Photo by M.V. Jantzen on Flickr.
In his Kindle book The Gated City, Ryan Avent argues that the limitations governments place on cities through zoning and other policies are holding back the nation’s economic growth.
Avent is a very smart writer on urban economics, who I interviewed in 2009. The book is very good, and I recommend it to anyone reading this post.
There are two points that I wish would have gotten fleshed out more in the book, and in discussions of housing markets more generally. The first is whether adding more density will, by the laws of supply and demand, make housing more affordable.
This is a recurring argument among writers like Ryan Avent, Matt Yglesias, and Ed Glaeser. They say that the housing market suffers from a supply/demand imbalance. There isn’t enough supply, and that’s the reason why so many neighborhoods in so many cities are unaffordable. If only we could boost the supply of housing to meet the demand, we could bring down, or at least stabilize, rents.
This idea rests, first and foremost, on the assumption that housing is a commodity. Consider a different commodity market — wheat. If wheat prices are very high, one way to bring them down is to boost production and flood the market with more wheat. This works because wheat actually is a commodity. Every unit of wheat is more or less the same as every other unit, so the price is whatever price the market dictates.
Housing is different. There are many unique types and styles of housing, some of which are more desirable than others. When demand for housing rises in a neighborhood, rents will rise, regardless of the type or quality of the housing. A neighborhood might have century-old rowhouses, 1970s apartments, and brand new luxury buildings. If demand is rising in that neighborhood, rents for all types of these units will rise.
But what if a neighborhood doesn’t have any vacant land sitting around waiting to be developed? How do you increase the supply of housing when there’s no place to build new housing? Basically, you have to knock something down and replace it with higher density housing.
Let’s imagine that a developer is proposing to level some not-so-great ‘60s-style townhouses in an urban neighborhood. In their place, the developer is going to build a multi-level apartment complex with a gym, pool on the roof, and ground-floor retail. Perhaps the developer is going to knock down 10 low-quality units and replace them with 50 high-quality units, for a net-gain of 40 housing units.
Even though the number of housing units in the neighborhood goes up, it’s virtually guaranteed that the market rents for those new units are going to be higher than the rents for the old units. So the folks who might have been able to afford one of the ‘60s-style townhouses no longer can afford a luxury-apartment in the neighborhood.
From a developer’s perspective, this is a no-brainier. The biggest cost in constructing housing is building the structure itself. The cost of making the units look cosmetically luxurious is marginal, but the price that people will pay for a “luxury unit” makes it more than worth it for developers.
For this reason, it’s understandable why some people oppose development, and it’s not so simple as sitting them down and saying, “Don’t you get it? There’s not enough supply to meet the demand in your neighborhood, and that’s what’s driving your rents up! Once we increase the supply of housing, everyone will be better off.”
The truth is that increasing the supply of housing units in a single neighborhood might not have its desired neighborhood-level supply/demand effect, because housing isn’t necessarily a commodity. But city-wide, and metro area-wide, it might actually accomplish something.
Unless a developer is going to replace 10 low-quality units with 50 low-quality units, there’s going to be a change in the structure of the neighborhood housing market that’s different from the impact on the metro area housing market.
Avent argues in The Gated City that homeowners often engage in NIMBYism because they are conservative, risk-averse, and are cautious out of fear that the project might fail. But it goes a bit beyond that. Renters often engage in the same behavior, not because of fear it will fail, but because they’re afraid the same project might actually succeed.