How to make expensive cities affordable for everyone again
Last week, we wrote about a new report from the California Legislative Analyst’s Office that found that poorer neighborhoods that have added more market-rate housing in the Bay Area since 2000 have been less likely to experience displacement. The idea is counterintuitive but consistent with what many economists theorize: Build more housing, and the cost of it goes down. Restrict housing, and the cost of it rises. If you’re a struggling renter, you’re better off if there’s more housing for everyone.
Many readers responded by saying “of course! supply and demand!” as if we’d just uncovered the obvious. Many others responded “of course! supply and demand!” — by which they meant, facetiously, that market dynamics clearly don’t work this way in neighborhoods like the Mission in San Francisco, where poor residents feel pushed out by tech workers moving in.
This question — how do we make room in highly desirable cities for everyone — gets at a defining problem of our times. And even experts (economists, sociologists and land-use scholars) don’t agree on the best answer. So we asked several of them to hash out the debate further for us here: What happens to housing affordability when we build more housing that’s not subsidized? Do the laws of supply and demand really apply here?
More market-rate units won’t protect low-income renters
The LAO report is correct that there is a housing shortage across California. It’s also correct that existing affordable-housing programs are inadequate. But the report errs in several ways, and for that reason we should think twice before taking its results seriously.
Most importantly, the report claims that constructing market rate units will protect low-income communities against displacement. But it relies upon a single imperfect definition of displacement and doesn’t distinguish between parts of the Bay Area that are growing rapidly and where land is cheap from the tight housing markets in San Francisco, Oakland, and San Jose. These three cities account for about a third of new market-rate units in areas the report focuses on. But other top producers include cities on the urban fringe as well as unincorporated areas where displacement pressures are minimal. Grouping together these very different places can make it appear as though new market-rate units prevent displacement, when in fact the opposite might be true.
The report also ignores clear evidence from other sources of ongoing shortfalls in affordable housing supply. The state tracks how well cities perform on the goal of providing housing affordable to all income levels. Between 2007 and 2014, fully 99 percent of the Bay Area’s need for high-end units was met. Conversely, building permits lagged far behind need for low- and moderate-income units.
To be sure, more supply is needed, but unless it is targeted to those who need it most, it will only help wealthier residents. To truly expand affordable housing in California, we need innovative policies that move beyond the limited existing programs. The most promising programs would provide direct subsidies to create permanently affordable housing and incentivize developers to include affordable units in their buildings. Even taking land permanently out of the market with land trusts should be on the table. We understand which mechanisms will work. The real question is whether we have the political will to overcome local opposition to new development and to change policies, like the mortgage interest deduction, that currently do more to subsidize middle-and high-income homeowners than struggling low-income renters.
What happens when housing doesn’t keep up with jobs
Kristy Wang, community planning director, SPUR
San Francisco’s housing affordability crisis is front and center of nearly every news cycle. Rents and housing sales prices are through the roof. Longtime low- and middle-income residents are experiencing pressures to leave San Francisco like never before. Employers of all types – restaurants, tech companies, coffee shops – are struggling to hire quality staff because it’s become so hard to afford life in San Francisco.
The LAO report accurately identifies the primary cause of this challenge: For decades, San Francisco has added fewer homes than needed to accommodate the people who want to live there. Adding fuel to the fire, San Francisco has added over 50,000 jobs in the last four years and is growing by approximately 10,000 new residents per year. With statistics like those, a housing “boom” of approximately 3,500 units per year in 2014 and 2015 (compared to an average of 1,750 per year over the prior twenty) still can’t go that far.
SPUR has long advocated for building housing at all levels, both subsidized and non-subsidized, recognizing that the need for affordable housing far outstrips what local and state government can fund. Most people will never have the opportunity to live in one of the high-quality subsidized affordable housing units that nonprofits build and manage in San Francisco, nor will they be able to access one of a shrinking number of housing vouchers provided by the federal government. So how do we help the vast majority of low- and middle-income residents who cannot access these benefits?
The LAO’s data shows that urban counties nationwide with more housing construction had slower rent growth than California coastal cities. Per the LAO’s analysis, growing the overall supply can reduce the strain on our existing housing stock and the resulting displacement pressures that many households are experiencing today.
SPUR agrees: To address this crisis, San Francisco and cities like it must plan for dense growth in the right places, dedicate significant funding to subsidized housing for those with the most need, pursue innovations that could address the needs of the middle class as well as lower-income households and allow robust production of nonsubsidized, market-rate housing.
We need market-rate housing to give subsidized housing a fighting chance
Daniel Hertz and Joe Cortright, City Observatory
Over the last several years, the San Francisco area has gained almost four times as many new jobs as new homes. You don’t need to use the words “supply” or “demand” to predict the result: When high-income and low-income people compete for the same homes, high-income people win—by driving up rents until no one else can afford them.
Importantly, most of those high-rent apartments are not new construction — they’re just older apartments that used to be cheaper. Like other cities, San Francisco has historically relied on “filtering”— a fancy way of saying “homes that are cheap because they’re old”— to provide most of its affordable housing. But filtering relies on a steady flow of high-income people moving into trendy new homes, and not competing for the older ones. For decades, by building at far lower rates than other cities, San Francisco has experimented with what happens when the gap between new jobs and new homes grows wider and wider, forcing the high- and low-income to compete for the same increasingly insufficient number of apartments. The results have been disastrous. By comparison, cities like Seattle, Denver, and Washington have recently seen rapid housing price increases grind to a halt after big construction booms.
Of course, subsidized housing still has a crucial role to play. But as affordable housing activists in the Mission recently discovered, even large amounts of housing subsidies can’t be effective if market prices stay out of control: a windfall $50 million from an affordable housing bond issue bought just three plots of land because of high prices.
Cities facing affordable housing crises need multipronged solutions: more subsidized housing, but also more market-rate housing construction, even high-end construction, to ease competition between high- and low-income renters for the same apartments, slow rapid price increases, and give housing subsidies a fighting chance to fill the remaining gap.
Filtering doesn’t work in hot, gentrifying neighborhoods
Dan Immergluck, professor, Georgia Tech School of City and Regional Planning
While building higher-density housing in large-lot, exclusionary suburbs can produce more affordability – particularly for moderate- and middle-income families – the situation is more complicated in hot urban neighborhoods. In New York, San Francisco, Chicago, Atlanta, and other cities, developers and capital markets are hungry for opportunities to build luxury apartments. They bid up land values in many neighborhoods so that developing affordable units (rent under 30 percent of income) for lower-income households becomes impossible without substantial subsidies. And older units, instead of transitioning into “naturally occurring” affordable housing, become targets for redevelopment into luxury apartments.
“Filtering,” where older housing units trickle down to lower-income families as they age, can happen in the broader metropolitan context. But it can take decades for filtering do deliver truly affordable units to lower-income households. As apartments age, the rent of a typical unit – not in a hot area – declines an average of 0.31 percent per year so even after 30 years, the rent will have fallen by only 9 percent. Moreover, as apartment buildings get old – if they are not in hot neighborhoods – they can deteriorate to the point of becoming substandard units, as owners see little return in reinvesting in the properties. The result, eventually, is low-quality housing and neighborhood decline.
In gentrifying neighborhoods, filtering does not work at all, because land values and rents rise as the neighborhoods become more desirable and developers bid up land values. So lower-income households must look in other neighborhoods where services and schools are likely to be much weaker. Hence the gentrification process can reconstruct economic segregation.
One answer to all of this is to provide long-term affordable housing in neighborhoods poised for gentrification or already gentrifying. This will provide for some stable income diversity. In areas where land costs have increased, the amount of subsidy required per unit can be relatively high. However, subsidies can be stretched by combining them with inclusionary zoning, where developers set aside a portion of their units at below-market rents, and the subsidy is used to make those rents even lower, so that they are affordable to lower-income tenants. Such creativity and municipal leverage are needed to make our cities more than simply playgrounds for the affluent.
Stopping gentrification won’t help
Enrico Moretti, professor of economics, University of California, Berkeley
High rents in cities like San Francisco, New York, Boston and Seattle have prompted some local activists to call for slowing down gentrification by slowing down construction of new market-rate housing units. These initiatives are based on the common misconception that new market-rate housing causes higher rents. People see new pricey condos in gentrifying neighborhoods like Williamsburg in New York or the Mission in San Francisco and conclude that the pricey condos cause higher rents. This conclusion is flawed. Rents in New York or San Francisco increase not because there are too many new housing units, but because there are too few, relative to demand.
This misconception is understandable, and it comes from the fact that adding new housing units has two opposite effects on rents in a neighborhood.
- First, there is the supply effect. Increases in the supply of apartments tend to push rents down. Intuitively, adding new housing reduces competition for existing apartments, and this helps keep rents in check for existing renters. If the new condos or apartments are not built, there are more families competing with existing residents for fixed housing stock, and rents and displacement increase.
- Second, there is the gentrification effect. Adding new housing units can also affect the type of residents, retail and amenities in a neighborhood. New boutiques, fancy new restaurants, and more young professionals in the streets tend to push rent up.
Activists tend to focus on the second effect, but the reality is that the first effect is much stronger. Economic research on this topic is unanimous. There is no question that on net, adding more units tends to lower rents. All existing peer-reviewed academic studies — including work done at Harvard University, the Wharton School at the University of Pennsylvania and by me at UC Berkeley — find that more housing supply results in lower rents and house prices, everything else being constant.
Fighting gentrification by blocking new housing has an emotional appeal, but is likely to hurt the very group of people that it is designed to help: local renters.
Something must be interfering with the market
There is a growing sense that some of the country’s most productive, high-income cities are becoming unaffordable for regular Americans, and the data bear this out. The gap in prices between places like San Francisco and Boston and the rest of the country, relative to the gap in wages, is much higher than it used to be. This affects where people choose to live.
In our research, we examined historical data on income and migration going back to 1880. For at least 100 years, Americans of all stripes moved to higher-income locations in search of economic opportunity and a better life. Over the past few decades housing prices in some high-income cities have risen so much that only the most educated people find it worthwhile to live there. Americans without a college degree are moving away from the most productive places in search of cities that offer a better standard of living after housing costs. This type of economic segregation is concerning for everyone who is worried about rising income inequality.
Why has housing become so expensive in some high-income cities? The statistical tests we (and others) have run confirm the common-sense idea that legal restrictions on construction have been the main culprit. Boston is not particularly dense, and technologically, it would certainly be possible to build the taller buildings and more infrastructure. When prices are high and rising, and yet construction is minimal, then something must be interfering with the market. Legal scholars point to major changes in the legal environment surrounding zoning and land use restrictions that began three to four decades ago as the cause of this rise, and our statistical work confirms this view.
As the California Legislative Analyst’s Office new report makes clear, the affordable housing crisis in California will not be solved by additional regulations. For California to again become the land of opportunity, it will need to build our way out of the affordability crisis, literally.