The housing productivity myth

“[T]he household acquires housing services by either owning or renting a house. Owning a house in this model provides dual services. It yields the housing service and return from its home equity. When the households buy their houses, they choose not only housing services but also investment in home equity. The households, however, can obtain only the housing services by renting a house. The renters do not take risk from holding home equity and only pay the price (rent) for the service in the beginning of the period. To rent, the households pay a fraction, á , of the house value and they can choose to rent or to own the house in the next period. To own a house, the households must pay the fraction d of the house value as a down payment and finance the rest through a mortgage contract. The homeowners also pay the maintenance cost (u) that is proportional to the value of house and smaller than the proportional rental rate in each period. This cost represents taxes, depreciation and other fees as well.”

Academic Research on the Productivity of Housing

In economics, housing is as productive as any other asset, such as commercial property. Housing services (ie, shelter) are a condition precedent to a viable economy. An early 1964 paper in Land Economics examined the question of the productivity of housing, and highlighted the difficulty some have recognising its value due to the fact that we tend “to depersonalize economic logic until its original purpose disappears from view”. On the question of housing productivity, this author commented (note that this was written over 40 years ago):

“Surely the time has come to assault frontly the shibboleth that housing is unproductive. For this shibboleth is hampering the efforts of all less-developed countries…The view that housing is not productive discourages the formation of more loan institutions, discourages planners from relating housing to industrial development, discourages the citizenry from believing that the development exercise is really concerned with his well-being and thereby discourages his willingness to help advance the development exercise itself…

The ultimate purpose of economic activity is to provide for the essential human needs, including shelter. Certainly, no one really favours paying farmers to grow crops which are then destroyed. The only true value of the crop, its only true productivity, is meeting the consumers’ needs for food and fibre. So it is with manufactured goods, including buildings. Thus it is the existence of housing, not its provision, which is its true productivity…

Housing is also productive in the mobilization of financial resources. The prospect of home ownership is one of the strongest inducements to individual savings. Home ownership will encourage people to accumulate their capital and mobilize their resources as nothing else will do…

Housing is, of course, more than putting rooms under a roof. Housing is an integral part of a functioning community. It must be suitably related to employment, to shop- ping, recreation, transportation and other essential services. Together these are all productive, as our pattern of investment outlays clearly affirm.”

Over the years, academic research has empirically demonstrated that new housing investment positively impacts both labour and business productivity. A Federal Reserve Bank of Chicago study by Fisher (2007), which was published in the prestigious Journal of Political Economy, observed:

“Household capital directly affects labour productivity. For example, analogous to the maintenance required to keep business capital in operating condition, workers must engage in rest, relaxation, and personal care to supply labour effectively. As a family grows, the size of its housing limits the quality of these “regeneration” activities. So, by increasing the size of its house, a household increases the productivity of its labour.

The second idea underlying household capital as a complementary input in market production is that it is efficient for houses to be located near business capital. An implication of this is that market production at a given location is limited by the supply of household capital at that location. The best example of this kind of complementarity is the factory town.”

Importantly, in an empirical (ie, practical) setting this paper found that an improvement in the quality of housing had a significantly positive impact on labour productivity:

“The estimates indicate that workers with the same education and working with the same business, government, and land capital are more productive in states with more rooms per household. The elasticity of productivity with respect to rooms per household is economically and statistically significant.”

A New Role for Housing

So we now have a better understanding of the main economic role of housing: amongst other things, providing the accommodation for the 10.8m workers that are the foundation-stone of our economy. In a similar sense, commercial property serves one primary function, which is supplying accommodation for businesses. Yet the housing market is increasingly fulfilling two distinct economic purposes: providing shelter for workers, and, with the advancement of technology, accommodation for business as more people work from home. In this regard, the home is no longer an office for just the self-employed individual, or for secondary employment activity. It is increasingly the workplace of professional service employees in their primary job, who don’t wish to commute long hours to their labour market.

In November 2008, the ABS undertook a Locations of Work survey. Just under one quarter (24 per cent) of all Australian workers spent at least some hours at home in their main or second job (up from 20 per cent in June 2000), of which 32 per cent worked only or mainly at home. Of those people who spent some time working at home, 70 per cent had an arrangement with their employer to work at home, and 84 per cent of people used information technology at home in that job.

The work-from-home trend is going to accelerate as Australia’s population grows and technology evolves. The roll out of high capacity electronic/optic communications (eg, the National Broadband Network) and other new technologies will allow employees to seamlessly interact with their colleagues and clients from home. And as Sydney and Melbourne are each predicted to grow to between 7-8m persons by 2050, it will become ever more difficult to transport workers from distant residential locales to the key labour markets. Federal and State Governments will presumably want to further encourage this trend to alleviate infrastructure expenditures and enhance productivity given there is no valuable time lost to commuting when one works from home.