A short intro
When a high-demand city makes it hard to build new housing, old housing becomes scarce and expensive
Someone on Reddit asked:
I was reading a book about the US housing crisis - “Fixer Upper” by Jenny Schuetz - and the author was advocating for less restrictive zoning laws, allowing for more townhomes, duplexes, and apartments to be built in previously low density areas. That way the land costs would be split up and rents/prices would theoretically be cheaper, which I'm all for. However, I'm not sure this would guarantee lower prices, since in my hometown, developers keep building luxury apartments, pricing old residents out. Are there policies that could prevent this from happening?
Jenny Schuetz's book is great.
The root problem here is that certain cities don't want growth and they don't want new housing, so they make it really hard to build. In places which make it easy to build new housing, like the southern US, or Edmonton and Montreal in Canada, housing is much cheaper - it's less scarce, so it's less expensive.
I'm in Vancouver, but the situation in places like Toronto, California, and NYC is similar. We have institutions that were set up back in the 1970s and 1980s to make it hard to build housing. At the same time, we have lots of well-paying jobs here. So people are always moving here - and then prices and rents have to rise to unbearable levels to push other people out.
When there's a housing shortage, it's worst for people near the bottom of the housing ladder. They're forced to move away, to crowd into substandard housing, or worst of all, end up homeless.
And when Covid hit five years ago, it aggravated the overall housing shortage, because there were suddenly a lot more people working from home, needing more space, and willing to move. It's like the housing shortage spilled over from high-cost cities to low-cost cities.
That's the diagnosis of what's going on. The prescription is pretty simple: build more housing. People want to live and work in Vancouver, and other people want to build housing for them. But because we regulate new housing like it's a nuclear power plant, and tax it like it's a gold mine, we're severely restricting the supply of housing. We should stop doing that.
In particular, high taxes on new housing really ratchet up the floor on prices and rents. And then because new housing is so scarce and expensive, older housing is also scarce and expensive.
I think people use gentrification to mean two different things:
(1) A lot more new housing being built in a neighborhood.
(2) People being pushed out of a neighborhood by high prices and rents.
Paradoxically, not building housing in a neighborhood that's desirable (e.g. because of its location) is what results in displacement. When you're building housing to accommodate demand, that reduces pressure on the existing housing. When you're not building housing, what happens is that higher-income newcomers end up bidding up prices and rents, pushing people out.
It’s like when there’s a shortage of new cars. Used cars also become scarce and expensive. We tend to focus on how expensive new housing is, while not paying much attention to what’s happening with existing housing.
Some references.
Nolan Gray on the general problem:
Many U.S. cities force every development proposal to go through a long and costly discretionary review process. This is often done by making land-use regulations so restrictive that any development must pursue a discretionary action like a rezoning or a special permit. In practice, this submits all proposed development to months of negotiating and public review, in which locals can shout a project down to their preferred size (which is often a vacant lot) or extract large concessions from the developer.
A couple videos from NYC. Neighbors shouting “We don’t want affordable housing!” Lineups of people trying to find an apartment.
A local example from Vancouver - a rental high-rise including 20% non-market housing, on top of a new rapid-transit station close to the city centre, replacing an old office building (so there’s zero displacement).
Unwanted housing. An eye-opening and surprisingly gripping paper by Manville and Monkkonen, using examples from California.
The MacPhail Report: same thing in BC.
Matthew Yglesias: Housing policy isn’t that complicated. “If you want more affordable homes, make it legal to build more. If you don’t, then don’t.”
In Los Angeles, Mayor Karen Bass was elected on, among other things, a promise to address the city’s homelessness crisis and lack of affordable housing. Shortly after taking office, she made a big splash with Executive Directive 1, an order that massively streamlined permitting requirements for new housing projects that consist of 100 percent “affordable” housing. ED 1 did not, however, provide any actual money for the construction of affordable projects. So when the order was issued, one interpretation was that Bass did not particularly intend this to make a big difference. She wanted to take a bold stand in favor of affordable housing but was counting on very little actually getting built.
This turned out to be wrong, though. California attaches tons of requirements to affordable housing projects built with state money. And California localities also put tons of costly permitting delays in the way of all kinds of projects. But it turned out that Los Angeles is so acutely under-housed that if you combine the express permitting of ED1 with saving money on labor costs by not taking state money, lots of new 100 percent affordable, privately financed projects are profitable (“pencil out”).
This was an unexpected result and naturally provoked elements of local controversy, in the face of which ED1 has been repeatedly revised, each time with measures that only make it harder and more expensive to build and ultimately serve to undermine the original idea of building more housing.
It’s easy to assume that markets and capitalism are the problem, but the real problem is scarcity. Even without markets and capitalism, we would still want to build a lot more housing.
Building homes is real investment, as in, you reduce current consumption to provide consumption over time. Becomes clearer when you think about it as a planner of a command economy, rather than with $$$ in the way which can be confusing.
Exactly! Don't get confused by the dollar veil. At the bottom line, everyone in your country having more & bigger homes means by definition they are wealthier!
There's just no way for scarcity to raise real incomes more than abundance.