • Shemp

    Glaeser can’t be right that the regulation drives up prices. It drives up costs; developers, however, will charge every penny that the market will bear. The reason those apartments cost a million is because people will pay a million.

    • Johnicholas

      If people will pay a million for an apartment, and developers can build an apartment for 500k, then developers would build more apartments, sell them, and more people willing to pay a million would have apartments.

      Eventually, you would house all the people willing to pay a million, and prices would come down.

  • http://www.isteve.blogspot.com Steve Sailer

    So, the solution to 3 people a day dying on the Bombay subway from overcrowding is to increase the density of Bombay?

  • Brian Geiger

    This seems to be a short sighted analysis. Yes, the housing is cheaper. What about the transportation costs?

    • Oligopsony

      Transportation costs are also cheaper when you raise density. (Not per-mile, obviously, but per-trip.)

  • Buck Farmer

    The context of the Mumbai train quote was promoting congestion pricing for Mumbai’s roads.

    Further if density goes up but population stays the same, that means each individual is spending fewer minutes commuting thus lowering the chances of commute-related fatalities.

    This would be countered by the fact that light rail commute fatalities are probably linked to peak density moments.

    So there’s no clear direction without getting into sizing these effects.

    • kirk

      The popularity of the 5-6 story DIY apartment building in the developing urban areas (what the West insists are hell pits but the deluded masses keep building) bears this out. Moar density.

  • Oligopsony

    I was about to ask what the fatality rate for automobile transportation was – in the US and I assume throughout the rest of the first world, cars are definitely less safe than most other forms of transport – until I realized the stats were for a single train. Yikes!

  • Benquo

    There’s also a difference between the density of residents in a city, and the density of people on a train. In a more spread-out city, more people need to move nontrivial distances more often than in a denser city of the same size. So if you hold the size of the main transportation arteries fixed, you should expect them to have more users at a time, in the less-dense city.

  • Nik

    The time from Mumbai airport to (near) downtown has been cut down significantly by the construction of a few miles long bridge over the bay.
    The trains are only for daredevils or desperates!

  • http://marketurbanism.com Market Urbanism

    At those heights, the land costs become pretty small. If there were no restrictions on new construction, then prices would eventually come down to somewhere near construction costs, about $500,000 for a new apartment.

    For sure, loosened restrictions would lower housing costs in New York, but it’s a lot more complex. I doubt it’s double in the city itself, but meeting demand in the city itself will allow cheaper construction in outlying areas.

    I don’t think the overall cost of constructing prime housing in the city will change drastically. As more density is allowed, land prices will rise in desirable locations. The land price will still be several hundred dollars per square foot in prime locations no matter how high you build.

    But, I speculate the effects will be felt greater as the effects trickle through less-than-prime areas as higher-end renters/buyers can have their demands met at better locations and more affordable housing can be provided at locations with lower land and construction costs.

    Of greater immediate significance is the lower holding costs/cost of capital/risks related to the time spent lobbying to get entitlements and variances related to density restrictions – all while a developer sits on a multi-million dollar piece of real estate. I have no doubt the net effect of less uncertainty and time spent fighting would be more beneficial than the effect of spreading higher land prices over more units. (but it would lower the profit margins for the well connected developers who thrive on the barriers to entry the restrictions create)

    • anon

      Glaeser’s point is that when building a skyscraper, the price of land is a fixed cost which can be offset by increasing height. In fact, high land prices are what makes skyscrapers viable in the first place: if the price was lower, developments would spread out.

      • http://marketurbanism.com Market Urbanism

        price isn’t fixed in a marketplace. It changes according to supply and demand, and that is impacted by what you can do with the land, which is currently regulated….

      • anon

        “price isn’t fixed in a marketplace. It changes according to supply and demand, and that is impacted by what you can do with the land, which is currently regulated….”

        How does this detract from my point? Yes, land prices will be bid up if regulations are relaxed–although the amount is anyone’s guess, since it depends on future demand. But the price of land beneath a skyscraper does not depend on the height of the building, so it is in the developer’s interest to build up and spread the cost of land over more units. At least until she reaches 50 stories or so, which according to Glaeser is where marginal costs increase noticeably.

      • TheColourfield

        “But the price of land beneath a skyscraper does not depend on the height of the building, so it is in the developer’s interest to build up and spread the cost of land over more units”

        The price most definitely depends on the height of the building. The more units you add, the more the land costs to buy.

  • http://danweber.blogspot.com/ Dan Weber

    I’m having a lot of trouble with that opening quote, that the two-story house is the cheapest thing to build. That beats a 2- or 3-family home? A small apartment building?

    People enjoy the privacy and freedom of detached housing, but that doesn’t make it the cheapest housing.

    • http://marketurbanism.com Market Urbanism

      I’m having a lot of trouble with that opening quote, that the two-story house is the cheapest thing to build. That beats a 2- or 3-family home? A small apartment building?

      It’s true. The construction costs for single family homes are cheaper (per suare foot) because cheaper methods and materials of construction are utilized. Also notice Glaeser specified “mass-produced two-story homes”, which I assumed he meant pre-fabricated in a factory. (I’m also inclined to think that one-story homes are cheaper still.)

    • Sister Y

      Two-story can be single family or multifamily; the difference in cost is that two stories can be wood framed, whereas more stories require a steel frame (in general).

    • http://www.uweb.ucsb.edu/~criedel/ Jess Riedel

      Assuming Market Urbanism and Sister Y’s comment are true, the conclusion would be that higher building densities only make sense when you incorporate the cost of the land.

      I was initially surprised by this too, but it makes sense in reflection. If it were cheaper per square foot to build apartment buildings, then the poor in rural areas (where land costs can be neglected) would live in a few apartment buildings rather than scattered cheap houses.

  • 2damnhigh

    Regulation raising housing prices should concern everyone. Why?
    That’s right, because the rent is too damn high!

  • Michael

    single family homes have the highest servicing cost per unit, roads, power, sewer and water grids.

    “marginal cost of adding an extra square foot of living space at the top of a skyscraper in New York is typically less than $400. ”

    this is true if the grid can handle it, if you have to upgrade the grid to handle the extra loads, time to re work your figures

  • click here

    thank you. This certainly covers a lot of ground. I could feel a lot of changes happening, though very subtle. I’d certainly be interested in the 3 day event Nick is considering holding.