It’s logical that when housing supply does not meet housing demand, prices will rise. Housing affordability is a huge issue in many cities around the world – with the blame often falling on planning rules and restrictions: both in the form of restrictions on sprawl and restrictions on the level of intensification. While there’s a logical connection between a lack of housing supply and higher housing costs, it is perhaps a little more complicated if we start to take this connection and apply it through saying that if we build a lot more dwellings we will start to make a positive difference to affordability.
For a start, there are two different ways in which we might try to improve affordability by constructing more housing supply: building more houses on the urban edge and building more houses through urban intensification. As many previous posts have pointed out on this blog there are likely to be a number of ‘false economies’ if you attempt to improve affordability by allowing urban expansion. Not only are many of the housing cost savings likely to simply be eaten up in transport cost increases, but there’s an enormous hidden cost in such an approach: all the additional infrastructure that’s required. An interesting Australian research paper suggests that the infrastructure costs of servicing urban expansion rather than urban intensification are huge: There are really only two ways to pay for the additional infrastructure costs of urban expansion. The first option gets development in peripheral areas to properly ‘pay its way’ – adding huge development contributions to the cost of each dwelling and therefore significantly undermining the ability of this development to actually be affordable. The second option, which seems to be what happens in a lot of American cities that provide ‘affordable’ housing on their peripheries, is to hugely subsidise that development – largely through not requiring it to pay fully for the infrastructure necessary to service it. But then there’s a bit of a logic gap here – why is the rest of the city helping to subsidise those on the periphery who contribute most to congestion, the urbanisation of farmland, probably the greatest amount of CO2 emissions per capita and so on?
The other option is to provide a lot more housing through intensification. This is more logical in a number of ways:
- You have lower infrastructure costs on a per capita basis and therefore the existing city either doesn’t need to subsidise the new development as much, or the development contributions don’t need to be so high.
- Most demand seems to be for inner-city housing (that’s where prices are increasing so dramatically), so you provide housing where people actually want to live.
- You avoid the ‘trade-off’ between housing affordability and transport affordability. More affordable housing in inner areas really will be more affordable for its inhabitants and they won’t see the gain eaten away at the fuel pump.
Harvard economist Edward Glaeser is a big proponent of the concept that you need to build your way out of affordability problems – criticising (for example) Jane Jacobs who wanted to maintain a mix of building ages in an area – even if that came at the cost of allowing additional development. The paragraphs below come from Glaeser’s fascinating article in The Atlantic, which is an excerpt from his book “Triumph of the City”:
But then, during the 1950s and ’60s, both public and private projects ran into growing resistance from grassroots organizers like Jane Jacobs, who were becoming adept at mounting opposition to large-scale development. In 1961, Jacobs published her masterpiece, The Death and Life of Great American Cities, which investigates and celebrates the pedestrian world of mid-20th-century New York. She argued that mixed-use zoning fostered street life, the essence of city living. But Jacobs liked protecting old buildings because of a confused piece of economic reasoning. She thought that preserving older, shorter structures would somehow keep prices affordable for budding entrepreneurs. That’s not how supply and demand works. Protecting an older one-story building instead of replacing it with a 40-story building does not preserve affordability. Indeed, opposing new building is the surest way to make a popular area unaffordable. An increase in the supply of houses, or anything else, almost always drives prices down, while restricting the supply of real estate keeps prices high.
The relationship between housing supply and affordability isn’t just a matter of economic theory. A great deal of evidence links the supply of space with the cost of real estate. Simply put, the places that are expensive don’t build a lot, and the places that build a lot aren’t expensive. Perhaps a new 40-story building won’t itself house any quirky, less profitable firms, but by providing new space, the building will ease pressure on the rest of the city. Price increases in gentrifying older areas will be muted because of new construction. Growth, not height restrictions and a fixed building stock, keeps space affordable and ensures that poorer people and less profitable firms can stay and help a thriving city remain successful and diverse. Height restrictions do increase light, and preservation does protect history, but we shouldn’t pretend that these benefits come without a cost.
This is an interesting debate, because of what Glaeser hints at halfway through his second paragraph: that while the new buildings themselves may not be affordable, they should contribute to an improvement in affordability by increasing general supply. The rationale seems to be that richer people currently living in older houses/apartments will shift to the shiny new houses/apartments, and their older houses will be less valuable and therefore more affordable. I’m not entirely sure whether I follow that logic. It makes sense for office space, as companies able to afford premium space generally lease it and therefore are keen to occasionally “trade up” to the shiny new buildings – leaving their previous space more affordable and now available for a second-tier of companies to shift into. But when it comes to housing, I’m not entirely sure whether building more inner-area apartments and terraced housing is going to make existing housing in that area too much less attractive for prospective buyers. In effect, you’ll have the choice of older lower-density housing or newer higher-density housing (which will probably be constructed to a fairly flash standard). Neither of those sounds particularly affordable to me.
This interesting Glaeser/Jacobs debate was picked up on in a post on the superb City Builder Book Club blog, which is going through Jane Jacobs’s masterpiece, The Death and Life of Great American Cities, chapter by chapter:
One of the most insightful observations that she makes about old buildings is that their capital costs have been written down and therefore the landlord does not need to charge a high rent. New construction is very expensive. It takes 20 or 30 years for a developer to pay off the mortgage. It is only then that there is less pressure on the owner to charge high rents.
This simple observation has recently been questioned. Edward Glaeser (Harvard economist and author of last year’s book, Triumph of the City), for example, has completely misunderstood this chapter. Glaeser asserts that keeping old buildings leads to nothing but high rents — that it’s a simple issue of supply and demand. He tells us that the only way to go is up, up, up, and if towers were built in the place of these older, smaller buildings, districts like Greenwich Village in cities all over the world would become far more affordable. That is, more density equals lower rents.
Can you think of anywhere you’ve seen that happen? It certainly has not been my experience in the past decade of tall building construction in Toronto. Nor has it been the case anywhere in Manhattan that I am aware of. It probably isn’t the case in your city either. I cannot think of an example in an economically healthy city where an old building was torn down and replaced by a new taller/bigger structure and this new structure has cheaper rent than the building it replaced.
It is certainly quite fascinating to compare these two argument – both of which seem to make logical sense, but at the same time find themselves almost diametrically opposed. What perhaps this highlights to us is that to improve affordability, we need to be a bit more specific than simply saying “expand housing supply”. What really needs to happen is a specific expansion of affordable housing supply. Perhaps the final word on this matter should go to this recent blog post by Cap’n Transit – looking at housing affordability and New York:
Suppose that tomorrow there’s a revolution in New York City. Zoning and rent control are abolished, and every member of the City Planning Commission and the community boards is sent off to the reeducation camps. Spreading out from the Empire State Building, developers cover the New York area in parking-free high-rises until there’s enough housing for everyone, at affordable prices. Sounds great, right?
Almost. But all housing is not created equal. Some apartments are bigger, some have better views, some have are more conveniently located. Some come with relatively superficial amenities like pools and package services. Some are dangerous or bad for your health, from crime, pollution, bad construction or neglect.
Some housing differences are a matter of taste, like neighbors who play loud salsa music or cook Indian food. Some people choose their housing out of racism, moving out if a Black family moves in. Some people want to live near people like them. Some people want to live where there is ethnic diversity, with no single group dominating.
All these factors affect the price of the housing. People who can’t afford higher rents will necessarily have to put up with some undesirable features, like bad views, loud music, crime or a long commute…
…There is a more market-oriented solution, though: build more cheap housing. And cheap housing is bad housing. The next question is: bad in what way?
If the only determinant of an apartment’s price is its distance from job centers, then the poor and the young will all wind up living on the outskirts of town, paying for their poverty with long inconvenient commutes. If the only determinant of price is proximity to a hazardous waste dump, or neglected housing stock, or gang activity, then the poor and the young will wind up in substandard housing, exposed to toxins and victimized by gangs. If the only determinant of price is proximity to “the right people,” then the poor will wind up clustered together, having little contact with other social classes.
To prevent segregating the poor into inconveniently located bad housing with crime and pollution, we need to make some safe, solid housing available closer in, integrated with the rich people’s housing. that is still affordable. In order to do that, we need to allow housing that’s cheap in the non-dangerous, non-segregated ways. That means housing that’s small or ugly, with crappy views and no doormen. Maybe housing that allows loud music if it doesn’t bother anyone else.
Ironically, a good example of this in the Auckland context are the much maligned ‘sausage flats’ built in the 1960s. While they’re pretty much universally disliked from an architectural point of view, they provide quite a lot of relatively affordable housing in places where people actually want to live (Mt Eden, Epsom, Three Kings, Herne Bay etc.) Their aesthetic unattractiveness, in a somewhat bizarre way, has ensured that they remain affordable and means that the supply of relatively affordable housing in inner Auckland is significantly greater than it would otherwise be.
I guess the key point is that just as building more 5 bedroom McMansions on the urban edge won’t make a blind bit of difference to housing affordability, building super-flash inner city apartments, townhouses and terraced houses is also unlikely to help. Clearly, constrained housing supply leads to housing becoming unaffordable, but to resolve that we need to not only build more houses generally, we need to build more affordable houses. How to do that in a way that still allows developers to make a sufficient level of profit for them to bother is perhaps one of the biggest questions facing Auckland in the next few years.