In normal times and places house prices are kept fairly close to construction costs by the ordinary processes of supply and demand. Average house prices didn’t rise much over the entire 20th century, for example. Even today, house prices are kept close to construction costs in most of the United States. But extreme supply restrictions in a small number of important places (San Francisco, San Jose, LA, New York, Boston etc.), have driven average prices well above any seen in the entire 20th century.

Over the last several decades high productivity industries have become more geographically concentrated. As a result, a substantial share of the productivity gains from technology, bio-tech and finance have gone not to producers but to non-productive landowners. High returns to land have meant lower returns to other factors of production.

The return to education, for example, has increased in the United States but it’s less well appreciated that in order to earn high wages college educated workers must increasingly live in expensive cities. One consequence is that the net college wage premium is not as large as it appears and inequality has been over-estimated. Remarkably Enrico Moretti (2013) estimates that 25% of the increase in the college wage premium between 1980 and 2000 was absorbed by higher housing costs. Moreover, since the big increases in housing costs have come after 2000, it’s very likely that an even larger share of the college wage premium today is being eaten by housing. High housing costs don’t simply redistribute wealth from workers to landowners. High housing costs reduce the return to education reducing the incentive to invest in education. Thus higher housing costs have reduced human capital and the number of skilled workers with potentially significant effects on growth.

Housing is eating the world.