For example, if investment into communications technology increases, we would expect that to be related to a shift in more spending on communications tech. More investment in railroads vs. airports would be related to more subsequent spending on rail travel vs. air travel, etc. You build stuff and then people use it.
But, the odd thing with real estate is that our consumption of it is highly sensitive to our incomes. We will tend to spend x% of our incomes, on average, on rent expenditures (both imputed and cash) regardless of whether, in our time and place, that spending gets us 3,000 square feet or 1,000 square feet. In fact, spending on housing is a bit inelastic, so that, if anything, in times and places where x% gets us 1,000 square feet, we spend more for it than we do in times and places where x% gets us 3,000 square feet.
In terms of national accounting, residential investment and rental expenditures appear not to have much correlation at all. For instance, we are spending more of our domestic incomes on rent than ever today, but we are at the end of a decade with basically no net residential investment after accounting for depreciation of the existing stock of homes. We spend more because we invested less.
This has important implications for how we think of real estate vs. other assets. All residential investment leads to consumer surplus. That doesn't mean that new units are given away for free. It means that when profitable new units are built, they reduce the rental value of the existing stock by at least as much as the added value of the new unit.
Take a look at San Francisco over the past 20 years or so. Basically, compared to other areas, its real estate values have doubled. This clearly is the result of restrained supply. At some level of new supply, prices there could have been maintained at their 1997 levels, relative to other places.
Compare San Francisco to Austin. The population in Austin from 1997 to 2019 roughly doubled from about 1 million to 2 million. San Francisco went from about six and a half million to just under eight million. The relative median home price in Austin stayed about the same while San Francisco doubled.
How much building would it take in San Francisco to get rid of the excessive rents that are due to supply constraints? What if we doubled the size of San Francisco? What if it was now home to almost 16 million people? That would have been a massively different 20 years. That's building and growth at roughly 6 times the growth rate San Francisco allowed. Would that be enough to eliminate the supply constraint and take two or three percentage points a year off of rent inflation? Would it even take that much building? Maybe only adding enough units to grow by 4 million would be enough to bring prices back down to the initial norm.
In markets with elastic supply, there is a fairly steep decline in marginal utility. The 3,500 square foot house just doesn't add that much value compared to the 3,000 square foot house. In those markets, that is probably the most important factor that creates an equilibrium between the cost of building and the willingness of buyers to build more.
This is a reason why real estate makes a useful tax base, and why property taxes have the potential to be an effective public revenue producer while homeowner income tax benefits are not very useful. Those tax benefits basically induce homeowners to live in 3,500 square foot houses that they don't really value much more than they value 3,000 square foot houses, and property taxes leave total rent expenditures about the same, but those expenditures only buy 3,000 square feet instead of 3,500 square feet - again, a difference that doesn't amount to much for consumers with steeply diminishing marginal utility.
On the other hand, if the location of a unit in San Francisco makes it worth $5,000 per month, then tax effects that provide a 20% subsidy to that spending will just mean it is worth $6,000 per month. Subsidies to housing in Austin would have to work through added residential investment while subsidies to housing in San Francisco simply flow to the bottom line of the real estate cartel members.
I am just spitballing here, thinking about this idea. Input is welcome.