A discussion on Twitter recently highlighted an important – and hard-to-understand – dimension of housing markets. Namely, what is the link between new construction – which is usually expensive – and housing affordability?
People who would have bought pricey new apartments instead compete for existing houses. And so on. Until poor person ends up in a car. https://t.co/btXb6tXFoA
— TransportBlog (@TransportBlog) October 14, 2016
A common objection to new construction is that new apartments are expensive, so they won’t do anything to improve housing affordability. However, this isn’t a problem: New homes are more expensive than old homes… but they get cheaper as they age.
To illustrate this point, let’s consider an analogy: the market for new and used power tools. If you go to Mitre 10 to buy a power drill, you can expect to pay hundreds of dollars for a new tool:
Or you could hop on Trademe to shop for used tools. Here’s a similar drill that’s currently selling for $90 (plus shipping):
So new tools are considerably more expensive than old tools. Does this mean that importing and selling new power tools make DIY less affordable for low-income New Zealanders? Of course not! In fact, it’s the exact opposite: expensive new tools sold at Mitre 10 become affordable secondhand tools after they’re used for a while. If the supply of new tools dried up, the supply of cheap old tools would also vanish.
The exact same thing happens in housing markets: New housing is almost always expensive to buy, but after a while it gets a bit run-down and sells for a lower price. This process is called “filtering”, and we have evidence that it happens in practice:
[In a 2013 study] Stuart Rosenthal of Syracuse University uses nearly 40 years of data from the American Housing Survey to figure out the average pace of filtering across the country, and what makes housing filter more quickly in some places than others.
Rosenthal uses the AHS to compare the incomes of people living in the same units of housing over time. He estimates that nationwide, housing “filters” by roughly 1.9 percent a year—meaning that a 50-year-old home is typically occupied by someone whose income is about 60 percent lower than that home’s first occupant. (All of these numbers are adjusted for inflation.) You might think of this process as something like “reverse displacement.”
However, there’s an important caveat on this: Filtering happens much more slowly in cities that don’t build new housing in response to increased demand. In other words, restrictions on development will, in the long run, price out the poor:
…strong regional housing price inflation—that is, metropolitan areas where home values grow much more quickly than the cost of other goods—can make filtering happen much more slowly, or not at all. That helps explain why homes in New England and the West Coast filter about 35 percent more slowly than homes in the Midwest or South. In those coastal regions, severe restrictions on new housing construction since the 1970s have created a “shortage of cities,” driving up home prices and preventing the kind of filtering that has historically produced the lion’s share of affordable housing—and which still does in much of the rest of the country.
What this means is that we must consider housing affordability in a holistic way. Rather than insisting that individual new developments should be responsible for solving a big, intractable problem, we should ask: Are we building enough to make the filtering process work? If not, why not? Are there barriers in zoning, in the construction market, or in development finance?