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? ∑ e i n i = ∑ e i N+ ∑ e i (N i -N) + ∑ e i (n i -N i ) 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) Mix effect Share effect Competitive effect Impact on Region 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 Output Market Simultaneous Equilibrium in a region’s product, labor and structures markets. 1. Product Demand=production costs. 2. Costs = average of wages and rents. 3. Wages equilibrate labor supply with labor demand (proportional to output). 4. Rents do the same in structures market. Q D Q C=α K R + α L W W/P Labor Market L D =α L Q L S R Real Estate Market L K K D =α K Q W K S R MIT Center for Real Estate Changes in Regional output, prices, wages and rents in reaction to shift in product demand Qd to Qd’. 1). Prices (and costs) must rise. Ditto output. 2). Wages and employment rise. 3). Likewise for rents and stock of structures. 4). Reverse for downward demand shifts 5). Supply Elasticity and the Magnitude of price versus quantity changes? P Output Market Q Q D C=α K R + α L W Q’ D W/P Labor Market R Real Estate Market L K L D =α L Q K D =α K Q L S K S W’/P’ C’=α K R’ + α L W’ R’ MIT Center for Real Estate P Output Market Changes to Regional product, wages and rents from shift in labor supply to L’ S . 1). Wages must fall as employment rises. 2). Costs must fall and output expand. 3). Rents, however, rise as the stock expands. 4). What % of the labor shift is absorbed? 5). Product demand elasticity determines Price, wage versus quantity changes. C=α K R + α L W Q Q D C=α K R’ + α L W’ W/P Labor Market R Real Estate Market L K L D =α L Q K D =α K Q L S K S L’ S W’ R’ [...]...MIT Center for Real Estate Recent Examples of Demand and Supply induced growth Regional Differences in Labor and Wage Growth, 1960-1990 Employment Metropolitan Area* Population (% Change) Total (% Change) Manufacturing ( % Change) Wages** (% Change) Atlanta 179 312.0... definitions * *Real average hourly earnings of production workers in manufacturing, 1990 dollars adapted from DiPasquale and Wheaton (1996) MIT Center for Real Estate 1) If regions vary in productivity (supply shifts): wages and rents will be negatively correlated across areas 2) If they vary because of amenities (demand shifts): then wages and rents are positively correlated across areas Regional Wage... uc tio n Co al Re l W e ag sts Greater Productivity Regional Land Rents MIT Center for Real Estate Actual Wage** Skill-Adjusted Wage** Median House Value*** Anaheim 11.22 11.09 237,184.00 132.30 Birmingham 9.27 9.08 79,662.00 98.50 Boston 11.88 11.31 200,000.00 164.10 Buffalo 9.34 9.50 78,614.00 107.20 Cincinnati 10.19 10.00 78,745.00 102.40 Cleveland 10.36 10.16 83,855.00 109.50 Dallas 10.62 10.44... workers on private, nonaagricultural payrolls ***From American Housing Survey median house values for 1988, 1989, or 1990, converted to real 1989 dollars ‫٭‬From 3Q 1989, except Boston (3Q88), Cincinatti and San Jose (4Q89), and Tampa (1Q90) adapted from DiPasquale and Wheaton (1996) ... Pittsburgh 9.84 9.56 71,155.00 102.50 Portland, OR 10.34 10.19 80,643.00 103.00 San Francisco 12.62 11.94 250,000.00 144.50 San Jose 13.06 11.83 251,564.00 129.90 Tampa 9.07 8.97 85,000.00 100.70 Washington, DC 11.97 11.22 170,000.00 128.40 Average 10.58 10.31 120,954.00 112.60 Over many years, in many countries, there are persistent positive correlations between wages and housing rents Metropolitan Area . 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