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Against defeatism: how more housing brings down rents
There's people who would move to Vancouver, but only if rents were a bit lower
Someone on Reddit argued that building more housing in Vancouver wouldn’t help bring down prices or rents:
More people means more demand which keeps prices high. If cost of living isn't a deterrent now it seems to indicate people will move here regardless.
I think this view is pretty common. “If we build more housing, pushing down prices and rents, what happens is that more people move here, pushing prices and rents right back up. So there's no way to make housing more affordable.”
What's wrong with this argument?
High prices and rents keep people out. People move where the jobs are, and there's lots of jobs in Vancouver. So there's people who would move to Vancouver if rents were just a little bit lower, but who can’t right now, because they can’t afford it. (The fancy term is "equilibrium.")
Conversely, there's people in Vancouver who are currently looking for a place, and who are just barely able to stay. If asking rents were just a little bit higher, they would give up and move away.
CMHC estimates that prices have to rise about 2% in order to reduce demand by 1% - in other words, to force 1% of people to give up and leave.
Equivalently, if we had 1% more housing than we actually do today, rents would be about 2% lower. That is, the people who would move here are people who can’t afford to live here now, but who would (just) be able to afford rents which are 2% lower than current asking rents.
People who can already afford today’s asking rents, and who really want to live in Vancouver, are already here. Since they can afford the asking rent, they don’t need to wait for new housing to be built.
Vancouver today is something like an exclusive club (like the Arbutus Club, which has an entrance fee of $65,000). We can continue to become more and more exclusive (with some non-market housing thrown in): the sky-high cost of housing acts as a filter which only allows high-income people to move to Vancouver, pushing younger people out. Or we can be larger and more middle-class, by building a lot more housing.
Who’s benefiting from the current housing shortage? Where does all the money go?
A lot of it turns into “deadweight loss.” With the housing supply and rents at point A, “consumer surplus” is the triangle above A: this is the gap between the actual rent and the maximum that each renter would be willing to pay. “Producer surplus” is the triangle below A: this is the gap between the actual rent and the minimum that each landlord would be willing to accept.
With housing supply reduced and rents rising to point B, the “consumer surplus” triangle shrinks (orange); the remaining landlords collect more rent (blue); but there’s a huge green triangle labelled “DWL,” for “deadweight loss,” that doesn’t go to anyone. It’s a pure loss.
Referring back to the equilibrium argument, adding more housing means shifting the red line a bit to the right, reducing the size of the deadweight loss, and shifting the rent (point B) a little more in favour of the renters.
The equilibrium argument is based on Joseph Heath’s explanation of how carbon prices work, looking at the marginal consumer. Correcting the record on carbon pricing, December 2015.
An explanation of deadweight loss, by Stephen Gordon. Memo to the Conservatives on climate policy: “Take the money, dammit!” October 2012.