All Housing is Still Affordable Housing: “Seen and Unseen” Edition

A little more than a year ago I wrote a piece in this space called “All Housing is Affordable Housing.” The claim was that the essential step toward reducing the housing shortage was to make it legal to build new affordable housing. I did an estimate of the break-even cost for a new apartment in Raleigh, NC, where I live, and showed that the required monthly rent was nearly $3,000, and that was if the developer made zero profit on the deal.

In response, I got emails with an argument I had trouble taking seriously, because it seemed ridiculous. But, on checking, it’s totally true: A significant number of “affordable housing advocates” are actually opposed to building new housing, except for subsidized housing for the poor. The reason is that new housing is more expensive than existing housing, and so allowing new construction will drive the price up.

The mind…boggles. Others have tried to make my case; I have to give them credit. The Atlantic, hardly a libertarian outlet, published a piece entitled “Housing Breaks Peoples’ Brains.”  Ditto those right wing nuts at the Washington Post, with this piece called, “Building More Housing Makes It Cheaper, Really.”

But the critics persist. There are far too many different versions of the “supply skeptic argument” to make a comprehensive inventory, but as far as I can tell there are four main categories of argument:

Argument 1: Land — land is so scarce in cities that any use other than for immediately affordable housing will take available land off the market, and will permanently prevent affordable housing from being built on that plot.

Argument 2: Price — new housing will be more expensive than the average existing housing, and so will raise the average price, not lower it.

Argument 3: Induced demand, allowing more high-end housing to be built in response to large increases in people moving to your cities, will lower the price of high-end housing, but that will simply attract even more rich people in the next wave. In growing areas, the price decrease from increased housing, in a static sense, will be more than offset by the additional high-end demanders moving in, in a dynamic context.

Argument 4: Even if building housing in a neighborhood does reduce rents overall, it increases rents in the immediate neighborhood, as previous tenants are displaced by gentrification and try to stay in the neighborhood where they have connections.

Three scholars from New York University’s Furman Center made an effort to take these arguments seriously. As they put it:

This paper is meant to bridge the divide between the arguments made by supply skeptics and what research has shown about housing supply and its effect on affordability…We address each of the key arguments that increasing supply does not improve affordability. Many of the arguments are plausible, and we take them seriously, but we ultimately conclude, from both theory and empirical evidence, that adding new homes moderates price increases and therefore makes housing more affordable to low and moderate income families. Moderating prices does not mean prices won’t rise at all; but they won’t rise as much as they would otherwise. 

This rather tepid conclusion, then, is that it may not be possible to build enough new housing to bring prices down, but if we legalize the building of new housing, at least prices will rise less than if we obey the impulse of the skeptics and outlaw new housing completely.

Let’s try to go inside the supply skeptic mindset. It might look something like this:

Consider a neighborhood of single-family homes, duplexes, and small apartment buildings, with a stable set of renters and owners, many of whom have lived there for decades. (There are separate problems of the “preserve the character of the neighborhood” argument, as described here.)

If the neighborhood is upzoned to allow for much denser development, some of the existing units will be torn down as the land is sold to developers. This will have two effects.

First, a unit that is currently relatively affordable will be taken out of the rental market permanently and replaced with much higher rental cost new units. Yes, it may be that 12 new units will be built where there were once only two, but the price of each of the new units will be much higher.

Second, the rezoning will cause the value of the land all around the new units to be bid up sharply, either causing the landlords to charge more for the existing units in the upzoned neighborhoods or causing those landlords to sell to developers to repeat the process.

No matter what, prices rise sharply.

So….yeah. Isn’t that a good argument? Increasing the housing stock increases the average rent. That’s their argument. What’s wrong with that?

One problem is that the argument is just empirically false.

But the larger difficulty is the classic Frederic Bastiat distinction between the seen and the unseen. It’s true enough that if there is enormous demand for housing in an area, because people want to move there because there are high-paying jobs going unfilled, or because folks want to live in that city, then there will be a “massive” shortage of housing. Given the difficulty and expense of getting permits and building new housing, and the expense of organizing actual construction, that means that the price will be bid up. Prices will in fact go up if we “allow” new construction. And yes, that is the seen effect.

But consider the unseen. Suppose that we do not allow new construction, and we use rent-control to keep costs “fair” for the existing residents. Then the prices of what few homes and apartments come on the market will skyrocket, and the market will collapse into a system of “know-who,” where flats are not advertised but allocated by connections and bribery.

Worse, the successful “defense” of wealthy, racially homogeneous neighborhoods—something we would call racist, except that everyone who lives there is on the far left politically, in every other facet of life—causes desperate newcomers to look to “less desirable” neighborhoods. Remarkably, even though the wealthy neighborhoods caused this by refusing to allow new construction in their borders, rich lefties call this “gentrification”! Then they have the gall to criticize “greedy developers” for trying to build the housing that the city needs so desperately.

The point is that the unseen cause of gentrification is the knee-jerk NIMBYism of affluent leftist neighborhood associations. And that causes the elimination of almost all affordable housing in the city, quickly. I understand it is not the intention of the misguided “neighborhood defenders,” but it is an unseen effect, and it’s powerful. (To be fair, all healthy housing markets are the same, but each unhealthy housing market is unhealthy in its own way.)

Making it legal to build housing may still result in price increases, because more people want to move to the city than can be housed by the number of available units, because construction takes a long time and permitting is complex. But building some housing is better than building none, as we have seen in our coastal cities over the past two decades.

All housing is affordable housing.

The post All Housing is Still Affordable Housing: “Seen and Unseen” Edition was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.

Related Articles

Back to top button