Comparative Readings from America: Housing, development and rents

… in which to explore some parallels with Vancouver.

From the New York Times: In High Gear

New York City is awash in development, with skyscrapers rising above the cityscape seemingly at random, especially in neighborhoods in Manhattan. …

“New York is one big construction site right now, every corner, every lot,” said Richard Nassimi, the president of Nassimi Group Real Estate, a residential brokerage. Each month, Mr. Nassimi takes a helicopter tour around Manhattan to check out the action, either alone or with developer clients. “Wherever you look, West Side, East Side, something new is coming in.”

With slide show.

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Also from the Times: In Many Cities, Rent Is Rising Out of Reach of Middle Class

Nationally, half of all renters are now spending more than 30 percent of their income on housing, according to a comprehensive Harvard study, up from 38 percent of renters in 2000. In December, Housing Secretary Shaun Donovan declared “the worst rental affordability crisis that this country has ever known.” …

… as long as there are plenty of upper-income renters looking for apartments, there is little incentive to build anything other than expensive units. As a result, there are in effect two separate rental markets that are so far apart in price that they have little impact on each other. In one extreme case, a glut of new luxury apartments in Washington has pushed high-end rents down, even while midrange rents continue to rise.

“Increasing the supply is not going to increase the number of affordable units; that is a complete and utter fallacy,” said Jaimie Ross, the president of the Florida Housing Coalition. “People say if there really was a great need, the market would provide it; the market would correct itself. Well, the market has never corrected itself and it’s only getting worse.”

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The Economist responds: The spectre haunting San Francisco  

The piece (in the NY Times) nods to the idea that rising rents—or housing costs generally, in America and elsewhere—are about more than supply and demand. Housing affordability activists like to point out that most new construction is for luxury housing, meaning that supply of non-luxury units is not growing by very much. Others love to say that price declines have historically gone hand in hand with falling construction.

These arguments are both nonsense. The latter point gets causation the wrong way around; given an unexpected decline in demand due to financial crisis or other shocks prices fall and interest in new construction dries up until existing inventories are cleared. The former point misses the fundamental fungibility of housing. When new construction of luxury units lags, the very rich buy up older housing stock at exorbitant prices and pay to have them redone. …

(There is then a section on San Francisco, with some obvious parallels to Vancouver.)

San Francisco is a nice place to live. It’s a nice place to live for a lot of reasons: the weather isn’t bad, the surrounding countryside is gorgeous, the city has all sorts of cool stuff in it, and (perhaps most important) living in San Francisco gives one access to the local labour market, which is a really excellent thing to have access to. If local regulations did not do much to discourage creation of new housing supply, then the market for San Francisco would be pretty competitive; anyone with land in San Francisco could make more San Francisco by building on that land. The price of San Francisco would then fall to the marginal cost, which is the expense of building another unit of housing, which is not very high. …

So, what is to be done? Well, one option is simply to use the levers of government to seize back the surplus for redistribution to the masses. That’s not an ideal solution, in this case at least, as it piles nasty incentive effects onto the distortions already created by zoning restrictions. Better to fix the initial distortion, which takes us to the second option.

You could reform local institutions to generate better zoning outcomes. There are lots of good ideas for how to do this floating around. What is less clear is how one builds support for institutional reform. One shouldn’t say that it can’t be done, but first such ideas need to win intellectual battles, and then they need to win political battles, and so it is safe to conclude that such reforms represent part of a long-term strategy for improvement. …

Or maybe we do nothing, and simply sit back and observe as housing remains an instrument of oligarchy. Who knows. But however one imagines this playing out, we should be clear about what is happening, and what its effects have been.

 Thanks to Felim Donnelly.