Category Archives: Urban Economics

World's Priciest Cities

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Oslo and London head the list. But surprisingly, my hometown Mumbai is among the cheapest place to live in. To think that everyone out there complains how expensive it is. Delhi, yet another Indian metro was also among the bottom five cities.

Update: Fast forward to 2007, “Moscow is the world’s most expensive city for the second year in a row, thanks to an appreciating ruble and rising housing costs, a new survey reports” [source]. London is now placed at #2 and Tokyo is at #4. To give you an example of Moscow’s cost of living:

“In Moscow, a luxury two-bedroom apartment will cost an expat $4,000 a month; a CD rings up at $24.83; one copy of an international daily newspaper is $6.30; and a fast-food hamburger meal totals $4.80.”

This ranking is based on a survey conducted by Mercer Human Resource Consulting that ranks 143 cities around the world, measuring the comparative cost of more than 200 areas such as housing, transportation and food.

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Do Rent-to-Own Stores prey on the poor?

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Aarons RentZero down! Zero percent interest until 2007!! Does this sound familar to you? I bet it does because the glut of supply far outstrips the demand of certain products such as furniture or GM gas-guzzling trucks. Both products have high markups allowing them to offer deep discounts and yet managing to make a profit off their sales.

There are other options to own these ‘luxury’ items – through rent-to-own stores at least for furniture. For other products, you have the lease option. The Brookings Institution recently released a report [PDF link] that blamed the rent-to-own stores for ‘preying upon its customers’. The damning evidence [via Buffalo News] was in form of an ancedote that told the story of Nicole Hennegan who leased a used 36″ color television from a rent-to-own store after paying $80 monthly payments. After she missed her fourth payment, the television was reposssed but the underlying implication of this story was that if she had continued paying her monthly dues, she would have ultimately paid $900 for an otherwise much cheaper television set. Those who blame the stores for such predatory pricing are missing an important economics lesson – Ms. Hennegan was perfectly capable of not opting to rent a 36″ television which considering her pecuniary condition was a luxury item anyway.

Thomas Woods, in his story, Do Rent-to-Own Stores Hurt the Poor rightly points to the oft-cited assumption that poor people are unable to make sound economic decisions [partly also the reason for food stamps when simply giving cash would maximize their marginal utility]. He also lists several reasons that advocates for the poor offer as reasons to regulate rent-to-own stores:

  1. Ms. Hennegan may not have had a large electronics store nearby.
  2. She may also not have had a car, or any friends who had a car, or any friends who had a car who knew how to get to an electronics store.
  3. She couldn’t have used public transportation, though it is not exactly clear why not.
  4. She couldn’t order the product online, since she lacked Internet access.
  5. She knew no one who had Internet access that she could use for ten minutes.
  6. She was also unable to go to the public library, where Internet access is available for free. She could not use public transportation to get to the public library; see #3 above.
  7. Even if she could have ordered the television online, she couldn’t have purchased the television because she lacks a credit card.
  8. You don’t need a credit card to order merchandise from Amazon.com – just a checking account – but she couldn’t order the TV there because, well, she just couldn’t.

But I agree with his underlying argument that these reasons seem to imply the the protagonist in the example above is a helpless victim unable to make smart decisions regarding her own financial health. And any efforts at regulating such stores would be akin to micro-managing social conditions and would also not allow poor people to benefit from enjoying ‘luxuries’ that the smart ones can effectively manage. In the name of social justice, we can offer to increase awareness of such pricing schemes and probably offer financial workshops to help them make sound decisions but completely banning or preventing rent-to-own stores is not the right solution. Probably even if they are aware of the financial downside, they are willing to make a trade-off for short term benefit; something that we cannot deny them.

After all, the Georgia State Lottery program that funds the HOPE scholarship is also accused of taking money from the poor to fund the rich kids education.

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Compact Living

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The common rant against compact or dense living is that it is not what people want. People rather prefer one-acre lots that have ample backyard space for their children to play and two-car garages to park their sedan and minivan/SUV/truck respectively. Every individual in the family needs his or her private space and in turn each family needs a large amount of private space that they chose to call home. The result – families are getting smaller and their homes are getting larger. And we believe that this is exactly what they – the consumers – wants? Or is it possible, like how I think, is this what they think they want because they have no other option or have not been offered any alternative. Before sounding to condescending regarding dictating to the common folk about how they should or should not live, I will simply argue that consumers of the real estate market or the housing market have been offered a limited set of choices for long and have been sold on the typical ‘American dream’ choice of a single-family home. Probably that worked for most part of the previous half-century but with the changing demographics and increasing need to living sustainably, we probably need more choices than we are offered right now.

Compact or dense living in condos or townhomes carry a stigma of being homes for middle and lower income but at the same time, high priced condos in most of the mega-cities cost far more than those single-family homes in the suburbs and the demand for them is no less. Single-family homes received a fillip from the government through incentives like the mortgage interest deduction or through veterans affairs or even as an indirect benefit from the construction of the inter-state system. People could afford home because they received magnanimous exemptions on their mortgages or they could commute easily to distant places thanks to the inter-states; so in fact the free-market isn’t entirely responsible for the inculcation of the American dream. The single-family homes sit on large lots away from the city mostly on cheap lands that are supported on city infrastructure and public subsidies. Fewer developers with the exception of high-growth Florida have chosen to develop subdivision if they were burdened with providing the underlying infrastructure of water, power, and sewage connections to these distant properties.

Density living, on the other hand occupy more people leaving more room for open and green space and significantly reduces dependence on automobiles. Provision of smaller parks for groups of apartments or town homes can easily fulfill the need for open space for children. This will not only further social communication but also encourage sharing of spaces that renders most backyards redundant (because children tend to play in groups in a common area as opposed to on their own in their own backyard). Compact living also makes it possible to walk down to such social spaces such as parks, neighborhood shopping, restaurants, or even hospitals. Retired folks and empty nesters (couples whose children have moved out) are already moving back into downtown to enjoy easier proximity to restaurants, night life, cultural districts, hospitals, and drug stores. They are choosing not to drive if they can help it.

Economically speaking, multifamily housing actually makes housing more affordable as infrastructural resources are shared and cost per unit is lot less than for single-family homes. The huge demand for housing is limited by scarcity of land in the suburbs which can develop only so much but by increasing the supply of land by minimizing the footprint and housing more people per footprint, real estate prices can actually decline. The city planning principle of developing several nodes in New Bombay (Navi Mumbai) has worked well in creating several foci instead of creating distinct zones for residential, commercial, or industrial that all people would have to flock to. Every sector or neighborhood is self-sufficient in its immediate needs and if you seek more, you can always travel to other nodes that have their own special attractions like movie theaters, stadiums, or transport terminals. But you may not need to use these public amenities everyday and hence reduce the daily commute by relying on facilities that your neighborhood provides. This is a proven fact by the traditional mohalla concept in Indian cities and has worked wonderfully over the ages.

Compact living has many other advantages over sprawling development, most of which cannot be packed into this short post. I’ll offer more arguments in the future. But respect for your environment is not a logical choice but in fact a moral and emotional choice, much like other choices you make in life. I wonder why this choice is always subjected to economic or logical conditions.

Cyclists and Pedestrians – Vanish now!

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“The prosperity of a nation is by counting the number of cars on the roads. Therefore there should not be cyclists travelling long distances and traffic should be made homogenous,”

The above priceless quote was uttered by Delhi’s Engineer-in-Chief, R Subramaniam. I am amazed that such a person with absolutely no knowledge of city form and urban economics holds such a high position in the government. Thankfully, he is only responsible for transportation policy in the capital city and not elsewhere. Policy in socialist India was government-driven and if this was the general attitude of all officials in the capital, we all would be forced to “be prosperous by driving more cars”.

Mr. Subramaniam seems to suffer from a case of spurious correlation. He must have seen America and noticed the number of cars on its road and decided that having more cars is the way to develop your country. Unfortunately, in a material-riddled society, his thoughts are shared by many and acquiring a vehicle irrespective of the ability to drive one safely is seen as an indicator of prosperity. In fact, people are buying more cars is only indicative of the choice they are making with their new-found wealth. However, if you look closely, they don’t even have that kind of money but they simply have easier access to car loans that the financial sector is heaping on the consumers. If the people somehow had opted to buy tons of chocolates with the money, it would mean that more chocolates in the country mean a more prosperous nation. So cars are simply a commodity that people buy to indicate their economic condition. Cars thus do not make a country prosperous but prosperous countries sure do have more cars.

Why am I harping so much on this lone bureaucrat’s statement? Simply because, it is one of the reasons that the Urban Development Ministry chose not to impose the condition to allocate space for pedestrians and cyclists for the city of Delhi. It allocated Rs.1650 crores over the next for years to Delhi to build 25 new flyovers and road over bridges. All this money with no express condition to consider the other forms of transportation – bicycles and pedestrians – which incidentally is also the primary form of transport for the lower-income class of people. However, Mumbai was denied this transportation largesse because of the same condition that it exempted Delhi from.

This policy decision is wrong and unfair on multiple counts. First, it unfairly discriminates against the population of the city that doesn’t own cars. Flyovers are primarily meant for car owners so that it can expedite their commute and reduce congestion. Of course, on the flip side, such a policy of building flyovers in fact encourages car ownership and brings more cars on the streets thus negating the advantage of additional road space added by flyovers. More flyovers are built to rectify the problem and the cycle continues. If you want to see a city dominated by flyovers and roads, come down to Houston and see if you would like to live in a ‘prosperous city with lots of cars and flyovers’. Second, the policy discriminates between cities i.e. Delhi and Mumbai by having different standards. Urban transportation policy needs to be coherent and if allocating space for pedestrians and cyclists is a guiding principle, it cannot differ from city unless a city has no cycles or people walking on the street, which is not the case for any Indian city, big or small. Third, environmentally, encouraging a car-centric urban form is disastrous. The prosperous nations that Mr. Subramaniam looks up to have since long suffered from problems of sprawl and inner city dilapidation causing other socio-economic problems. The developed countries have begun to reconsider their position on the role of automobiles in a city. London has already imposed a hefty congestion tax that limits vehicular traffic in the city (government-side policy) and astronomical parking charges make driving into New York City make it economically unviable (market-oriented mechanism). Dense and pedestrian friendly cities not only improve the social fabric of the city but also cause a lesser burden on the environment, at least until a pollution-free mode of transportation is developed.

Let us hope that this policy decision is reconsidered. The worse case scenario would be if Mumbai also was given the luxury of ignoring the transportation needs of more than 90% of its population.

In related news, Lata Mangeshkar is in the news for ‘delaying city infrastructure improvements’. In a later post, I will explain why her actions aren’t wrong.