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The housing ladder
Why new housing helps, even when it's expensive
Housing is a ladder. Higher up, housing is more expensive, but also more spacious, newer, and more secure. Lower down, housing is less expensive, but more crowded, older, less secure, and in the worst cases, in poor condition.
It’s all connected, because people can move down the ladder. Scarcity higher up the ladder pushes people downward. When you block new market-rate housing, the people who would have lived there don’t just vanish: they’ll find somewhere else to live, further down the ladder.
This makes housing more expensive at each lower rung of the ladder, putting immense pressure on people closer to the bottom. They’re forced to move away, to crowd into terrible housing, or worst of all, end up homeless.
Michael Sullivan describes how this works:
My wife works in affordable housing. When she tells me about the families that end up moving into one of the units she develops, they usually weren't homeless before, but they often lived (and continue to live) in insufficient housing -- things like five-person families in a one-bedroom apartment. Plus other negative factors. (Crime-ridden neighborhoods, lots of deferred maintenance on their units, etc. In one memorable case, no bathrooms in the unit. Safety code violations.)
So there's a ladder, right? At one end, you have people who literally live on the street in cardboard boxes. One tiny step up from that, people who couch-surf or live in their cars. Another step up, people who live in extremely cramped or otherwise heavily compromised unit. Then you have people who aren't like four to a bedroom, but still live in very small units that have significant compromises. Then people who are like "well, the kids share a bedroom and the kitchen is a postage stamp." And so forth and so on, up to the level of "we have a beautiful large house with a big yard and nice views and..."
I think there's an understandable impulse to draw a line somewhere on that ladder and say, "Well, above this line, it's not really a problem and we don't care if people at that rung want to be a rung higher." And so you get lots of progressives who only want to talk about "affordable" housing to some definition of affordable, or who only want to talk about homelessness. But I think it's really important to see that crowded higher rungs put pressure on lower rungs.
My family is very fortunate when it comes to income. We have a nice house, nobody shares rooms, etc. But it's still a house that, when I was a kid, I would have associated with someone significantly lower income than we actually are -- because we live in the Bay Area and housing is ultra expensive. I'm not saying anyone should be crying about my life -- my house is nice. But because I bought this house for $1.6M, someone who has a six figure income, but not as nice a six figure income as I do is staying in a starter house, maybe a two bedroom. And you shouldn't cry for them either. But because they're in that house, someone else is staying in a condo. And there's nothing wrong with condos. But because that person is staying in a condo, someone else is in an apartment. And that means that someone else is in a smaller, dingier apartment where they're sharing rooms. And because that apartment is not available, someone else is crammed like sardines in a tiny little apartment.
Which all seems relatively obvious, but God, it doesn't seem to be very obvious to a lot of people.
Evidence that more housing helps
There’s something called negativity bias: a story that something bad will happen always seems more plausible than a story that something good will happen.
Because of negativity bias, it’s easier to believe that blocking housing results in trickle-down evictions, than it is to believe that adding more housing results in “vacancy chains” which make housing further down the ladder more affordable. But it’s basically the same story, just reversed.
New housing helps even when it’s expensive. Whenever a new rental building opens up, high-income renters move there from the surrounding neighbourhood. (They’re paying more, but getting newer housing.) Each move opens up a new vacancy, resulting in a subsequent move, and so on.
Studies of moving chains show how this works in practice.
Evan Mast studied new construction in major US cities: “The effect of new market-rate housing construction on the low-income housing market,” Journal of Urban Economics, July 2021.
Constructing a new market-rate building that houses 100 people ultimately leads 45 to 70 people to move out of below-median income neighborhoods, with most of the effect occurring within three years. These results suggest that the migration ripple effects of new housing will affect a wide spectrum of neighborhoods and loosen the low-income housing market.
Cristina Bratu, Oskari Harjunen, and Tuukka Saarimaa studied new construction in Helsinki: “City-wide effects of new housing supply: Evidence from moving chains,” Journal of Urban Economics, January 2023. Abstract:
We study the city-wide effects of new, centrally-located market-rate housing supply using geo-coded population-wide register data from the Helsinki Metropolitan Area. The supply of new market rate units triggers moving chains that quickly reach middle- and low-income neighborhoods and individuals. Thus, new market-rate construction loosens the housing market in middle- and low-income areas even in the short run. Market-rate supply is likely to improve affordability outside the sub-markets where new construction occurs and to benefit low-income people.
When expensive housing opens up, the people who move there are high-income, but because of moving chains, this creates vacancies in middle- and low-income neighbourhoods:
We start by showing that people moving into the new centrally located buildings have much higher incomes and are more likely to be highly-educated than both the HMA population on average and the people who move to other locations in the HMA during our time window. New housing built in expensive areas of the city does indeed primarily house the better-off. However, the moving chains triggered by these new units reach middle- and low-income neighborhoods. By round three, 60% of movers originate from neighborhoods in the bottom half of the neighborhood income distribution. Our register data also allows us to show that low-income individuals are indeed part of the moving chains. By round four, 50% of movers are ranked in the bottom half of the national level household income distribution. This is direct revealed-preference evidence that low-income individuals in the city area also benefit from new expensive housing, even when the new units are allocated to individuals higher up in the income distribution.
How many vacancies are created:
We find that for each 100 new, centrally located market-rate units, roughly 66 units are created in the bottom half of neighborhood income distribution through vacancies. [And that 31 vacancies are created in the bottom 20% of the income distribution.] Given that the moves we study happen between two adjacent years, i.e. we study the very short-run, these numbers are significant.
The fallacy of the excluded middle
You’ll often hear people in Vancouver say that what we really need is affordable housing, that building expensive housing doesn’t help.
This is the fallacy of the excluded middle. Land in Vancouver is very expensive. Housing that uses a lot less land per home compared to a single-detached house - owning a townhouse in a townhouse complex, owning a condo, or renting an apartment in a purpose-built rental building - is going to be way less expensive than owning a $2 or $3M detached house, even when it’s market housing. As Kennedy Stewart explained in 2019, renting a newer 1BR apartment on the east side for $2000/month would require an annual household income of $80,000 to be affordable; owning a newer $1.5M half-duplex on the east side would require an annual household income of $335,000.
Again, referring back to negativity bias: when you don’t build expensive housing, the people who would have lived there aren’t going to disappear. They’ll move down the housing ladder, reducing vacancy rates and pushing up the cost of housing. (Or, taking a more positive view: when you build a lot more expensive market housing, creating vacancies further up the ladder, people will move into it. This creates more vacancies and alleviates the shortage further down the ladder, via moving chains.)
If we want to fix the housing shortage, we need to build everything, up and down the housing ladder. Market, non-market, townhouses, secondary suites, low-rises, high-rises, co-ops, supportive housing, student housing: everything that creates more housing helps. If it results in more housing, we should build it.
Noah Smith, The Left-NIMBY canon, January 2021. Housing is an issue that cuts across the usual left-right boundaries. For example, on the left, housing divides younger and lower-income people, who are most exposed to high housing costs, and older environmentalists, who are wary of population growth. In Vancouver and Toronto, arguments against housing tend to be cast in a progressive way. You see the same kind of argument in blue cities in the US: “Allowing private developers to build market-rate housing results in the construction of ‘luxury’ housing instead of ‘affordable’ housing.” Smith summarizes and responds to the left-NIMBY argument.
Matthew Yglesias, The “induced demand” case against YIMBYism, January 2021. Responds to the argument that building more housing actually results in more demand, overwhelming the effect of more supply.
Perspectives on Helping Low-Income Californians Afford Housing, Legislative Analyst’s Office, February 2016. “Some have questioned whether efforts to increase private housing development are prudent. These observers suggest that policy makers instead focus on expanding government programs that aim to help low–income Californians afford housing.” A detailed response, observing that expanding market-rate housing reduces housing costs and displacement for low-income households.