Nantucket - an Island with million dollar homes: the
extremes of spatial equilibrium
Nantucket is an island around 50km off from Massachusetts. The permanent population is
just over 10 000 people. Its gray, up to two-storey high wooden houses look more
like haunted shacks than like the American dream home. Walking down the narrow,
cobblestone streets one might occasionally encounter an elderly couple, and
rarely any cars. There are two grocery stores, a few family restaurants, several
tiny-tiny shops on the main street, two banks, and… that’s about it. No mass-production
factories, giant malls, crowded clubs, McDonalds or Burger King, not even Starbucks.
Yet, in 2011 Nantucket had the highest housing prices among US counties, the
only place where a typical home sold for over $1 million.
There also is no trend for a decline in prices ,
despite the crisis.
What explanation can
economic geography provide? According to the spatial equilibrium theory,
house prices are determined in the labor and housing market. The major factors
explaining rental-rate differences among regions are wage differentials, region-specific
amenities, and peoples’ mobility.
Nantucket hosts two types
of economic agents: the incredibly rich and the workers providing services for
them. The preferences of the incredibly rich are shaped by first geography and
cumulative causation. Nantucket rose to prominence in the 19th
century as a port midway between New York and Boston. It was also a major
whaling spot, bringing vast incomes to whaling ship owners. Ever since, ocean
transport has declined, and the spread of electricity rendered whale-oil candles
redundant. Yet, the centrality of the island did not wane. One explanation,
given by a Nantucket resident,
is that the rich simply enjoy being around other rich people. Thus, the flow of
successful families has followed a non-linear growth, where ever more of the
wealthy are attracted to the island.
Furthermore, the concentration
of high-income families led to the development of services catering to their
needs. Today, Nantucket has two yacht clubs, several golf clubs and an airport
where private jets drop off their owners. It offers a number of high-end
restaurants, gourmet food stores, boutique designer shops and quality
jewelries. Thus, site-specific amenities, in the form of concentration of rich
people and services for them, have boosted the demand for housing, and bid up
rents.
Other explanatory factors
are mobility and the wage levels. Most island inhabitants do not earn their
income there – they are either summer residents or retirees. Therefore, people’s
mobility is less limited: they are either there temporarily, or do not work any
longer, thus have a lower opportunity cost of relocating. Second, the local
wage is irrelevant for them; what matters is their mainland income or savings. Money
is likely to be increasingly concentrated in the hands of the very same
Nantucket residents, given the rising US wealth and inequality.
Similar reasoning applies
to local workers servicing the rich. For them, first and foremost, relative
wages have increased substantially, due to the limited local labor supply, the
high-value added of services, the high willingness to pay by the rich, and the
specific skills required. Moreover, due
to the good quality indivisible public goods supplied to the rich, workers
benefit as an externality. Finally, given that many workers are low-skilled
tourist sector laborers and immigrants, they are quite mobile.
Thus, housing demand has
been progressively increasing. Supply, on the other hand, is severely limited.
On the one hand, there is a natural limit of construction in an enclosed space.
On the other hand, the island authorities put strong restrictions on the
initiation of new construction, extensions, building size, height and design.
Thus, via the combined
force of history, concentration, mobility and natural limits to expansion, the
spatial equilibrium model provides insight as to why Nantucket offers the most
expensive houses in the United States.
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