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Time, Space and Capital

Åke E. Andersson and David Emanuel Andersson

In this challenging book, the authors demonstrate that economists tend to misunderstand capital. Frank Knight was an exception, as he argued that because all resources are more or less durable and have uncertain future uses they can consequently be classed as capital. Thus, capital rather than labor is the real source of creativity, innovation, and accumulation. But capital is also a phenomenon in time and in space. Offering a new and path-breaking theory, they show how durable capital with large spatial domains — infrastructural capital such as institutions, public knowledge, and networks — can help explain the long-term development of cities and nations.
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Chapter 11: Real estate capital

Åke E. Andersson and David Emanuel Andersson

Extract

Real estate capital is interesting not because it is a combination of land and physical capital (the usual interpretation), but because it represents a bundle of physical and social capital attributes. In places with high land values despite an elastic supply of land, it is social capital—that is, superior access to other people and adequate institutional support for economic interactions—that explains almost the entire capital value of local real estate. The capital value of real estate is around 50 percent of household wealth in Europe and the United States. In the Eurozone, the value of households’ direct real estate ownership amounted to more than €15 trillion in 2015. The price and thus capital value of a house varies between different locations because of actual and expected differences in accessibility, amenities and local services. An apartment on Fifth Avenue near Central Park may be therefore 50 times more valuable than a seemingly similar apartment in downtown Poughkeepsie, New York. Because of the extreme durability and fixity of real estate, there are substantial entrepreneurial opportunities in real estate markets. New uses, improved technical solutions and changes to the interior and exterior architecture of buildings are thus typical of the most dynamic cities. Some of the greatest increases in the cost of real estate are however not caused by an expansive regional economy, but instead by land use regulations that render the supply of developable land inelastic. North American examples of dramatic planning-induced increases in real estate values include Honolulu, San Francisco and Vancouver. Similar planning initiatives have made some of the world’s financial cities even less affordable than they would have been with less restrictive land use regulations, with Hong Kong and London being two notable examples of the combined land price effects of agglomeration economies and urban growth boundaries.

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