The best way to deal with sprawl is to price traffic congestion not to impose boundaries.

I had a go at some of these issues here.

I was struck by the graph and then in anticipation of posting, briefly corresponded with Rory but managed to skim over Rory’s accompanying text which made it clear that the rise was proportionally similar across the geographic areas. Rory’s point was that if inadequate land release was the problem this would show up as disproportionate rises on the periphery.

I’m not so sure. Firstly there’s the argument that substitution may be more powerful than we think. CBD property may not substitute with property in Campbelltown but there could be a chain of substitution across smaller distances.. So suburbs substituting for each other that are within say 15 Ks of each other (Campbelltown-Liverpool- Ashfield-CBD) may create a chain by which land release in Campbelltown has some influence on CBD or at least Ashfield prices. It can also lead to different patterns of development with edge cities developing and drawing development out towards the periphery.

There’s also Glasser’s line that what’s going on here is a regulatory problem on a larger scale. We have all sorts of restrictions on land use which don’t relate to land release on the periphery. Height restrictions, limitations on dual occupancy and other developments.

No problem. I initially mention the modelling approach in my earlier 3:29 am comment (comment number 20 above).

I suspect that it is likely to be difficult in practice to distinguish between a situation in which it is just the status goods that enter the utility function and the positional externality situation.

Regards,

Damien.

I hadn’t read your 10.14 am post when i made my 10.15 am one. My post was meant to be the simplest way to get at the question: ‘is there an exernality?’. Your proposed approach begs that question and assumes there is an externality.

Your more complicated approach is relevant for answering the question: assuming an externality could the government actually improve matters? (even assuming it has the incentive to).

The modelling approach that I suggested is not quite the same as either of these approaches, although it is closer to the second. The household production function for “social status” would include as inputs both the luxury goods purchased by a consumer and the luxury goods purchased by other consumers.

Regards,

Damien.

Another way is to assume that people directly care about the consumption and status of other people. In that case, there is an externality and some forms of competition for status may lower efficiency. For example, if people care about their relative rank in the income distribution they may work long hours to raise their relative income. If everyone worked equally long and hard, all incomes rise proportionally and no-ones relative status changes, but everyone’s utility goes down because they worked excessively. This problem does not arise in the first way of modeling status competition because when people compete for status there, they bid up the price of the status good which accrues to its initial owner.

I don’t think the proponents of ‘envy taxes’ have made the case that the second model is more accurate than the first.

It is certainly the case that positional externalities, if they exist, could be said to result from an extreme form of envy. It is not enough to keep up with the Jones’, people weant to get ahead of them. Nonetheless, to the extent that this results in everyone using lots of resources with no impact on the ranking (or, if you are a utilitarian who weights everyone equally, regardless of the impact on the social status ranking), this is a market failure. Resources that could be used to increase everyones welfare are wasted on what is essentially rent seeking.

The section of my earlier comment that you quote is not really relevant to this line of reasoning. However, an elaboration of that section of my earlier comment does provide some indication of how difficult it is to correct for positional externalities. The inputs into the “social status” characteristic that I listed will also be inputs into other characteristics. In effect, the consumer has a multiproduct production technology for characteristics. It may well be the case that attempts to reduce any resource misallocation that arises from positional externalities results in some degree of resource misallocation elsewhere.

Should we be concerned about positional externalitiues? I don’t know, but I suspect not. If only because it is hard to see any credible way to design a policy to correct for them that is not open to capture by some special interests group. Furthermore, there is probably an inbuilt correction mechanism that prevents positional externalities from becoming too big a problem. This correction mechanism is the foregone consumption of other goods that positional competition might entail.

Regards,

Damien.

The characteristic would be social status. The inputs in the “social status”

As an aside, I suspect that this situation might be best modelled in a Lancaster and Becker “preferences over characteristics and household production” framework. The characteristic would be social status. The inputs in the “social status” production function would be things like waterfront mansions, luxury cars and the like.

Regards,

Damien.

1. We pay GST and Luxury tax on expensive cars. We pay a larger amount of stamp duty on expensive home purchases. We pay more GST the more expensive the goods or services.

Lets not forget that we are also paying income tax at a higher rate and more of it as income increases.

What this really means is that we need to place an even larger burden of tax than we already have, this time on goods that aren’t regarded as essentials.

It would be interesting to see how a ” positional” home would be spliced. Is it by suburb, home or region?

Are you sure that’s what the data show? It looks to me that prices have grown by factors of between 2.5 and 3 across the board, and that the largest increase is actually at the low price end.

Visually it does, but it looks like the presentation method is playing games with our mind. It would have been better if the academic concerned used a more ‘neutral’ and less biased presentation method that does not convey an impression contrary to underlying figures.

To prove my point, check the figures themselves. Then do the sums on the percentage increases across all distances.

It looks as if the percentage of growth is about the same between inner and outer.

If in 1996 you bought $600k worth of property in the inner zone you’d have only slightly more worth now than if you bought it on the outskirts. But the percentage difference is negligible and small compared to normal variations between house prices. You’d have 4 houses on the outskirts vs 1 inner-city, but the overall outcome would be about the same (Jan Somers has figures on this from an investing viewpoint in her book).

The figures behind the graph actually debunks the idea that capital growth is highest in inner city areas, which is opposite to what its author was trying to prove!

Peter

Thats an incredibly absolutist position to take. Just what are these positional goods that you speak thereof? Lets hear some specifics. We want to see these offending goods so deserving of chastisement.

I would have thought this was obvious.

To use Jason’s terminology, I’m not trying to subsidise ‘seachangers’. Just have a level playing field. If we can tax rent away from people buying positional goods – then there’s an efficiency gain because the same quantity and quality of positional goods get distributed – only at higher (tax inflated) prices and we can increase the consumption of non-positional goods.

David, not sure why you think this is going to be more painful for us but go for it. A lot of us city dwellers have made the choice that we don’t give a stuff about greenery which is why we’re here … It could all look like Sydney Airport for all I care as long as there is adequate infrastructure.

I didn’t mean to imply it was necessarily bad, just that there would be a backlash against it. As has been stated in this thread, inner city dwellers before they have kids seem happy with higher housing densities and good on ‘em. They mightn’t be so happy when one corner of their apartment block collapses as the tunnel being built underneath it (a) kills property values and (b) sends their Ikea lounge 50 metres into a hole and (c) their local park gets a big smokestack stuck in it.

It’s going to take a shipload of money and a big set of cojones to make Sydney work like outer-suburbanites think it should, and somebody will lose. Alternatively, a fundamental rethink of what an Australian mega city should look like will take place. Either way, I’m a spectator now rather than a participant so it’s a totally academic question to me.

One thing though – when your heavily pregnant good lady wife explains with a trembling voice and tears welling in her eyes that your precious offspring will never feel the joy of grass under their toes living in in your current abode, you will yearn for the outer suburbs just to have some peace :-)

Houses are going to have to be bought and knocked down, pockets of greenery will be concreted over …

David, not sure why you think this is going to be more painful for us but go for it. A lot of us city dwellers have made the choice that we don’t give a stuff about greenery which is why we’re here (don’t know Clover Moore is obsessing over this issue) – as Trugiboff said, people who do are welcome to live elsewhere. It could all look like Sydney Airport for all I care as long as there is adequate infrastructure.

Personally I wouldn’t touch Redfern because of the drug/crime problem, nor Randwick and nearby areas because of congestion issues (no immediate train or ferry option).

I suggested Redfern because the crime/drug problem makes it cheap. Surry Hills used to be nearly as bad but it’s almost gentrified now, which leaves Redfern as the last inner suburb that has potential. I’d agree it has problems, but I think there could be a massive potential upside.

As for the idea from Nicholas about the positional tax, there’s an easier way already within the grasp of the state government i.e. go back and fix the infrastructure problems. It’ll be painful and unpopular with the inner city residents to build new train tracks and fix the roads, but if you have to keep centralising Sydney around the CBD, that’s the only choice. Houses are going to have to be bought and knocked down, pockets of greenery will be concreted over, and it’s going to be very expensive. However, it will have the same effect as a positional tax by making the proximity of houses to the centre of sydney less valuable without necessarily penalizing those residents directly as with a tax.

As an alternative, Castle Hill, Campbelltown etc. should be expanded instead, by shifting NSW goverment departments there to relieve the pressure on the CBD.

Now I can see why you are unconcerned about high effective marginal tax rates Nick, as ‘excessive leisure’ is their main cost.

Firstly, despite being commonly applied, comparisons with US cities can be problematic. Houston and other US cities have governance structures (localised school boards for example) and demographics that have had strong decentralisation effects: inner-city decline (if not abandonment), exurban sprawl, extensive freeways and a dispersal of urban activities. Sydney and other Australian cities have strong state-based centralising influences: centralised infrastructure (CBD investment, roads, p/t) and the state bureaucracy, as well as the ocean and Blue Mountains acting as geographic constraints. Even without zoning, Sydney would retain strong inner-city house prices whereas US cities are generally the opposite (see here for example).

Secondly, as much as planners would love to think otherwise, their ability to restrict sprawl has been marginal at best: Australian cities retain densities lower than most US cities. They have been marginally more successful in restricting (not encouraging!) higher density developments in existing suburbs. A point that can be noted by comparing Houston’s pockets of high density development with Australian cities tendency to restrict it to the CBD. These restrictions (or the red-tape surrounding them) may be causing an increase in inner-city house prices, but not necessarily; despite the planners, rental returns have generally been falling.

Thirdly, land doesn’t really substitute from periphery to the centre. Our central cities are full of young singles or couples without children. Couples with children generally buy on the periphery – although this may be changing as the periphery gets further out and people make trade-offs between a large house/backyard and local amenity. The graph you show seems to suggest that all areas have gained a return of slightly more than double over the past ten years. This implies to me that house prices are being driven by investment returns (or perceived returns), but others would know much more about that.

Not sure about the economics, but on a first principles basis this sounds dubious. Surely if people want to take it easy on a lower standard of living, they opt for a “sea change” somewhere slightly cheaper and quieter. Your proposal seems to want to take away/penalise the choices of people who choose to work hard to afford a well-located house in the big smoke. However, these people already pay higher income tax (leaving aside tax minimisation strategies), and a higher price for the house they buy, and higher local council rates. Why is it a good idea to also slug them with a “positional goods” tax? I wouldn’t, however, argue against a congestion tax, which would fall on people living in inner urban areas who chose to use their cars on crowded inner urban roads during peak periods (rather than commuting by public transport).

On your more immediate question about Sydney apartment investments, the Ultimo/Balmain/Rozelle area is worth a look. These suburbs are very close to the CBD and you can commute by ferry, bus or light rail. Personally I’d opt for either Manly or Mosman/Cremorne Neutral Bay, partly because of proximity to harbour and ocean, but also because you can commute to work by ferry. The near eastern suburbs through to Bondi Junction are also good because you can commute by train (like Malcolm Turnbull). Personally I wouldn’t touch Redfern because of the drug/crime problem, nor Randwick and nearby areas because of congestion issues (no immediate train or ferry option).