The Determinants of Metropolitan Growth
Real Estate and Regional Economic Growth
MIT Center for Real Estate
Week 12: Real Estate and
Regional Economic Growth
• Exports, transfers, investments and the
determinants of regional growth: demand.
• Population growth and migration: supply
• 3-Q model of regional response. Factor
supply elasticity and the role of real estate.
• Wages, productivity and real estate costs –
across MSAs.
MIT Center for Real Estate
Income and Product Accounts in States
Summary of Output and Income Accounts
for Florida and Pennsylvania, 1991
Florida ($ billions) Pennsylvania ($ billions)
Income Accounts*
Income (Y) 262 242
Wages (w) 126 127
Other Income (y + G) 136 115
Consumption (C) 260 193
Private 214 161
Government 46 32
Federal Taxes (T) 38 41
Savings (S) -36 8
Output Accounts**
Output (Q) 219 211
Wages (w) 126 127
Profits and Rents (π) 93 84
Consumption (C) 260 193
Investment (I) 44 27
Imports (M) 175 153
Exports (X) 92 144
INCOME (Y) - OUTPUT (Q) 43 31
MIT Center for Real Estate
Regional Accounts: Flow of Funds
• Regions do not have to have individually balanced
accounts. Surpluses in goods can be balanced by deficits in
capital or government flows: the following cross border
flows however must sum to zero.
Trade surplus: X-M [exports - imports]
Gov. surplus (Federal): G-T [spending – taxes]
Capital surplus: I – S [investment - savings]
Profits surplus: y - π [received - earned]
• Notice the in Florida, huge trade deficit is made up with
huge negative savings.
MIT Center for Real Estate
Sources of Regional Demand .
• Some variables are determined directly by the size of a
state’s economy (Income or Output) : imports (M), Federal
Taxes (T), consumption or savings (S) and profits earned
in the state (π).
• Other variables are determined by forces largely outside of
the region and serve to bring money into the state,
generating growth and ultimately determining state size
(level of income or output):
- Exports (X)
- Investment (I)
- Federal spending (G)
- Unearned income: SS, retirement…(y)
MIT Center for Real Estate
Characterizing Export growth and Investment?
∑eini = ∑eiN + ∑ei(Ni-N) + ∑ei(ni-Ni)
i i i i
Share | Mix Competitive |
Shift
(i): industry
n,e: regional growth in activity, level of activity
N: national growth of activity
• Share: a matter of timing
• Mix: Historic industrial structure
• Competitive: “our” companies versus “theirs”
[innovation –vs- production costs: “product cycle]
MIT Center for Real Estate
Study of impact of each Demand factor on the
Boston Area Economy over time (Coulson)
Impact on Region
Competitive effect
Share effect
Mix effect
0 1 2 3 4 years since start 8 9 10 11
MIT Center for Real Estate
Regional Supply shifts are as important
• Migration into a region that results from
factors in the origin and not destination.
[US history 1820-1920].
• Birth rates in the state – 20 years earlier!
(Mass –vs- California Net Reproduction
Rates).
• Recent immigration from Mexico and Asia.
MIT Center for Real Estate
P
Simultaneous Output
Equilibrium in a Market
region’s product, labor C=αKR + αLW
and structures QD
markets. Q
1. Product
Demand=production W/P LD=αLQ
Labor LS
costs.
Market
2. Costs = average of W
wages and rents.
3. Wages equilibrate
labor supply with L
labor demand KD=αKQ
R
(proportional to KS
Real Estate
output). Market R
4. Rents do the same
in structures market.
K
MIT Center for Real Estate
P
Output C’=αKR’ + αLW’
Changes in Regional
output, prices, wages Market
C=αKR + αLW Q’D
and rents in reaction to
shift in product demand QD
Qd to Qd’. Q
1). Prices (and costs)
W/P LD=αLQ
must rise. Ditto output. LS
Labor
2). Wages and W’/P’
Market
employment rise.
3). Likewise for rents
and stock of structures.
L
4). Reverse for
downward demand R
KD=αKQ
KS
shifts Real Estate R’
5). Supply Elasticity Market
and the Magnitude of
price versus quantity
K
changes?
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Changes to Regional P
Output
product, wages and C=αKR + αLW
Market
rents from shift in
C=αKR’ + αLW’
labor supply to L’S. QD
1). Wages must fall
Q
as employment rises.
2). Costs must fall W/P LD=αLQ
and output expand. Labor LS
3). Rents, however, Market
W’ L’S
rise as the stock
expands.
4). What % of the L
labor shift is KD=αKQ
absorbed? R
KS
5). Product demand Real Estate R’
elasticity determines Market
Price, wage versus
quantity changes. K
MIT Center for Real Estate
Recent Examples of Demand and Supply induced
growth
Regional Differences in Labor and Wage Growth, 1960-1990
Employment
Population (% Total (% Manufacturing ( % Wages** (%
Metropolitan Area* Change) Change) Change) Change)
Atlanta 179 312.0 109.0 19
Chicago 18 54.0 -21.0 3
Dallas 136 241 140.0 19
Detroit 16 71.0 -9.0 18
Miami 107 191.0 109.0 -8
Pittsburgh -7 31.0 -52.0 -8
San Diego 142 275.0 103.0 -3
St. Louis 19 64.0 -12.0 18
* 1960 figures based on 1960 Census Bureau MSA definitions; 1990 figures based on 1990 Census Bureau definitions
**Real average hourly earnings of production workers in manufacturing, 1990 dollars
adapted from DiPasquale and Wheaton (1996)
MIT Center for Real Estate
In the Long run:
e
ag
Regional Wage
1). If regions vary in W
al
l Re
a
productivity (supply Ev Equ
en
shifts): wages and Pr
od
rents will be negatively uc
tio
n Co
correlated across areas. sts
2). If they vary
because of amenities
Preferred
(demand shifts): then Life Style
Greater
Productivity
wages and rents are
positively correlated
across areas.
Regional Land Rents
MIT Center for Real Estate
Median House
Over many years,
Metropolitan Area
Anaheim
Actual Wage**
11.22
Skill-Adjusted Wage**
11.09
Value***
237,184.00
Cost of living index٭
132.30
in many countries,
Birmingham 9.27 9.08 79,662.00 98.50 there are
Boston 11.88 11.31 200,000.00 164.10
Buffalo 9.34 9.50 78,614.00 107.20
persistent positive
Cincinnati 10.19 10.00 78,745.00 102.40
correlations
Cleveland 10.36 10.16 83,855.00 109.50
Dallas 10.62 10.44 85,000.00 103.80 between wages
Denver 10.89 10.35 86,335.00 101.50
Ft. Worth 10.33 9.96 80,000.00 103.20
and housing rents.
Indianapolis 9.62 9.61 78,614.00 99.30
Kansas City 10.69 10.22 71,155.00 95.10
*1989 dollars.
Los Angeles 10.90 10.83 225,000.00 126.50 **calculated by multiplying wage
Miami 9.43 9.75 94,874.00 110.10
differential indices by Dec. 1989
seasonally adjusted afg hourly earnings
Milwaukee 10.11 9.91 92,240.00 102.00
of production or nonsupervisory workers
Minneapolis 11.22 11.10 95,000.00 99.80 on private, nonaagricultural payrolls.
New Orleans 9.42 9.45 68,309.00 97.80
***From American Housing Survey
Philadelphia 10.98 10.72 139,000.00 127.20 median house values for 1988, 1989, or
Pittsburgh 9.84 9.56 71,155.00 102.50 1990, converted to real 1989 dollars
Portland, OR 10.34 10.19 80,643.00 103.00
٭From 3Q 1989, except Boston (3Q88),
San Francisco 12.62 11.94 250,000.00 144.50
Cincinatti and San Jose (4Q89), and
San Jose 13.06 11.83 251,564.00 129.90 Tampa (1Q90)
Tampa 9.07 8.97 85,000.00 100.70
adapted from DiPasquale and Wheaton
Washington, DC 11.97 11.22 170,000.00 128.40 (1996)
Average 10.58 10.31 120,954.00 112.60
