Tuesday, January 7, 2014

Housing Affordability at the Breaking Point - Part 2: Fighting Gentrification (with Luxury Condos)

Well this is just great. Now I'll never be able to afford a used Hyundai.
(Source: www.cleantechnica.com)

Gentrification is back as a hot topic. High income people of various stripes (in San Francisco it is tech workers, in New York it is bankers) are ruining nice, bohemian neighborhoods by moving into the area and driving up the rents. 

At least, that's the word on the street.

While it is understandable how people would interpret the situation this way, this idea is misguided and counterproductive.

Did you hear about the twenty-year-old used Geo Metro that just sold for $100,000 because of nearby wealthy people buying Ferraris?* You didn't hear about it because it didn't happen. It didn't happen because wealthy people buying Ferraris doesn't drive up the price of used Geo Metros. We all know this. Suggesting that the sale of luxury autos drives up the price of economy cars strikes most people as utterly ridiculous.

Yet when the same suggestion is made about housing, we tend to take it seriously. After the success of the recent referendum campaign to block the 8 Washington condo project in San Francisco, Supervisor David Chiu said "Tonight, San Francisco said we stand for affordable housing and not luxury condos.”** 

(Source: San Francisco Examiner)

Last month, protesters blockaded a Google bus in San Francisco, complaining of evictions, rising rents, and other problems supposedly brought about by an influx of high tech workers. (While most of the Bay Area's tech firms are located in Santa Clara and San Mateo Counties, a huge number of their employees prefer urban living and thus reside in San Francisco, and are shuttled to work by private busses).

(Source: Yahoo)

The 8 Washington opponents, Google bus protesters, and other anti-gentrification crusaders seem to be operating under three assumptions that are completely and utterly false: The presence of rich people inherently drives up prices; we can keep rich people out of good places by banning luxury condos and harassing them; it would be good to be rid of techies and other rich newcomers. 

Pursuing these concepts will do nothing to achieve anti-gentrification activists' goals nor will it make better cities, and here is why.

1. Shortages, Not Wealthy Tech Workers, Cause Out of Control Prices

I don't want to sound as if I'm discounting the pain caused by skyrocketing housing prices. I get it. However, we must accept the fact that if there is a sufficient supply of homes, there is absolutely no reason why the presence luxury housing should drive up the price of other housing types any more than the sale of new luxury cars drives up the cost of economy cars. Sure, some blocks or neighborhoods will be ritzier than others, but entire sectors of cities, or entire metropolitan areas, should not be unattainable to people with average incomes. Luxury condos don't cause that kind of crisis, shortages caused by restrictive zoning and anti-development NIMBYs do. Bidding wars and waiting lists are the real enemies of affordability.

There has been a lot of talk lately about income inequality and low service worker wages, and how that affects people's ability to afford housing. Some have even suggested that each city adopt its own minimum wage to reflect the wide variation in housing costs from community to community. The merits of minimum wages aren't something that I will get into on this urban planning blog but I will concede that, all else being equal, higher pay makes it easier to afford housing. However, in reality the extra income only helps when there is an adequate supply of housing. When it is a seller's (or landlord's) market due to a scarce supply, prices will simply rise as people out bid each other until income gains are eaten away, leaving people no better off.

This isn't theoretical. We've seen it over the past 40 years. While wages for individual workers have stagnated, household income has risen dramatically due to women entering the workforce in large numbers during that time. Yet these same households are having a harder time affording their housing than ever. Why? Because when bidding wars have resulted from low housing supplies, these higher household incomes (and easy credit) have simply been used to outbid competitors, driving prices higher and higher. The extra income only helps when there are no bidding wars. The bidding wars won't go away unless there is enough supply to satisfy the demand. 

2. You Can't Keep Wealthy People Out of Nice Places

Wealthy people tend to like nice things. Most of them are also risk averse, at least when choosing a place to live. They don't usually come to rough areas and make them nice. Rather, they come to areas that are already nice; either because they have always been nice, because local government improvements made them nice, or because risk-oblivious artists and others moved into a rough area and improved it. Therefore, the only way to keep high income people away is to make the place undesirableClearly, this is not a viable strategy. We need to make our cities better, not worse.

Like it or not, wealthy people have the luxury of being able to live wherever they want. When they decide they want to be someplace, they can and will pay whatever it takes to get in there. Blocking luxury condos won't help. If they can't get new luxury condos, then they will buy up rowhouses and other older, smaller, more modestly equipped housing types which weren't designed for the wealthy and which ought to be affordable for average folks. If there are enough luxury units for high income people that want to live in an area, then you don't have to worry about them driving up the price of non-luxury housing. 

Wealthy people don't necessarily prefer to overpay for housing, but if there is a bidding war for something that they want badly, then they will bid the price up until they win.

Rich people bid up the price of things they want. The rarer it is, the higher the bidding goes. 
Sorry. That's just the way it is.
3. There Can and Should Be Room for Everyone

Hating rich techies for changing the bohemian character of a city is ridiculous. Every healthy city has a wide spectrum of people; bohemians, intellectuals, artists, craftsmen, bankers, rich, middle class, and poor. All of them should have a place in our cities.

I'm not plugging for the rich here, but having them in our cities and neighborhoods isn't such a bad thing. For one, they pay a lot of taxes, which can help provide public services and civic facilities for everyone. Wealthy neighbors have disposable income to eat in area restaurants and buy goods in local shops, which can support jobs for service workers and profits for small business owners. And, decry it as we may, rich folks have connections and know-how. Wherever they live, they will make sure that it is well-patrolled, well-cleaned, and well-maintained. They donate to campaigns and host fundraisers; whether you think it is right or wrong, they are sure to be taken care of. When they move into your neighborhood, it will be taken care of, too. 

This is Part 2 in a 6 part series.

     Intro: Housing Affordability at the Breaking Point

     Part 1: Home Is Where The Supply Is

     Part 2: Fighting Gentrification (With Luxury Housing)

     Part 3: Housing Shortage or Urbanism Shortage?

     Part 4: Do We Need Affordable Housing or Affordable Living?

     Part 5: Removing Snobbery From Codes

     Part 6: How the Get the Right Types of Homes Built in the Right Places

* Tip of the hat to Matt Yglesias for the car analogy.

** While the idea that blocking luxury housing would help affordable housing was erroneous, I should note that there were other aspects to the 8 Washington referendum that had some merit, specifically urban design issues of height at the waterfront and the nature of special exemptions from zoning rules.


  1. I agree with you almost 100%, Dan - when supply is short, demand drives up prices. In the long run, only an increase in supply can answer an increase in demand without rocketing prices; that's basic economics. However, in the short term, the type of supply does matter. To carry your metaphor with Geo Metros and Ferraris, if all of the cars being produced were Ferraris, i.e., luxury housing, EVERYONE except the rich will be priced out simply because they can't afford the high end finishes, large floor plans, shared "innovation" rooms, roof decks, gyms, etc. If these units were priced at affordable rates, they wouldn't be built because their would be no economic incentives for them to be built. Instead of a true supply curve, you have a supply curve that doesn't begin until prices are already astronomical. Unfortunately, there is a huge demand for luxury units and that is all that is being produced at the expense of more economical apartments. Eventually, there will be a glut of luxury units, creating another "mismatched" housing crisis. In the long run, all of these things that make these apartments luxurious will be common, like the refrigerators, ovens, yards, what have you, of yesteryear. But today, they are creating an unbalanced supply, which is just as bad as no supply. An increase in supply is the answer, but the type of supply does matter. Developers stop producing Geo Metros when they realize they can get rich selling Ferraris.

  2. Thank you Dan. I've been reading a lot about gentrification and affordable housing and this is the sanest thing I've read on the topic. I look forward to the rest of the series.

  3. Housing affordability has same problem in South Florida. Developers are building luxury condos in Miami everywhere but there is shortage of the affordable units!

  4. I think some of the opposition to luxury housing centers around something you haven't touched on nearly as much: demand.
    You mentioned that prices would decrease if demand decreased due to the area being a worse place to live, but conversely it also goes up by making it a nicer place to live. Luxury housing makes it a nicer place to live so would increase the demand a bit.

    As you pointed out, more housing increases supply, lowering prices, but would also stimulate demand more than if you were to build a block of tenements, so I think people in opposition are missing the sum of the effects because they are tied up with the effects of being a nicer neighborhood.

  5. I agree with this statement. Such things really happens. The housing price is sky-touching these days and it is difficult for a middle level family to buy a new house. Though, this price level doesn't affects the wealthy people but the middle level and the poor are getting affected a lot by it. The houses with an average price are not well accomodated and lacks in lots of facilities. Saying as a whole, it is quite difficult to get a house of your own choice. Property managers can be helpful in providing a house of your own choice with an affordable price.

  6. Thank you for this post. I've been reading about this and I really like it.
    Junk Removal Joliet