What if houses lasted months instead of decades?

Because of the durability of houses, past development ideas lead to lingering structures – regardless of demand. What does this mean for cities that climate change makes unattractive?

By , Guest blogger

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    Houses stand vacant in the Castlemoyne development in North Dublin, Ireland, Nov. 19. This development is one of the many so-called ghost estates that have been been largely abandoned and left unfinished across many parts of Ireland due to the financial crisis. If houses vanished after a year, what would housing patterns look like?
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If homes weren't durable (and thus melted in one year like a piece of pizza), how many people would live in Detroit today? Glaeser and Gyourko argue that Detroit's population would be much smaller. Past investment decisions in real estate development sometimes turn out to be a irreversible mistake. We end up with infrastructure, housing and buildings where we currently do not need it. If Detroit had remained the car capital of the world, then the housing built there in the 1930s-1950s would be quite valuable today but given the decline of Detroit's "golden goose" industry the durable housing stock lives on. Demand for Detroit housing is low and the result is very low home prices (under $20,000) and the city thus becomes a poverty magnet and this effect feeds on itself.

This case study matters for thinking about climate change adaptation. If, due to climate change, a city such as Phoenix faces extreme heat conditions and water shortages in the year 2040, will it become the "next Detroit"?

I sketch this quick example because I received a very reasonable email this morning from Jim Gleeson of the London School of Economics. Since I am a graduate of the LSE, I believe I owe him a serious answer. Here is his comment.

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"If Moscow's quality of life declines relative to other Russian cities, do you believe that people won't move to a relatively nicer city?"

Gleeson:

"This is the bit I'm concerned about. Looking at the US example, the greatest population growth in the last ten years has been in hot, relatively sprawling Sunbelt cities, not in temperate, relatively dense places. Professor Kahn has elsewhere established that 'liberal' cities tend to restrict new housing supply. My concern is that these are often the same cities where we expect demand to rise as a result of climate change. Isn't there a real danger that housing supply won't be sufficiently elastic in these places for the required economic and demographic adjustments to take place?"

My response:
When I was a graduate student, we were taught that asset prices (such as homes and stocks) quickly reflect new news. If due to climate change, Phoenix becomes unlivable and this becomes common knowledge in the year 2030 then home prices there will fall sharply. Land owners will suffer an income effect. Renters who live there will merely face a transition cost of moving to a new city and trying to stay in touch with their social network (Facebook will help). Phoenix employers are likely to seek out new locations and thus for many workers they would not switch jobs as they switch cities.

In Climatopolis, I assert that different cities will be affected differently by climate change and that there will always be geographic areas where we can rebuild future urban infrastructure. Consider San Francisco. Here is a flood map created by the Pacific Institute. This is exactly what we need from the climate scientists. We need precise GIS maps concerning under different scenarios how much coastal real estate is at risk. Given the possible damage caused by extreme low probability scenarios, it is important to map out worst case scenarios. I predict that insurance companies and city governments will both have an incentive to do this in the future.

Suppose that even in "worst case" scenarios that there are parts of San Francisco's metropolitan area such as the Berkeley Hills that will not flood. A benevolent planner might want to encourage more people to live and work there. Will land regulation be flexible enough to allow more people to do so? In Climatopolis , I discuss at length in chapter 4 that Los Angeles will have an easier time adapting to climate change if more people live closer to the ocean in the Santa Monica area. Drive along Wilshire Blvd there and you will see low density bad commercial auto shops. In my world, this area should be rezoned for 25 story residential towers with Manhattan or Hong Kong density. In this way, millions of people could live there and a co-benefit would be that Los Angeles subway would become a viable transportation technology. If you worry about earthquake risk, I am confident that earthquake engineers have made progress in designing buildings to withstand such shocks but people would be free to choose whether they want to live there.

So to return to Jim's email, the key issue here in the future is to identify those geographical areas that face the least climate change risk. I predict that these areas will experience land price appreciation. How many people will be able to live there? This depends on how these areas are zoned. Are they zoned for one household per 1/2 acre or are high rise towers allowed? I agree with him that binding zoning law (if enacted in the most desirable places in the future) could inhibit adaptation. I want to write an academic paper with real estate lawyers on this very point and I think it merits serious research. The research question is; "Is real estate law nimble enough to evolve as the threat of climate change becomes apparent?" Could local zoning and land use controls inhibit adaptation by raising real estate prices in areas where people want to move to and thus making it hard for them to move to the safe areas?

In my recent Journal of Urban Economics Paper, I document using data from California that its liberal cities do slow growth. This matters for climate change adaptation only if liberal people are the majority of voters in areas that will have the easiest time adapting. Now the ability for a city to be able to adapt is not merely a function of its geography. Liberal cities may have enacted policies (such as wetlands and water pricing policies) that make it easier for them to handle climate shocks. This point merits future research by political scientists. A rational forward looking mayor will know that there are synergies between his city's geography and the policies he enacts. An inland city does not need "sea walls" but needs to have several sources of water and a "backup" plan in case there is drought.

In Climatopolis, I talk about competition in political markets. A mayor who allows a city's quality of life to suffer will lose his mobile skilled people and end up with a poor city. Anticipating this provides strong incentives for this Mayor to be pro-active in the face of climate change.

To close this long post, let's return to durable housing. To minimize the Glaeser/Gyourko durable housing problem in the face of climate change --- maybe we need more people to live in mobile homes or to live in structures that are not as durable but live on for 30 years. I realize that there would be a life cycle environmental cost to this reduction in durability but it would allow us to have more option value. In transport economics, researchers like John Kain argued in favor of buses over irreversible investment in subways in part because of the option value. Buses can be re-routed (as new information about the city's urban form is learned) while subway cannot. In the face of climate change, we need to build in more investments with "option value".

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on greeneconomics.blogspot.com.

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