Study Suggests US GDP Strangled by Overly High Rents

Anyone who has looked at the cost for rent in New York, San Francisco, and similar cities knows just how expensive it can be to live in these towns. But, could these high rents actually be hurting the economy?

Anyone who has looked at the cost for rent in New York, San Francisco, and similar cities knows just how expensive it can be to live in these towns. But, could these high rents actually be hurting the economy?

A new study suggests that incredibly high rents in cities like New York, San Jose, and San Francisco stymie overall economic growth, as measured by gross domestic product (GDP). The study, authored by two economists from UC Berkeley and the University of Chicago respectively, suggests that the solution is to build more, build higher, and increase overall population densities in these cities.

The authors of the study note that, “Despite some of the strongest rate of local growth, New York, San Francisco and San Jose were only responsible for a small fraction of U.S. growth…By contrast; almost half of aggregate US growth was driven by growth of cities in the South.”

The researchers theorize that excessively high rents harm the economy and constrain economic growth. The theory goes that money paid to landlords fails to benefit the local economy or flow back to the employers paying the tenants their salaries. Instead, that money either goes on deposit or funnels into the pockets of landlords who may be in other parts of the country or even overseas.

Much of the paper’s criticism targets efforts to maintain smaller residential areas to preserve aesthetic considerations. The researchers posit that more housing would spread demand and help lower overall rent costs. By their estimates, this would boost the US economy by a whopping 9.5 percent (precisely how is a little unclear).

While some of the assertions of this research appear to be little more than wild conjecture, the underlying theory is interesting and sound. Due to the scarcity of property in areas like New York and San Francisco, developers must fetch top dollar for their projects just to break even, let alone profit. This has led to annual rent increases in San Francisco of as much as 15 percent per year. However, free those developers to build higher (much higher), and they can make much more money from the same patch of dirt while offering significantly lower rents.

Of course, some critics point out that cities like New York are already quite densely populated, and question packing more housing into this already confined geographical space. Others suggest that a move towards smaller “micro-apartments” may be the way to achieve the kinds of population density required to make rents affordable once more. Regardless of the approach, if these cities are willing and able to squeeze in more housing, it could free renter’s disposable incomes and lead to a boost in the overall US economy; a true win-win for all involved.