Not at all. Shipping over water is absurdly cheap, and the Mississippi is the best inland river for transporting goods of maybe any country in the world. It's held back by the regulatory costs of shipping between domestic ports and dredging the Mississippi Delta. Looking back at my post, I might also have given the impression I meant the state rather than the river. More likely it would be St Louis.
Part of the problem is that if you aggregate on the level of the entire metro, you're talking about thousands of square miles (3800mi² for the Detroit metro, 4800mi² for Los Angeles), of which relatively little (10% in LA, 4% in Detroit) is the actual municipality.
City limits are very arbitrary. Most cities consist of a core and a large suburban sprawl. Boston city limits are very small, it's essentially just the core of Boston with no suburbs.
Boston and its associated smaller cities are pretty interesting - arguably that's where the historical process of cities annexing surrounding smaller municipalities died in the US, so we're left with a whole bunch of intermingled borders that today come across as completely arbitrary. Looking at population, population density, and median home price for 2020 gives us this:
Boston: 675,647; 13,989/sq mi; $700k
Cambridge: 118,403; 18,500/sq mi; $938k
Somerville: 80,842; 19,656/sq mi; $870k
Brookline: 59,223; 9,347/sq mi; $1065k
Cambridge is a world-famous center of academia that's leveraged the startup pipeline for decades, Somerville is aggressively recovering from a post-industrial slump in the 80s, and Brookline is an experiment in how many country clubs can fit in an urban area. There's an easy story to tell here as to why the values are where they are, but you can't get it by density alone.
Daly City is an interesting thing to mention. It's really the same city as SF, but it's in a different county with it's own government. Walking from one to the other, you never get out of the city. It's not even suburbs, though once it was. So I'd say that CA has ONE.
Any list that has both SF and Daly City on it should raise eyebrows, and make us suspect that very unlike things are being compared in ways that obscure their differences.
"Density of a city" is a pretty meaningless number. A (physical) city is a big agglomeration of buildings which slowly peters out as you get towards the edges. The overall density of that "city" is dependent on exactly where you (somewhat arbitrarily) decide to draw a line that separates the city from the countryside.
In the US there's a concept of "city" which means "local government area" rather than corresponding to a physical city. Guttenberg NJ is supposedly the densest "city" in the United States but it's not a city in any physical sense, it's just a handful of blocks of the gigantic city which we could reasonably label New York.
That's not to say there's not a very real sense in which New York is more dense than Los Angeles, just that if you want to measure density you need more than one number. Plot an average density vs distance from city centre curve, and you might have something you can reasonable compare.
For Detroit I expect you'd see this curve flatten considerably over time as the city turns from a densely concentrated one to one in which the suburbs hold the majority of the population.
It turns out that, unless you consider scales << 1 km or >> 10 km, such curves for different cities tend to be roughly proportional to each other. (I'll post a link to a tweet I saw about this if I find it again.)
Right. The problem is that we want to include built-up areas that are contiguous with the rest of the city even if they're not all in the same municipality, and we want to exclude, e.g. random cornfields in the suburbs.
I think the core municipality is plausibly a better level to aggregate at than the metro area because policy generally gets set at the local level and it's most likely to be a binding constraint on new construction there than in other parts of the metro area, which are also not necessarily contiguous with the city.
The writer wasn't using metro areas, he was using urban areas, which are the urbanized portions of metro areas. There is a strong correlation between high housing prices and density at the urban area level.
Scale matters a lot here, so I'm confused why you want to disqualify the Tokyo example (or Seoul for that matter). Tokyo and Seoul make up a huge fraction of the populations of their respective countries (20-25%). It's true that _locally_ there are agglomeration effects so prices may move up, but if some place is YIMBY enough prices will move down. As far as I'm aware, _every_ locality that builds at the scale that the full-on YIMBYs want them to build as reduces prices.
You may disagree with turning the bay area into Tokyo. But I don't see how if the bay area built enough housing for 66 million people (20% of America) that prices wouldn't go down.
I agree if the Bay Area built 66 million new houses, prices would go down. I am only seeing debates about building 10,000 vs. 100,000 new houses; at that scale, I wouldn't expect prices to go down.
But why? We have good research showing that adding even a hundred new units lowers the trajectory of rents in existing stock in the immediate vicinity of where it's built, compared to the trajectory of rents on similar blocks that don't get a new building; and that adding those hundred units leads to move-chains that open up units even in lower-income neighborhoods. (See Evan Mast's research on this.) The fact that people filter up from poorer neighborhoods to richer ones fairly strongly suggests that the new building in the "gentrifying" neighborhood will also lower the trajectory of rents in farther-away neighborhoods, since fewer people "too wealthy" for that neighborhood will bid up the prices of units there. (But this effect would be smaller / more diffuse, compared to the local impact.)
I believe CA YIMBY maintains some resource lists about this stuff if you want references to more of the papers.
All you've observed is that there is no dense/in-demand US city where the market has been allowed to supply what is being demanded. Density is a signal that the location is desirable. Given Anglosphere style bad land use practices, desirability _partly_ translates into density, and partly translates into housing inflation. So of course you see correlation between those two things.
Edit: Aha, I think maybe I see the distinction you're making. You mean "go down in absolute terms", not "go down relative to what would otherwise happen". And yes, if you wanted prices to actually go down -- back down to the level of a healthy market where the median person's housing costs less than a third of the median income -- then the Bay Area would need to build on the order of 400-500k more units, in the next eight years, than what the RHNA process currently calls for.
I think the best case we can hope for is to accelerate building to the point that rents flatten out for long enough that incomes can catch up, so that rents will go down in _relative_ terms, but never absolute terms. Rents, like many types of price, are pretty sticky downwards. Less-so for corporate operated housing where people are more inclined to just set the market-clearing price. "Mom and pop landlords" operating a handful of units are much more willing to let a unit sit empty for six months rather than lowering the rent 10%.
I have absolutely seen cases where people own the unit outright (e.g. inherited) and behave in wildly irrational ways. I've also seen a ton of self-destructive behavior where people will be penny-wise, pound-foolish, with trying to avoid dealing with critical maintenance like roof repairs, where if the problem is not dealt with it will result in much more expensive long-term habitability issues.
Behavior in the small-landlord market is _extremely_ variable.
I've read about this effect also, particularly in San Francisco. This behavior seems to be driven by San Francisco's particular legal environment. Some of the relevant considerations:
* it's extremely difficult to raise rents if the housing market recovers, so you might be better off waiting for the rental market to move in your direction
* it's extremely difficult to evict a "bad" tenant (who doesn't pay the rent, damages the property, or repels "good" tenants), so owners may want to hold a vacant property in the hope of eventually selling it, occupying it, or re-developing it.
Outsiders' assessment of what sort of behavior is "rational" often depends heavily on unstated assumptions.
Sure, for towns that have rent control, waiting out a down cycle could be rational.
But seriously, I have seen multiple landlords just do stupid things, where it was clear they just were lazy and short-sighted, and would've been much better off getting a property management firm to take over. (In both the cases where I have direct experience -- the landlord my spouse had early on in our relationship, and one I had -- the landlord in question inherited the property. The Bay Area has a certain amount second- and third-generation landed gentry, who are exactly as smart about managing their properties as landed gentry are portrayed to be in a Jeeves and Wooster novel.)
Speaking hypothetically, but if I previously rented an apartment for $1000, I would probably refuse to rent it later for $900, for the reason that a person who has a problem paying $1000 a month is more likely to have a problem paying $900 a month.
Just like banks prefer to lend money to rich people, for landlords it is also safer to rent to rich people. Your greatest risk in this business is a person who suddenly starts paying *nothing*, is impossible to evict, and even destroys your property. Poor people are statistically more likely to do this... therefore, sadly, making your price more affordable is playing with fire.
> And yes, if you wanted prices to actually go down -- back down to the level of a healthy market where the median person's housing costs less than a third of the median income
Not sure 1/3 is always a good bar. Depending on your situation it can make sense to spend substantially more than that. Especially if it saves you from needing to commute, or you work remotely and spend a lot of time at home.
Once you have kids you probably need to get in that area, but kids are less and less common these days.
A) It almost certainly isn't the same house. People replace mechanicals, do minor projects etc. Most property seems some level of investment when occupied.
B) Sure it would be better if it was cheaper? it would be better still if it was free. But that money comes from somewhere, it doesn't fall out of the sky.
My father custom built this house to her specifications, she hasn't made any improvements besides those. It has had maintenance, certaintly, fresh coats of paint, she swapped out the interior door handles recently, but that's it. Nothing that would even remotely justify a tripling of price in two decades.
If you want to reproduce get a decent job. About 40% of societies problems are down to people having children they cannot support or raise effectively.
What if a move-chain is disrupted by someone moving to that city from elsewhere? That is, for big "destination" cities, if there exists a supply of people who would move there were it not for the difficulty of finding housing, then wouldn't adding more housing simply attract those people without affecting rents for anyone downstream on the move chain?
That's exactly the question Evan Mast's research was trying to address -- what portion of brand new units get occupied by locals, and once you open up new seats in the musical chairs game, as people shuffle around, how far down the income scale does the effect reach before affluent people from outside the metro area flow in?
He used postal service change of address data, and then made sure his modeled results were realistic by chasing down real-world move chains for various buildings in several metros.
The TL;DR is that his model says adding 100 units of market rate housing renting to affluent people will lead to around 70 middle-income units opening up, and around 40 units that rent to the lowest-income portion of the metro.
But real quick, it seems like his data comes from Chicago. Although I run the risk of attracting ire from its natives... I would not put Chicago in the same class as NY and SF. I think it entirely possible that there are a lot of people who would love to live in downtown NY or downtown SF who would not want to live in downtown Chicago.
I believe some of the details in that specific short summary focus on Chicago, but his work is much broader than that:
"I next sharpen focus to the migratory connections between new construction and low-income areas and track moves at the building level. I identify 686 large, new, market-rate multifamily buildings in 12 large central cities and track 52,000 of their current residents to their previous buildings of residence. I then find the tenants currently living in those buildings and track them to their previous residence, iterating for six rounds and, in order to focus on local connectivity, keeping only within-metro-area moves in each round."
And there was a team in I want to say Finland (it was definitely one of the Scandinavian countries) that replicated his work for at least one of their local metros.
No doubt, but what continues to evolve in central Chicago is if anything an underreported story. The change just during my lifetime is quite remarkable and is exceeding the most wild-eyed predictions of local urban-planning dreamers of my parents' generation. (My father worked during the 1960s for NE Illinois' regional planning agency and my elder siblings met some of those dreamers at our family's dinner table.)
Central Chicago (defined as the Loop+River North+South Loop+West Loop) has continued to steadily grow as a residential district for about three decades now. Demand growth, reflected in both prices and new construction, has had small pauses but has not meaningfully slowed through even major disruptions such as COVID and before it the 2007-2008 real estate crash. And demand is absolutely roaring right now: just in the South Loop another 1,000-foot all-residential building is under construction just steps from that area's first one which is right next to that area's first 700-footer (both full); as are at least a half-dozen others from 30 to 50 stories each. The West Loop has a fresh wave of new projects now underway as well and the new-construction boundary of that district appears to have extended at least another half-mile westward based on my drive through there the other day. Etc.
Just the small Loop business district, about 1.5 square miles which in the 1980s had fewer than 5,000 fulltime residents, is closing in now on 50,000. And there is fresh political focus locally in pushing that trend farther by encouraging/enabling residential conversion of Loop office buildings at a new scale.
Chicago's total population remains flat because of population losses elsewhere in the city. (E.g. Englewood had nearly 90K in 1970 and is now down near 40K and still falling.) The central area though -- roughly 12 square miles which as of 1980 housed fewer than 20,000 people -- is now approaching 200,000. And seems on track to by maybe 2040 be the densely-packed home to twice that many.
Also I think it's a mistake to think of this in terms of "a supply of people who would move there were it not for the difficulty of finding housing". Like, very few people move to a new metro _just because_. They move to the area for a job or school or family. What happens if somebody gets a six-figure job offer in Palo Alto and then finds that even on six figures, they can't afford to live in Palo Alto, is mostly not that they decide not to take the job. They just live in Fremont instead, and commute across the bridge. (And then somebody who works a service job in Fremont can't rent the unit that person takes -- and they commute in from Pleasanton. And somebody working a service job in Pleasanton ends up commuting from Tracy.)
The number of people who want to rent _somewhere_ in the Bay Area is short-term almost entirely price-insensitive. Long-term it is budging, very slowly, with out-migration, but the issue of jobs-housing balance is much more about city planning decisions. Each city individually finds that the way the property tax formulas break down, compared to who pays for stuff like schools versus who pays for transit systems and roads, it makes sense to try to attract offices -- you get more of the property tax revenue, while paying for less of the incremental services involved in supporting activity for that building. But of course if _every_ city tries to encourage investment in office parks, while expecting _somebody else_ to build the housing for those office workers, you have a problem. The RHNA process tries to solve that, but for 40 years the whole thing was a joke, with no enforcement.
(Well, I turned down a job in the Bay Area partly because I didn't want to deal with the Molochian housing market there. I had other offers of comparable quality elsewhere, and took one of them. But I'm probably weird like that.)
I wouldn't consider it weird to include cost of living into the evaluation of a job offer.
We have a similar situation in Germany. In southern Germany salaries offered are substantially higher than in northern and eastern Germany. However, cost of living there essentially negates this for all but the highest paying jobs.
So very often the additional burden of having to move isn't offset by those wage offers.
Unless you need to accept a specific job offer to advance your carrier, financially it's very often a good idea to evaluate the entire package instead of just comparing wages, even if we ignore all other considerations (like friends and family left behind).
Lots of people consider location and housing as a primary factor, especially when they are married and have kids at home. Young people right out of college tend to look at straight cash income more, often to their detriment.
My sister wanted to live in SF. It was too expensive so she lived in Oakland. Then she had to move for a job, and chose Portland over higher pay elsewhere. I think some people DO choose a location that fits their lifestyle.
My sister would not take a job in some small town in TX or maybe even a big city. Maybe Austin. Because she needs to be in a "cool" left wing environment.
Let me refine the point: Sure, there will at the margin be some people who decide not to move to the area, or to leave the area, because of this factor, but if some company does decide to add high-end engineering jobs, they _will_ be able to fill those jobs, in reasonably short order.
Silicon Valley companies have started griping about cost of living here making it harder to recruit, but for the most part they haven't taken the housing issue seriously enough to take public positions on it.
Elon moved Tesla HQ to Texas, but then quietly moved "engineering headquarters" back to Palo Alto because it turns out that very few of the employees in CA wanted to move to TX, and the pool of engineering talent here is much deeper, and he cared more about having more in-person work -- which honestly for the hands-on mechanical engineering stuff is probably fair! -- than he cared about trying to keep office rental costs low.
It's also an open secret that a fair number of the Fremont Factory employees commute in each week from as far away as Nevada, and sleep in the parking lot during the week. Better housing conditions there would make it easier to recruit, and would mean higher real standard of living for employees, even at a lower cash pay level. Yet the Tesla Government Affairs office has taken no interest in lobbying cities around the factory (Fremont, Milpitas, Union City) to make it easier to build workforce housing.
Patrick Collison has put some money into backing YIMBYs in the region, but far less than he easily could. Marc Andreesen talks a good game about the importance of letting people build, but then turns out to be personally quite NIMBY when it come to his own town of Atherton.
And all of this makes sense because, despite the gripes, when push comes to shove, all of these folks _can_ still hire. Maybe they pay marginally more, but it's peanuts compared to the actual value a good employee produces for the company, and there are tons of highly-talented people who want the good weather and great cultural amenities on offer.
To a first approximation, the number of highly-paid jobs directly determines the number of high-income people competing for housing in the region, with no elasticity at all -- if Apple or Google or Facebook or Tesla decides they're going to open another thousand reqs, those reqs will get filled. If the number of "nice" / "luxury" units falls short of the number of high-paid workers, then they enter the market for older units, and bid up the prices, pushing middle-income people into long commutes or sub-standard housing, and pushing low-income people into homelessness.
So, would you agree with a rough simple model like this:
Take a bell curve, and chop off the left quarter. NY and SF are somewhere in the new left third, on the left side of the peak. There's a pool of people who would like to move in, and we can order them from high-income to low-income. Right now, adding more housing means that more high-income people will move in, so at best there's no effect on housing costs, and at worst they go up because having more high-income people living in the area will raise property values. But eventually, if we build enough housing, we'll have skimmed off all the higher-income people, and start getting to the middle-income people who want to move there, at which point housing costs will decrease (or there will be vacant housing).
The move-chain formulation may appear not to apply in particular jurisdictions, but that's a result of the jurisdictions not being aligned with the metropolitan area. (For example, people living in northwest Indiana may count as part of the Chicago metropolitan area.) Thus, building more housing in Manhattan may not affect housing costs in Manhattan (yet), but will affect housing costs in the greater NY metro area, and will eventually, if enough housing is built in Manhattan, start to affect housing costs in Manhattan.
(This all assumes a free market in housing, with no rent control or tenants' rights laws that incentivize keeping housing vacant rather than renting it to the current best available tenants.)
My model says that if you add a relatively small number of new units, the people who move into those new units will be high-income people in brand new units. So _their units_ obviously are moving the average upwards. But the average for the region as a whole will rise slower than it otherwise would've, and if you do this in enough places, the average of the region as a whole will even turn around and start going down, _even if_ the average for each little two-block radius around one of those new "luxury" buildings goes up.
The average for the units in the immediate neighborhood _excluding the new ones_ actually should be deflected downwards more than the downward push on the region as a whole, since "other stuff within a few blocks" obviously has some level of substitutability with the new stuff; but some of the benefit of the new units, in terms of lowering the trajectory of the regional average, is "leaking out" to other neighborhoods, including, as you say, out to really far-flung extensions of the metro. Like, to refer back to the example I gave earlier, if the guy taking a job in Palo Alto _could_ find a decent place in a new twenty-story building on top of the Palo Alto Caltrain, then he doesn't instead rent a place in Fremont; and that means somebody who wanted to be in Fremont doesn't go to Pleasanton, and somebody that wanted to be in Pleasanton doesn't go to Tracy. So some of the benefit from the new units in Palo Alto has been transmitted sixty miles out to the exurban fringe of the East Bay.
But the place I disagree with your description is that it's not like you have to fully saturate the higher end of the market before you start seeing _some_ benefits move down to lower-income people. Again this is what the migration chain research is getting at. When you add new market rate units -- what Noah Smith has jokingly called Yuppie Fishbowls -- the fact that new people move into those _instead of_ trying to move into and renovate older units, does provide an immediate reduction in price pressure on people who live in older / more run-down units nearby.
So building a relatively small number of new units in Manhattan (say, increasing stock by 1%) would put the price of _existing_ units in Manhattan on a lower trajectory (so maybe they rise by 3% instead of 5%). But it may not in the short term lower the _average_ price of units at all relative to what they would've been, and will probably _raise_ the average of the immediate neighborhood, because the new units will be premium stuff that costs 2-3x the average. To actually put prices of existing units onto a track of absolute reductions, you'd have to build a _lot_ of new units. Plus you'd then run smack into the way that real estate undergirds our financial system. It's probably safer to just aim to make it so prices are stable, or at least rising slower than wages, so that people can see some real income growth instead of having people below like the 80th percentile in high-wage markets feeling like any progress they make on wages is immediately clawed away by the housing market.
So I think your article may be conflating density of two things:
1) Density of jobs
2) Density of housing
These are often highly correlated! But, increasing jobs (while holding housing constant) will raise housing prices, while increasing housing (while holding jobs constant) will decrease housing prices.
Network effects encourage both growing together, but things like Prop 13 encourage zoning for jobs over housing, because jobs bring in more tax revenue while houses bring in more expenses for the city, notably providing public schools.
If you build a cornucopia of housing without also building jobs to go along with it, you will end up with widespread poverty, food deserts, and other symptoms of urban decay.
I think you have that history backwards, nowhere (in US at least) have large tracts of housing been built without the rise, or anticipated rise, in the job market. That dysfunction you point to is from housing being built in concert with booming job markets, the job market then collapses and you see a cascading exodus leaving so much vacant housing that the value of the unit falls below the price of maintenance, resulting is cascading ruination and disinvestment in other infrastructure as municipal budget obligations fall behind revenue.
Think St. Louis or Detroit or most other rust belt cities that were hollowed by deindustrialization and suburbinization.
The jobs were subtracted from whole cities, housing was not added to empty cities.
Additionally, a large part of this construction was driven not even by the expectation of future jobs - it was the result of actions taken by local governments to meet aggressive growth targets set by the central government, combined with cheap credit for developers. It didn't matter whether the units would be occupied because the construction was the point. The wild thing is that a large proportion of these empty units did actually sell: combined with the lack of a property tax, this made real estate an attractive, ever-appreciating investment for those who could afford it, so many of those properties were sold at high prices before they were even constructed. And then when the central government started to get nervous about all this debt and tighten things up, that triggered a liquidity crisis in which Evergrande and other mega-developers defaulted on some of their debt.
I don't understand your argument here. Suppose more housing doesn't cause even a short term decrease in price for housing of a given quality (size/amenities). Absent that decrease in price what induces the demand? If prices stay the same how do these mobile people know to move there?
I doubt they are looking at the total number of available units and using that to estimate how desierable the city is to live in. So maybe there is eventually an induced demand effect but that's going to happen at a longer time scale.
Or maybe that's your claim. It is plausible that in the long term (though dunno if true) that more housing increases overall prices in the city but in short term it's got to reduce it.
(tho reason it's increasing prices in long term is by making it better to live there so ...)
> Absent that decrease in price what induces the demand?
Agglomeration effects could induce that demand.
> Or maybe that's your claim. It is plausible that in the long term (though dunno if true) that more housing increases overall prices in the city but in short term it's got to reduce it.
Yes, but that short term might be very short indeed.
> (tho reason it's increasing prices in long term is by making it better to live there so ...)
Yes, exactly. Especially 'better' in the sense of economic productivity. New York is not more or less pleasant in an absolute sense than podunk, but it's a lot easier to find a high paying job in the big city.
Agglomeration effects don't materialize until agglomeration has occured, I.e., you've increased total residents relative to the counterfactual. I agree that in the 'long' term that might happen but the causation has to go from: more houses -> cheaper to move their (than in counterfactual w/o) -> higher population -> agglomeration effects. So at least briefly you need to get lower prices.
Regarding how long long term is, I highly doubt that it can be less than a year. I think a good lower bound comes from looking at the length of time between, say, high income people starting to move into an area and substantial changes in the nearby stores. Usually that takes a few years (I admit it might be less in areas where one developer can create a massive mixed use complex in one go but I presume here we just discussing pure housing construction).
I guess that's short term as far as the debate is concerned.
> Agglomeration effects don't materialize until agglomeration has occured, I.e., you've increased total residents relative to the counterfactual. I agree that in the 'long' term that might happen but the causation has to go from: more houses -> cheaper to move their (than in counterfactual w/o) -> higher population -> agglomeration effects. So at least briefly you need to get lower prices.
Not necessarily, because economic actors can anticipate predictable future price movements.
So even if the real agglomeration effects only materialize in X years, prices might already go up today.
> Regarding how long long term is, I highly doubt that it can be less than a year. I think a good lower bound comes from looking at the length of time between, say, high income people starting to move into an area and substantial changes in the nearby stores. Usually that takes a few years (I admit it might be less in areas where one developer can create a massive mixed use complex in one go but I presume here we just discussing pure housing construction).
Any real discussion would need more details, and we would need to nail down scales.
An example where I would expect almost immediate effects:
Mountain View in California, where Google is headquartered, has about 80k inhabitants. Many well paid people live out of town and commute long hours.
If they housing for another 10k residents tomorrow, people would move in almost immediately. Local shops would probably expand almost immediately as well. Eg restaurants can perhaps hire and cram in a few more cooks in the same space they already have.
In this example, the high income people convert from commuters to residents. They already have jobs in the area. But after the conversion they presumably spend more money and time in Mountain View than before. Those effects are predictable to other local businesses, and thus they can expand even before they actually observe the effects, almost as soon as they reliably learn of the coming expansion.
I agree that for many other places the process would likely to slower, as they don't have that pent-up Google-employee demand.
Sure, economic actors can anticipate future changes but people looking to buy a home aren't looking at the number of new apartments built and deciding where to live on those grounds.
Anyone can move to the city provided they willing to pay market rate. Essentially (holding other factors fixed) the net migration is a function of the housing cost. Yes, if they build another 10k houses more people move in almost immediately *because* those new houses are a better deal for the ppl moving in than they could have gotten before they came on the market.
Might be they are 1% cheaper. Or maybe they are priced the same as existing units but offer nicer amenities or are just closer to where the buyers work that units prev available for that price but that still means someone who had wanted to be x miles from work and live in this nice a place (it's rarely) going to be 0 units like that b4) is now paying less for those conviencies.
This may in some sense be a verbal dispute since I'm not necessarily claiming the average price on Zillow goes down, merely the average price on Zillow for something that offers that buyer features they rate as subjectively similar.
--
Yes, I grant that sometimes a big buisness may move in as part of a large property development believing they can now house their employees but absent those kind of large development deals (which I agree may be different) new restaurants are rarely opening up before anyone moves in bc they anticipate the new people in a small number of units. They are going to react to that movement.
I suspect that what tends to happen is that in practice the "price decrease" really comes in the form of better fit between buyer and unit (ohh look I can now move to SF and I can afford the kind of place I like near my employer) or simply the fact the unit is new (that's more desierable) so there isn't any decrease in anything like cost per square foot as a result of these small increases in the number of units but the cost per unit of subjective value to buyer has decreased. And that the agglomeration effects and the anticipation of them you mention can kick in before it results in any decrease in actual cost per square foot.
But you need something that makes the city more appealing to people who are thinking of moving in/out to have a net pop increase and I don't believe they are looking at number of units built and predicting that there will be future benefits to agglomeration as a result of the new units.
If ppl really did that on net this discussion wouldn't be so full of disagreement.
I think you're neglecting search costs. Twenty prospective occupants competing for two vacancies produce a lot more noise in relevant channels than twenty competing for ten, and bad signal-to-noise ratio makes life difficult for everyone involved without changing the nominal rent price at all.
I don't think search costs are going to vary independently of actual costs. People often need (or at least really want) to sell their house within some period of time (eg to move for a job or to accommodate a new kid). If more houses enter the market so your house doesn't sell in the originally expected period of time you reduce the price. If all the houses you see during 2 months of looking that are acceptable are a certain cost per unit of desierability you accept that you'll need to pay more for that.
But see the thread above. I agree that this argument doesn't imply you see a change in the median price relative to the counterfactual. For instance, it might be that many people would like to move to the city but only if they can get a place that's above average in size or centrality. So the price to get those amenities may decrease in a way that actually causes the average sale price to go up.
But I'd still call that a decrease in price in the same way that you can say the price for computing power has decreased hugely even though most families probably spend more on computers than they did 20 years ago.
Can’t speak for others, but as a YIMBY I would, if it was within the window of political feasibility, be arguing for converting most downtowns into loosely woven arcologies. But you have to tackle this problem in bites because people are reluctant to let you even build a duplex, let alone bulldoze all the single family and row houses in SF to build a series of terraced megatowers.
I would suggest something much simpler and hands-off: abolish Euclidean zoning (and perhaps move to something like Japanese zoning, if you want zoning at all), and abolish rules like mandatory minimum parking requirements.
Then let the market sort it out. If they want 'loosely woven arcologies', I'm sure someone will build them.
Yes, Euclidean zoning is very confusingly named. Yet another reason to ban it.
Btw, Euclidean zoning is a big philosophical dilemma for me:
On the one hand, Euclidean zoning is obviously bonkers.
On the other hand, I believe in subsidiarity. The notion that (political) decisions should be made at the most local level they can be made. See https://en.wikipedia.org/wiki/Subsidiarity
Of course the most local level possible is to let the land owner decide what to do with her land. But I find it hard to justify on principled grounds giving the federal or state level control here, even if it is just to ban Euclidean zoning.
I guess in a democracy communities get exactly the kind of bad governance they vote for?
Not all democracies have bad zoning, not even all federal democracies. Eg Japan and Germany are doing just fine in this respect as far as I can tell.
Perhaps if you allowed American communities to straight up ban poor people (eg via an income or wealth threshold), they would do that, instead of having to hide that desire behind restrictive zoning?
The best level, under “subsidiarity,” is not the federal, the state, or the neighborhood, but the commuting urban region, which could be the county or a super-county.
I mean, it's probably a variant on the Liquidity Trap, right? Once you get to high enough home prices, building more houses doesn't lower their prices *unless* you very publicly and very believably commit to building houses until the prices go down. If the state of California said, "We are going to build homes as quickly as possible until their price falls by 20%" and in some way demonstrated that this was unequivocally going to happen, the price of homes would fall over night before a single house was built.
Because homes are in the terrible position of being both a necessary good and a personal investment, they get affected by both basic supply and demand as well as the weird economic traps that result from speculation. If you want homes to be cheap, you have to both meet demand and convince people that there are better investment opportunities.
I think the first mistake in the housing discussion is talking in hard numbers. You can't say, "We're going to build 100,000 new houses", you have to say, "We're going to build houses until the median price is X."
I'm not even sure that "if the Bay Area built 66 million new houses, prices would go down." The demand for housing seems to be fairly inexhaustible. Everyone always wants more of it. If the YIMBYs win, and in the future there are enough apartments that everyone has at least one each, then the second apartment will start to go up in value. Slightly bigger apartments will seem even more attractive.
Housing seems more like TV than like beer. If you produce too much beer, you'll have to flog it at a discount. But there doesn't seem to be the same limitation on the amount of video entertainment that people can produce.
If true, that seems like it would be good problem to have.
Plenty of blue collar jobs in construction to be had. All the extra GDP will lead to extra tax revenue to finance your favourite boondoggle or pay off government debt, etc.
Right? I mean, that's pretty much what the 20th century looked like in the USA, isn't it? And the last 40 years in China, where I live. A lot of housing got built, house prices went up, and everyone got a lot richer. And despite the big crash in 2008, house prices have continued to rise.
It's fine to say "there must be a limit" - and I suppose there must be, somewhere. But I don't see any reason to think that current levels of housing supply/density are anywhere near the limit where house prices will suddenly start to go down.
Yes, absolutely. I certainly don't think that if you just build a bunch of houses, everyone would get magically rich! It would have to be part of a general development, including new work, new places to work, new entertainment, and everything. But I don't see any reason to think that new jobs and new technology and all the other things wouldn't appear.
I just worked on a comment on this article for an hour and then accidentally CTRL-W'd myself. I want to die.
tl;dr: Additions to housing stock decrease rents at the margin, holding all else fixed. Second-order effects include increased wealth/capita (unless you assume new residents have negative wealth), leading to increased demand for goods and services in the same fixed area, thereby leading to increased supply of amenities which directly increases the attractiveness of the city's housing stock. The whole feedback loop is also affected by the mobile-yuppie hypothesis you mention, especially because higher-income high-skilled Americans are disproportionately mobile. However, very dense cities with less concentrated wealth, e.g. Union City (or Manila, or Bnei Brak in Israel) have nowhere near the same effect. That mobile-yuppie hypothesis ties into the role of cities as a productivity multiplier for high-skilled jobs, scaling with density: see The New Geography of Jobs by Enrico Moretti.
I wrote two comments (combined 70+ minutes of writing) on this and accidentally CTRL-W'ed myself twice. I hate myself and would very much like to die.
tl;dr; Yes, second-order and third-order effects from housing stock increases can increase rents, even though the first-order effects (ceteris paribus, etc) is to lower rents. Primary driver is increased wealth/capita, which is especially a factor for cities which are already large, dense, and attractive to high-skilled workers (partially validating your mobile-yuppie hypothesis). Causal pathway: More housing -> more residents/capita -> more demand for amenities per capita -> increased attractiveness of city -> higher housing costs. Please just reply to this if you have any questions.
I think you have to consider rents not so much as a function of density but as a function of density plus time. If Oakland doubled its housing stock tomorrow rents in Oakland would go way down. Rents going down would cause some people to move to Oakland, and the low rent would make it a very attractive place for workers to live, which would cause many more companies to move there and open offices there, and those companies would hire workers who would move there. All the people moving to Oakland would increase demand for all sorts of goods and services in Oakland, which would cause more businesses to move to Oakland or be started there, which in turn increases wages causing more people to move to Oakland, and eventually all the extra housing is filled and Oakland is a much larger and denser and economically important city, maybe similar to Seattle, with higher rents to match.
But crucially, this process would take a lot of time. Just because Oakland suddenly became much denser does not mean that people will immediately start treating it like New York or San Francisco. The network effects that make large dense cities highly in demand and therefore expensive to live in take quite some time to develop, so the effect in the short and even medium term would be to reduce rents in Oakland.
Now obviously you can’t just double the Oakland housing stock overnight. In reality, the housing stock increases slowly, both because of burdensome regulations that are the bane of YIMBYs (which slow down housing construction that would happen in a sensibly regulated market) but also precisely because the network effects that increase the demand for housing take so long. But the same effect still happens on a much smaller scale, which is why you get all those studies saying that building some more housing causes rents nearby to drop a little bit. Building more housing generally causes rents to go down in the short term, but in the long term network effects dominate and large dense cities become more expensive. The only way to reduce rents in the long term is to build more housing everywhere, like you said.
I think a lot of the confusion might stem from ambiguity in the word "prices".
Consider a city with a set {X} of existing homes and a proposal to build a set {Y} of new homes, where ||Y||<<||X||. Most/all of {Y} will be luxury units, so the average price of {Y} will be higher than the average price of {X} was prior to the new construction. But, at least in the very short run, the average price of {X} alone should drop for basic supply & demand reasons.
The relationship between the average prices of {X U Y} after new construction and the average price of {X} before construction is indeterminate from just this stylized scenario; I suspect a lot of clashing intuitions are due to this.
Japan overall has fairly YIMBY policies, so no, it's not a discontinuity. But the fact that Western countries are suffering from high prices while the densest island with the densest city has cheap abundant housing, suggests that policy is the relevant factor.
Immigration policy, in this case, is probably the most relevant factor. Japan has cheap housing now because the population is declining due to low birth rates and an extremely restrictive immigration policy. In a game of musical chairs with more chairs than people, there's not much pushing and shoving. Why would you need to increase density when you have fewer people each year?
Back in the 80s-90s when the Japanese population was still growing and urbanising, Tokyo real estate was insanely expensive, and there was an often-repeated factoid that the gardens of the Imperial Palace were worth more than all the real estate in California.
You might be surprised to know then that despite Japan's low birthrate and low immigration and rapidly declining population, they build far more new homes per capita every year than the US does. As a result, the average Japanese home is very new and the average house is torn down and replaced after a relatively short 30 years. They're living in nice new homes for cheaper. All because they mastered the dark art of building drywall boxes
In a country with a declining population, you would expect that fewer homes are being built per capita because there's little to no competition for existing homes. But it's exactly the opposite! Japan builds far more homes per capita than the US does, despite their declining population. That should really make you stop and think what's going on here.
I don't really get your point about "building new homes" vs "replacing existing homes". Like, if I build a new townhouse in Osaka and then someone in the country side demolishes an older home, then mine doesn't count as new? I think you're just saying that anywhere with a declining population can't "build new homes".
The new homes are sometimes built on land that previously had a different structure there. I guess if you want to call that "rebuilding", then you can try to rationalize it away. But you would expect that a country with a declining population would do less rebuilding because there's no need to. But in fact, the opposite is the case. Japan builds almost twice as many homes per capita as the US and the average home is demolished after only 30 years. People there treat used homes like used cars and don't think of them as an "investment".
I can see from this and your other responses here that you're really not doing this in good faith and you're just looking for any reason to be opposed to free market housing, but your arguments are pretty bad and you should at least try harder.
The argument is about housing prices not whether you personally can make friends. I recommend attending a local meetup for people with similar interests.
Exactly! Tokyo just like SF or NYC or London is experiencing net population growth. It’s irrelevant whether that’s from international immigration or migration from your own (otherwise declining) domestic population. The difference is that Tokyo has an urban housing and planning model that privelages housing affordability over restricting new construction.
Just want to note that despite Japan's low birthrate, they actually build almost twice as many homes per capita as the US and the average Japanese home is torn down and replaced after only 30 years. It's not really a matter of population growth vs shrinkage. They just build new houses for the same reason we build new cars or new refrigerators: new stuff is nice.
Your assumption is unfortunately wrong. Japan, despite having a shrinking population, builds almost twice as many homes per capita as the US. This is exactly the opposite of what you would expect! As a result, the average Japanese home is torn down and replaced after just 30 years. I'm not going to tell you this is super great for the environment or something, but it is really great for people's living standards. Even a relatively poor person can afford to live in a nice new apartment in a desirable neighborhood.
I think there's a significant chance that this is a weird effect of modern zoning (or maybe service economies?) cities used to be where poor people lived! *Downtown* used to be full of poor people! There are major cases of high-density dirt cheap living (like tenements). It seems at the very least plausible that
It looks like you haven't finished your comment, but what you're describing is essentially the same thing as the local vs global prices, if you don't just look at the housing price average for a city. If you build 10,000 more houses, all built to code with modern materials and insulation, those houses might be so expensive that they drive up the average for the city, but they might cause wealthy people already living in the city to move there, causing the prices for all the other houses in the city to decrease. If all new housing is objectively better value for money than old housing (which is likely untrue given the weird zoning you mentioned) and all people move to better housing given the opportunity, it's the lowest quality housing that ends up becoming cheaper, and thus your city attracts more poor people.
So building more housing attracts more (rich and poor) people? Existing demand consumes new supply.
But even if current demand would includes millions of more residents moving to that city who can’t currently afford it, that demand is not infinite (if only because the human population is finite). You would eventually hit a point of increasing vacancy where prices would be forced down to compete for consumers who can more easily shop around. This would be especially true if you increased the supply of housing across multiple high demand cities at the same time by say, for example, deregulating zoning restrictions at the state or federal level.
I think it's more likely to be due to deindustrialization and transitioning to a service economy. During the industrial revolution there was a huge migration to cities because they were the centers of industry and provided lots of jobs for poor people. Now cities provide jobs + status for college educated people, and have to become more desirable in order to actually attract those people. This results in lower income workers getting squeezed because they are competing for housing with people on professional salaries.
NYC/SF are expensive because there are MANY good jobs there and people WANT to live there. Not because of the density of housing. You could build 500,000 homes in the middle of your empty field in North Dakota, and it wouldn't do much for the demand there. You aren't going to create Manhattan by magicking 3.5 million housing units of similar quality into the Red Lake Indian reservation in Northern Minnesota.
But overall you are right, that in the real world local density increases can/often lead to local gentrification/rising prices, and the benefits tend to be for the wider area. But the actual impacts depend a lot on the particulars and the services/jobs available.
There are good jobs there because the cities are dense; jobs go where employees are, and vice versa, in a cycle. There aren't hundreds of thousands of good jobs in a Manhattan-sized area of a random plain in North Dakota (unless that plain has oil!) , because that plain isn't dense enough to support the businesses that create jobs.
Yes but a housing unit isn't an employee. We are talking about the impacts of building more units, not more employees. Our rapid cloning tech isn't that far along yet. :)
It takes years (and even generations) for institutions to build up and for something like Manhattan to grow. Absolutely there are many places in the country (especially during the last housing crisis), where it was built, and no one came. This isn't the field of dreams. It is very possible to over build demand (at least in most places, I do shudder to think of what that would look like in Manhattan).
Maybe I’m wrong, but weren’t most of those development flops green field suburbs in Vegas or vacation condos in Miami, i.e. dependent on rising income and continued growth in speculative real estate markets? Commercial real estate woes might be more associated with the Covid shock to work patterns.
I think all these have in common that they’re something of an economic monoculture and are much less resilient to economic shocks. Mixed use neighborhoods are much less likely to go bust because there’s no single employer or investor that can pull the rug out, residents are more likely to have roots and networks that mitigate flightiness and there’s sufficient density of infrastructure and other jobs that they can adapt without moving away. Density means there’s always going to be a minimum customer base to keep more street level businesses viable through a downturn.
Yeah that is the point. A bunch of houses out in the middle of nowhere can attract no one. We are literally debating whether "housing alone" is enough. I am saying no.
So what's the argument for big cities that fall apart, like Detroit? It does seem like there's some employment-related piece in here - Oakland is going to have some limits on who it attracts because it's not going to pull a ton of finance people from NY, etc.
You need way less people for transshipment with containers then when everything was break bulk and had to be handled out of the hold by longshoremen. You also need way less ships (and therefore docks) and warehouses for the volume of cargo.
This is way more efficient for the economy as a whole, since you're dramatically dropping the price of shipping, but it's damn hard on the neighborhood around the docks, which grew up to support the huge number of longshoremen previously required.
Tangential to this, the drop in shipping costs also affect a lot of other places than just the docks. The Rust Belt--containing steel mills and the like--formed because it was at a nice transport juncture. The least-valuable-by-weight part of making steel, the iron ore, could be shipped from the mines in Minnesota and the Upper Peninsula by water, the cheapest shipping option. Limestone for flux, also very dense and not all that valuable, could come by water from Wisconsin. Meanwhile, coal for coking fuel came up from Pennsylvania and West Virgina on a more expensive but shorter journey via rail. These all came together on the shores of the Great Lakes. Then, once the city has formed, inertia kept them going: a lot of cities continue to exist because they have a long tradition of existence, which means people are willing to move there.
However, transport is so cheap in general nowadays that there's not a huge advantage for that location. Making the steel overseas with cheap labor can take advantage of the cheap shipping, so the margins for the Rust Belt got super thin, and once a demand shock killed a bunch of firms, it was no longer "the place to go" to build a new steel plant, and the area decayed.
On an even bigger tangent, but still kinda related to the OP as long as I'm writing, it's a lot more difficult for a small town to form and become a big town today than it probably was in the past, because transport is cheap. I came from one of the mining towns in the Upper Peninsula that would have supplied the Rust Belt. It formed to support an iron ore mine, which has since closed and the town is dying. However, if CCI were to reopen that mine, it probably wouldn't save the town: back in the late 19th century, you really had no choice but to live pretty much right on the mine headframe. When a mine formed you formed a town, and if it lasted long enough it accreted enough ancillary business and population to build schools and the like, so that the "has a long tradition of existence" might allow it to keep going as long as the mine was still providing a job base.
However, if you were to found a mine on that exact spot today, 1) you're going to have way fewer miners than you would have in the past, because machinery, and 2) the miners can live in a town that's not dying and drive to work from a much larger catchment.
About a 30 minute commute today would get you to a somewhat struggling, but not outright dying town, and 45 minutes gets you to Marquette, with Northern Michigan University to anchor it as well as a bunch of other amenities. It's not a major city, but not getting hollowed out, and therefore has better schools for your kids. Compare this commute to a story from a local UP author who grew up in the '40s in the town I discuss. When he was a kid, going to Marquette was literally such a major trip--requiring his mother to dip into their rainy day fund to get train tickets--that it made it to a book of stories. A miner damn sure wasn't *commuting* to work from that far away at that time. But they can now, and that means the town is not likely to come back. The conditions that created the town were more than just "had a mine", it was the entire transportation economy that existed at that time, and those conditions aren't coming back.
Containerization and the cheap shipping that resulted disrupted a lot of existing economic networks, making them susceptible to shocks. Sic transit gloria mundi.
> You need way less people for transshipment with containers then when everything was break bulk and had to be handled out of the hold by longshoremen.
Something that intrigues me is that the classical world (and the pre-classical world!) shipped their goods around mostly in giant sealed clay jars. This obviously reaps all the benefits of containerization, right down to the use of dedicated machines to make loading and unloading easier; it is containerization. Nobody's pocketing some grain from the big clay jar with a wax plug blocking it.
How did such an important -- and simple and intuitive -- technology get lost?
Before containers, loading and unloading the cargo was extremely labor intensive, and that was the kind of labor that required practically zero education, you only needed a strong back, two strong arms and two strong legs to be a dockworker. And since large cities both produced and required a lot of goods, they had to support a large population of urban poor that loaded and unloaded their ships.
With containers, you could build a large port away from the city where a few crane operators and their ground crew could unload a container ship and load the containers onto a waiting cargo train quicker than a thousand dockworkers could. Then the container would be unloaded and moved to a warehouse by a few more skilled tradesmen: a few more crane operators, a truck driver that would take it from the urban cargo train station to a warehouse, a forklift driver that would remove the pallets from the container. Suddenly, all these urban men who would support their family by carrying heavy sacks were redundant.
What if good jobs follow from density but with a delay? So if you build new houses now, prices temporarily decrease, then they increase in a decade or so once the jobs appear.
> There are good jobs there because the cities are dense
There are are some jobs there because the city is dense. But in SF the good jobs are tech, and tech isn't in SF just because it's dense but because it's a tech hub. There are plenty of other cities in the U.S. where you can have access to a much larger work force. Just not one specializing in tech.
I think you're modeling employees and employers as a homogenous blob, and assuming a city is the total market. But many companies clump together in industry cities/districts and produce value that is consumed across the nation.
Companies go where they can hire their specific type of an employee. It's the size of talent pool for that specific job not general density that drives that phenomenon. Facebook hiring site reliability engineer vs Halliburton hiring a petroleum engineer.
But I think what's happening is there an industry specific agglomeration effect. You want to start a start up in SF since it's easier to get funding because of previous successful exits. And once you're successful it'll be easier to hire for niche roles like a node.js site reliability engineer who has scaled an application to a billion users.
This leads to a clumping of certain industries like Tech in SF, Finance in NYC, Oil/Gas in Houston. Some of these industries pay high wages, and people like living next to where they work so this drives up price which can support higher density.
It's industry aggolomeration -> high density of high paying jobs -> high demand for real estate -> high prices/density.
There's a whole literature on generalist vs specialist agglomeration, which I mostly haven't read, much less have the ability to properly summarize, but a quick-and-dirty version goes something like this:
Employers tend to locate where there are employees. Some industries employ so many people that there are suitable employees in every city (e.g. lawyers, accountants, baristas). Some industries need lots of different skills and tend to end up only in the biggest cities where the labor market is deep enough for them to get all the specialists they need. This is "generalist agglomeration". Other industries need lots of people all from a single specialist skill and tend to cluster in one or a small number of cities (e.g. tech in Seattle and SF, biotech in Boston). This is "specialist agglomeration".
If you look at the most recent era of decline for big cities, ie the 1930s-1980s, part of the story was specialist agglomeration in manufacturing. Individual manufacturing industries each concentrated in a different smaller city (most famously, cars in Detroit). The result was that growth was mostly in the smaller cities, rather than in the biggest ones; when considering metro-area population the big cities levelled out rather than actually declining, but suburbanisation meant that urban core population was dropping and this had a dramatic effect on real estate prices in those urban cores.
While density does make generating economic growth easier, it is definitely possible for housing to outpace jobs and vice versa. Indeed, San Francisco, San Mateo, and Santa Clara Counties added significantly more jobs than housing in the last couple decades. Planners partly enabled this by green-lighting commercial real estate development (office towers downtown, big tech campuses down the peninsula) while restricting new residential. The resulting increase in housing demand then was absorbed by the East Bay and further inland, driving up prices.
I suppose deindustrialisation is also a part of this. You can pack workers much more tightly in an office than a factory, even before you start expanding upwards.
You've read Seeing Like a State, you *know* that just building a bunch of housing doesn't materialize people who want to live in it, or businesses to employ them.
Not so long ago, housing in Williston, North Dakota cost more per square foot than either NY or SF. And I can guarantee you that the average rental in Williston was rough, compared to what you got for comparable money in NY or SF.
That was when people were making well into the six figures, while living in their cars. Magical times.
I am sure that it wasn't because people just wanted to see the Williston Ballet.
As an aside, I knew a young woman, an Indian investment banker, who got transferred from Singapore to Williston. I wonder whom she pissed off and what she did to do make them that mad.
My niece recently moved from Heber, UT, which is one of the highest cost rental markets in the US—more than $6000/mo avg. Which is shocking when you're there because it's a little farming town. But its near ski resorts and there are enough hyper wealthy people in the world who think nothing about buying land there, so the whole housing market is whacked.
Definitely talked about less than major cities (and imo less important given their smaller populations) but resort towns from Jackson Hole Wyoming to Vail Valley of Colorado are among the best examples of wealthy NIMBYs cynically wielding zoning to make it unaffordable for the working class they rely on to live.
There aren't that many ultra wealthy people in the world who want to own a home in a ski town in Colorado. But there is a lot of land in rural Colorado. If you just went full libertarian and let people build whatever they want, you would pretty quickly saturate the market of ultra-wealthy individuals and prices would crash.
Perhaps it's too distant, but I was surprised not to see any discussion of Chinese cities here. There are hundreds of Chinese cities that have mega dense developments but didn't really see the changes proposed for Oakland, because just adding endless housing alone will not induce demand.
I think it’s a hard comparison to make given how radically different the Chinese economy operates and the migration restrictions imposed by the Hukou system.
The hukou system doesn't stop you from migrating. People do it all the time. What the hukou does is stop you from receiving government benefits when you're outside your native region.
Is migration of the elderly a normal phenomenon elsewhere? Where are the examples of countries with such free internal migration that young adults moving to the city bring their parents with them?
The price of housing in China has skyrocketed over the past few decades, as all those extra apartments have been built. I live in a pleasant but unremarkable southern city, and I paid London prices (about 4.5m yuan/$650k for a 1,300 sq ft flat). That seems to match Scott's hypothesis that high density leads to high prices. House prices here have risen much faster than incomes. They've risen in rural areas, too, but the increases in price in cities have been stratospheric.
For China you have to account for the very low rental yields. There people do not trust other other classes of assets which inflates purchase prices, but not rental prices. Rental prices in major Chinese cities are comparatively low in my experience, my rent was about half as much for my Shenzhen apartment compared to my roughly equivalent London one.
Crowd sourced cost of living data like numbeo.com seems to corroborate this.
You're conflating the price of buying a house and the price of renting one. House prices are subject to speculation just like any asset. Rents aren't subject to speculation because you can't profit by renting 5 units and hoping the rent goes up. Rents are the way we measure housing affordability and in China, rents are crazy low because of the oversupply and many mom and pop landlords can't find tenants for their apartments, so they sit vacant.
Yeah, I see what you mean. Rent variation isn't anything like as extreme as house price variation, that's true... but rent variation still follows the same pattern as house prices. You try to rent a nice flat in the big cities, and you'll still pay a lot. Smaller city, not much; in the countryside, there's no rental market. So, it's still the same graph, just a shallower gradient.
Take it to an extreme: I have built an apartment in a pocket dimension (TARDIS-style) in New York. It has effectively infinite capacity. What will this do to New York real estate pricing? Do we expect that the apartments next door to mine will become more expensive as a result?
the storefront next door was previously in the middle of the city. now it’s on the outskirts of the city. i can imagine that many occupants who previously used that store will now use an even “closer” store inside their complex instead.
depending on how you read “infinite density”, every unit inside this infinite density block is on equally prime real estate, and there’s infinite of it so the land portion of rent is driven to 0. the exterior storefront can’t become priceless, else they’d pay so much more on rent that they can’t be price competitive with the interior stores.
The comment I was replying to specifically said apartments, nothing about retail space. "Realistically" you're probably right but then it's unclear what's really "realistic" when we're talking about magical infinitely dense real estate.
The apartments will become cheaper as you've made yourself impossible to compete with. Other landlords will be forced to charge much less than you to give people a reason to rent from them rather than taking a space out of your infinite capacity. But, as you've just given the public-facing businesses in the area a massive number of additional potential customers, all the real estate that isn't housing will become more expensive.
If its capacity is truly infinite, and is to be auctioned off or otherwise used in a profit-maximizing way, then the limiting factor on occupancy would appear to be congestion at the inter-dimensional transit point. The apartments next door to yours will be expropriated to build transport infrastructure meant to support getting through the bottleneck, and compensation for that is a legal and political question. It suggests that the whole analogy is rather too far afield to be useful.
You can kind of make the analogy work. If you build a large skyscraper in the middle of Mountain View, you would need to also improve transportation infrastructure to make that viable and some of that burden would fall on the government who might use eminent domain to sieze neighboring land to expand the road or build a new subway station.
Or more likely, the government would just say "we don't feel like building transportation infrastructure, so you can't build your TARDIS apartment".
1. It's the only one in NYC because after he built it, the city introduced a new interdimensional permit process that takes 10^23 years.
2. It's technically mobile, but relocating it to a new site requires a new environmental impact review for each relocation, even back to the original site, so in practice, it's stationary.
3. Yes, but because the weather has to be the same for all tenants, there's a complicated process with 3 different agencies having oversight over the weather setting process to ensure fairness, accountability, transparency, and equity.
4. The MTA is still in the design phase for building a subway line. Despite being in a pocket dimension, the janitors' union doesn't want to share a break room with the engineers' union, so interagency discussions are ongoing.
4a. Time in the TARDIS is also omni-parallel, so technically everything is happening all at once. But city code requires an 18 month notice and public comment period, so no, they don't plan to finish before 2045.
The doorway is the bottleneck. Even with a clever traffic management system I can't see how you could reasonably accommodate more than ~10,000 people, and even then you'd probably be facing long lines to enter/leave at peak hours (in which case you might as well be commuting in from Connecticut).
So I'm sure you could make some good money but I doubt it would significantly affect the real estate market.
Supposing _everyone_ could have a Tardis-apartment (but that these Tardis apartments are not moveable) then I guess you'd completely revolutionise real estate. Land would become less valuable but the right to place your doorway in an in-demand location would become valuable. Cities could easily accommodate populations of many millions, all within a short walk of each other, so urban life would be very different, just a bunch of corridors.
Rather than a single fixed door, suppose the development is shaped a bit like the Mandelbrot set, an irregular hyperbolic manifold in higher-dimensional space, perhaps some distant cousin to the Eldar Webway or https://questden.org/wiki/Haze_Town , and residents can freely teleport to or from any otherwise-open public roadway on the same continent as the central anchor point... but the teleportation process takes up to an hour per mile 'as the crow flies,' so realspace travel is still faster when possible at all.
As to legalities, let's say it was formally recognized as the embassy of some alien empire, and installed near the UN building, before the whole teleportation thing was well understood by relevant policymakers. Forcibly removing it would be an act of war, and systematic action against "applicants for refugee status" (as renters in the fractal embassy are technically classified) would be thwarted by bureaucratic gridlock even if it was somehow logistically possible. However, the alien empire is also sufficiently corrupt, or at least lax in enforcement of extraterritoriality, that it poses no significant obstacle to the NYPD or other local authorities when they've got a court order to look for someone or something specific.
Now, how you want to manage your TARDIS aparment is by first offering super cheap rents to drive down the rents of all the competing apartments in the area. Then buy them out at low prices, then jack up the rents and rake in monopoly profits!
What do we expect would happen? The government would tell you that you can't build your TARDIS apartment there because you didn't get an interdimensional permit and also it would have an impact on street parking.
The important thing is to uncouple housing and land. Density increases the value of the land. But it also allows more units to occupy an existing parcel of land, which decreases the per-unit cost of housing.
So here is what you expect to see happen when new units are added at the margin:
1) Cost of all nearby buildings go up (this is actually the land value increasing, but we usually bundle land and building)
2) Value of existing single-family homes increases for the same reason as (1)
3) Cost to move into the neighborhood goes down because there are now more places to live.
It doesn't always happen precisely this way, but this is broadly what you'd expect.
I don't have the link handy, but Matt has argued before specifically that existing single-family homeowners should expect to see their house values go up in neighborhoods that become more dense, even as the cost of housing per unit goes down. This is part of his case for why homeowners should in general be less worried about YIMBY policies.
The value of their house may go up, but also their quality of life may go down. And it really does depend a bit on who is moving in there.
In a mixed income post industrial urban SF-home area with a lot of rentals and poor people scattered about, creating a bunch of density is probably going to help the homeowners financially. They already need to lock their doors, and put away their valuables, etc.
In some area with little to no poor people, and very high quality of life and good services/little crime, creating a bunch of density can be catastrophic to the quality of life. It is pretty situational/granular.
One person is like OMG I would love it if there was a trendy bar across the street even if it means I need to park a block further away. Another doesn't like fancy bars and thinks the dive bar 2 blocks away is fine, and the trendy bar going in across the street is a 100% negative.
The frustrating thing to me about posts like this is that the whole NIMBY vs. YIMBY dynamic is at least as much cultural and aesthetic as it is economic. You can explain the dynamics of real estate valuation to me all day; That doesn't change the fact that if the woods around my suburban home were to be razed and replaced with apartment blocks my quality of life would go down palpably.
A sea of two story single-family units might not be optimally efficient but there are reasons why the people in those neighborhoods chose to live in that arrangement.
I mean, the value of your land would go up appreciably, you would be able to sell for a nice capital gain, and buy a nice suburban home for cheaper elsewhere. So you end up with the suburban living you desire + a bunch more money.
Some people have sentimental attachment to the land, the environment, and the community of people who lived there. And sometimes, when they put a dollar value on all of that, the loss is more than the gain.
Unaffordable housing annihilates family formation. Billions of people have and do raise families in apartments when large enough apartments are sufficiently affordable and there are integrated services that families need.
2) This immediately increases the value of all that land (since there is now more freedom in how that land is used)
3) Owners now owe more in taxes
4) Owners have three options: eat the tax increase, take advantage of the upzoning to make more money off their property, or sell to someone with a plan to take advantage of the upzoning
5) This leads to a virtuous cycle of land improvement -> increased value -> land improvement
6) The money captured through the LVT can then be distributed throughout the community as makes sense. Anyone who feels they've lost out due to the transformation of the area can in theory be compensated out of this revenue stream.
Honestly agreed, I don't think Georgism is a practical political program. This is just my prediction of what would happen if it were magically implemented.
Assessing land accurately at scale already happens across the world. Several countries already have LVTs: Denmark, Estonia, Lithuania, Singapore, and Taiwan.
Implementing it is a solved problem. Getting it through a vetocracy I guess isn't.
What I'm always a bit surprised about is that America is *so productive*, even with such terrible land use. Imagine productivity with dense cities? If the Bay Area has such agglomoration as it is, imagine what it could built if it densified to London levels? Paris? Barcelona?
I think I've understood Matt's view and am taking this into account. I agree that price per acre of ground-floor land will increase faster than price per housing unit, but I think price per housing unit also increases. This is why the cost of 1000 square feet of living area is higher in Manhattan than North Dakota.
In a perfectly competitive market, market price should just be equivalent to the marginal cost.
Marginal cost of building housing (NOT land) is slightly higher in denser areas because cost of labor is higher. But that's not what's causing the delta between North Dakota and Manhattan.
Oh a lot more than just the cost of labor is higher. More regulations, more zoning, harder to work on build sites, inability to store materials on site, etc.
Well but some of those aren't just "obstacles from crazy bureaucrats", but actual rules you need about building codes and rules for construction etc. when the nearest building is 3ft away and the nearest residents 6ft away instead of 500. And there are 4,000 people passing on the sidewalk out front instead of 3.
There are certainly regulations that are unneeded, but most of them are needed. They are built into the reality of the level of density already existing in those places. More stakeholders, with more harms doled out.
Even in an imaginary perfectly competitive large city, a large, high-density apartment block will need to devote more of its square footage to things like elevators, leaving less (proportional) square footage for actual housing. Also, building a 50-unit high rise apartment will cost much more than building a 50-unit 2-story block with external access to all units.
It’s never just the cost of construction, it’s always also (often mostly in expensive areas) the cost of the land to build on. Also construction costs go up non linearly based on fire protection, elevator, and structural requirements. Building a 20 story building is way more than 2x the cost of a 10 story building and waaay more than 4x the cost of a 5 story building.
Hmm. I do see what you're saying. But I think this conflates a second-order effect with a first-order effect.
The primary drivers of demand for living in NYC are the specific opportunities available in NYC. It is true that on long time horizons, one of the reasons these opportunities have tended to collect in NYC is that it is a dense place. But those aren't the only reasons - NYC is much more important than other, bigger cities in other parts of the world for complex historical reasons. Even if a catastrophe were to wipe out half the city, there would still be a great deal of demand to live near important institutions like Broadway, Wall Street, Port of NY & NJ, Columbia, etc (assuming those institutions survived the catastrophe).
Increasing the number of housing units has a very mechanical impact on how many people can live in the place. But it has only a second-order impact on the types of institutions that drive demand to live in the city. People don't just generically crave to live near other people for the most part (a handful of urbanist freaks like myself excepted).
The Bay Area is a great example of this. It is much less populated than other much cheaper cities. Density isn't why people want to live there - it's access to a specific culture and specific institutions. Demand for that is not simply a function of density - some people want to be part of Bay Area culture and others don't. Adding more units will induce some demand as a second-order effect, but will bring prices down as a first-order effect.
To relate this to your model: we might be able to say that the country has a certain number of abstract "culture points" that have been allocated to different cities by various historical forces. Each culture point a city has increases demand to live in that city by a certain amount. Adding more people to the city may allow it to generate additional culture points over time, or acquire culture points from other cities, but this doesn't happen right away, and is determined by a host of factors other than just density.
Under this model, we expect a place like NYC to always cost much more than North Dakota (since NYC possesses a large number of culture points), but we would also expect that adding additional housing units to NYC would bring costs down (since there are now additional housing units per culture point). Perhaps this process will over time allow NYC to steal away some culture points from Chicago, Boston, or other cities, but this is a secondary effect.
Price per square foot in Manhattan will always be higher than in North Dakota just because building skyscrapers is more expensive than building single-story wood frame houses. But in a free market, the difference might be 1.5-2x, not 10x.
I think there are amenities that aren't available in Manhattan that put a floor on the price per square foot, as you wrote in the text.
But I think there are simpler supply/demand calculations. Chicago used to have ~1,000,000 more residents than it does now and that abundance of supply is why I live in an industrial conversion here with five bathrooms for about the same price a 2br in Brooklyn. And the median value of a home in Chicago's worst neighborhood--Austin--is higher than the median price of a home in Metro Detroit, where supply greatly exceeds demand.
I believe it's a multivariable problem, that's supply/demand + fashion + (external value of shared amenities) + (price for dividends from aggregation economics.)
In a perfectly competitive environment, price of housing (not land, the literal house) would be driven down near to what it cost to build. Denser cities usually have more productive people, so labor costs are higher.
Land is also fixed, so that does scale with amenities. Land close to amenities is valued higher, all else equal.
Wouldn’t cities having more productive people make labor costs *lower* rather than higher, assuming that higher productivity included the building trades? Or are you implicitly assuming Baumol’s cost disease here?
In this theory, how would something like California upzoning everywhere work? Would the local effect drive prices up? (California is one of 50 states) Or would the global effect drive prices down? (All cities doing it together)
Same question if the US upzones. Same question if a city upzones. This local vs global dichotomy seems poorly thought out.
I think two apartments in the same city in California are almost perfect substitutes, an apartment in LA and an apartment in SF are partial substitutes, an apartment in LA and an apartment in NYC are weaker substitutes, and an apartment in LA and a house in the country are very weak substitutes. You would have to check empirically how strong the substitution is in each case.
I think it's plausible that California upzoning everywhere could decrease prices (because it absorbs a substantial amount of the demand to live in California), or increase prices (because it directs people who would otherwise want to live in NYC to live in California instead). I think most likely at that scale it would decrease prices, but I'm not sure.
Why would 2 apartments in the same city be a near perfect substitute? People have very strong neighborhood preferences and city politics is hyperlocal. I would propose that housing is endlessly fractal such that this local/global dichotomy really breaks down and you're left with a contradiction. Does upzoning one parcel lower price per sqft on that parcel? One block? One neighborhood? One city? One region? One state? One country? One planet? (ok, I'm kidding about the planet)
Also, just want to add that the mechanism for this local price increase is presumably something along the lines of "X place is hip, therefor I want to live there instead of Y place". Call it the "SoDoSoPa effect". I think it's tempting to think that everyone else is a hipster, but in reality, most people are boring people looking for a boring house near their boring job. Maybe with good schools.
"Identical", how? Square feet and cost of furnishings? Then no, they're not perfect substitutes. One's near the Orpheum, one's near Golden Gate Park, and another is in China Basin.
Another one is on a Bart line that doesn't get too crowded.
Location, location, location is often a matter of tenths of a mile, not tens of miles
I think you should read Matt's take on the case against induced demand. He's responding to the same argument I think you're making. "What if building housing lures in more rich people?"
I linked this article on the top of the post. But I'm not sure my argument has anything to do with class or how rich anybody is - it would still apply in a world where everyone had exactly the same income.
I think your estimates of elasticities of substitution are a little off. I understand you're abstracting away from neighborhood amenities at a city level and just thinking about broad location, as others have quibbled with, but still there's a lot lacking. It seems that your mental model assumes everyone has a desired location to live in, and demand for housing is mostly driven by urban amenities. But demand for housing is really mostly driven by employment. If I work in downtown San Francisco, and I like my job and want to keep it, then I'm not substituting towards apartments in LA or NYC, but rather apartments in Oakland or houses in Tiburon or wherever.
For most people who aren't fully remote workers, in order to live in a city you need to find a job there, and the jobs available in different cities can vary based on industry composition. So if you work in, say, the film industry, you probably need to live in LA, maybe NYC, or a few other metro areas. Those effects will drive measured rates of substitution.
Doesn’t it depend on the link between population and housing? Manhattan isn’t Manhattan because of the number of apartments but because of the number of buildings (and all the services and amenities that follow them).
I doubt the link between the two is as strong as you’d think; there may be a few people who don’t move to a city (think metro area, not urban core) due to house prices, but I suspect they mostly just live in worse (smaller, less convenient, further away, more crowded etc) housing. If you build more housing in Manhattan, you might suck people in from Brooklyn or Jersey City, but I’d bet on it lowering prices in Manhattan’s internal housing market, and Greater New York’s, because you won’t suck more people into the metro area.
In other words, I don’t think housing density causes population density; I think population density snowballs itself, and tends to cause housing density as a byproduct.
It is a bit bi-directional, but yes the jobs/amenities/services are doing most of the heavy lifting.
>because you won’t suck more people into the metro area.
Oh you would for sure suck *some* more people into an area. There was a period in my life where I was constantly being offered jobs in DC. But the pay was generally not much more than my current pay (say 20%-40% more), and the $300k house I have, would cost $700k AND be 10 miles further from my job. That absolutely was a huge factor in me not taking any of those jobs and not moving there.
Now you might say "well they will jsut hire someone else", and to some extent yes. But availability/cost of qualified labor absolutely will change corporate behavior about where to locate.
This raises the key point, that I can't seem to find data on --- do people move because they want to live somewhere else... or do they move to a place where they get a job? Your anecdote suggests your pressure to move to DC was purely economic. I suspect MOST people move to places because they have things they want--jobs, schools--not because they want to live there. BUT In order for "induced demand" to be substantial, we'd need a large % of people who move just to live somewhere else. Otherwise, as this comment notes... people's decisions would not be impacted by housing prices, which I suspect they're not.
My guess is it’d be mostly job-related but not entirely; however, people will probably decide whether to take a job based in large part on where it is, and some will specifically look for jobs (or university places) in places they want to live.
It depends on the data. You could ask people why they moved in a nonrepresentative survey sample, match that with existing data, find some predictor of reason for moving, and estimate the total distribution.
I'm not saying it's impossible to estimate, just that it's hard and likely to be very imprecise.
Liking the place and availability of work aren't independent factors (places with jobs have strong economies, which leads to availability of amenities, for instance, but also employers like creating business in places they want to live).
By some people's comments here, we wouldn't need a very precise estimation, just a general sense of how large the group is. I tend to agree with people who say the voluntarily mobile class is very small as a fraction of overall housing demand.
As I type this, I also realize that we could first ask the much easier to measure question of what overall housing demand is from immigrants. Realty data might have that, i.e. moving from out of town without reason specified. If that amount itself is relatively small, we might be able to discount the induced demand argument. (We'd want to consider people from truly outside the economic/geographic area, i.e. not people from the suburbs or exurbs moving in.)
But sucking in people from Brooklyn into Manhattan lowers prices in Brooklyn too, which will potentially suck some people into the metro area. But overall prices still have to fall - if people wanted to live in Brooklyn and were willing to pay current prices, they would already live there.
I think my argument is they’d come from Queens or White Plains, but not Des Moines; the testable claims are that built density (as opposed to population density) wouldn’t increase the “metro population,” defined as the number of people for whom New York is their socioeconomic hub, and it’s metro population that snowballs (I’m less confident about the second half, and not that confident about any of it).
Imagine we built 10x houses _everywhere_. What would it do to the land price? I imagine that the total price of all land would remain more of less the same, but the price in the most popular places (Manhattan) would rise because it would be possible for more people to live there. It seems like it implies that the prices in the less popular locations should drop.
Of course I may be wrong about the grand total remaining the same, after all building more housing will create value.
I agree that if we waved a magic wand and dectupled housing everywhere, land prices would fall in some less desirable locations.
E.g. I live in Queanbeyan, across the border from Canberra. I bought my house here because Canberra prices are poisonously high, and it's close enough to Canberra. Many other people in Queanbeyan commute to Canberra for work too. If Canberra had a crap load of new housing and it was cheap enough to just live there and travel less, demand for housing in Queanbeyan would drop off a cliff.
Everyone is bringing up Tokyo, which was my first thought, so I'll instead mention that London is a place that's experienced quite a lot of growth and while it's pretty dense, it's also not very easy to build new stuff there which is why rich people build big underground complexes under their existing houses. For that reason it doesn't seem like a good example of YIMBY not working.
"For that reason [London housing prices increasing a lot with little new construction] it doesn't seem [London is not] like a good example of [the thing Scott used to say YIMBY is making housing prices worse] YIMBY not working [London is not actually YIMBY paradise]".
I've reread what I wrote about a dozen times and I'm perplexed that two people have both read it to say the opposite of the only meaning I can see it having.
The key empirical facts that go against your story is that physical mobility has declined in the past decade while housing prices have shot up. The tiny share of hyper mobile people you're thinking of aren't nearly enough to move the needle for cities. In general, people move to a city they have no connection to for jobs, not housing.
I think one intuition you're missing here is that allowing for easier construction of housing at the policy level in general shifts housing costs closer to their actual construction cost. And, higher density housing is (to a point) cheaper to construct per unit than sf housing.
I asked an academic about this because I was interested in what the effect taking zoning controls off in areas marked R-60 (single family dwelling) as the local developers and their supporters kept saying it would help develop affordable housing (yet at the same time it seemed like everything new getting built was more expensive than the stuff it was replacing). Locally it does drive up prices. According to my colleague, in the wider DC-metro area it should not because areas in which there were 'old' housing stock have to reduce prices to remain competitive with the 'new' build areas. So Chevy Chase isn't going to get affordable, but mid-South East might see a price drop. At least that's the theory. There's a good example of this in Minneapolis (as they took zoning controls off in 2018). See
Right! I forgot about that, but you're completely correct.
New housing comes in at the top of the market: developers build top of the line expensive apartments. So wherever they build it may see prices increase, since it's a neighborhood with apartments for rich people.
But! When they do that it creates a hermit crab effect. The rich move to the new apartments, the less rich move to the apartments the rich were in, the middle class move to theirs, and so on down the line until you reach the poor.
So building new housing may make a neighborhood more expensive, but it should lower housing prices for the city as a whole by creating more supply at the top of the market.
It's too bad nobody builds apartments pre-rat infested with old plumbing, old electrical, and smoke stains on the walls and carpet. All new housing is luxury housing.
Yeah if you look at that article, almost all the growth in units is in large apartment buildings. The upzoning of SF neighborhoods has had, and will continue to have almost no impact. In most metros there are more than enough brownfields, and dilapidated structures, and commercial/industrial spaces no longer in use to accommodate all the rental units the market will bear.
The unit demand is most filled by 120 unit 4/5-over-1s on major roads replacing run down 1960s commercial strips, not upzoning SF homes. The duplex/triplex initiative is more a political statement than anything honestly.
In principle I agree with you, but in practice it seems unless there's specific money tied to building on brown field sites, developers would much rather build on green sites or knock down family homes to build apartments (also something we've been seeing arguments about locally. Such as why should the county give tax breaks to build apartments next to a metro station when that's one of the most attractive places to have an apartment building?).
>but in practice it seems unless there's specific money tied to building on brown field sites
Sure but there often is. HUD and state/local governments spend a lot of money incentivizing developers.
Developers are big political donors and (secretly) fund most of the housing non-profits out there doing research and lobbying. It is one reason the housing/urban development world's research is always so in love with developers. It is who pays the bills.
I agree often the tax breaks are ill advised, outright graft, or are paying someone to do today, what they would have done 6 months from now anyway.
Meh partly, but there is a lot of local organizing. Additionally I don't think you want to underestimate how much of the "research" people like Matt point to, is funded by developers.
> New housing comes in at the top of the market: developers build top of the line expensive apartments
It doesn't have to. What developers do is a compromise between what they want, and what they are allowed to do: you can force them to build a proportion of affordable housing.
Yes. I work in affordable housing. Huge portions of the overall units constructed have some income restriction on them. basically any project needing money or any special favors/variances from the government will have some affordable housing restrictions on it.
The Department of Housing and Urban Development spends $250 billion a year subsidizing housing (that is not getting into state/local money and restrictions). A lot of them ends up as partner financing on housing developments in exchange for some units being made affordable.
The critical distinction here is that upzoning drives up the price of *land*, not the price of *housing*. A single-family home in a newly-upzoned neighborhood becomes more expensive because the *land it sits on* can be sold to a condo developer, but the resulting condos will be cheaper to purchase than the single-family home was, either before or after the upzoning.
I think this is missing an important piece of the puzzle. There's a big potential difference between the number of housing units in a city and the number of people living there. If Oakland had 4.5 million housing units suddenly appear that wouldn't summon an additional 4.5 million people into existence into the city.
The thing that makes New York a more desireable place to live than some island off the coast of Maine isn't the amount of housing there, its the number of people. And not just the people, the pattern of economic activity too. If you created those 4.5 million new houses in Oakland and just teleported people in randomly from across the country they'd all want to move out immediately because they wouldn't have any job to do in this hypothetical Oakland and the things that make a city a pleasant place to live like theaters and restaurants wouldn't exist either without a big shaking out.
If you just created 4.5 million new homes what would happen would be that maybe a few tens of thousands would move in immediately or lets be generous and say 500,000. Then the people who owned the other 4 million would have to slash rents to try to not stay empty and you would see prices plummet enough to start attracting people from all around the Bay Area driving down prices in that metro. But most people have a job or friends of family that prevents them from moving across the country just to take up residence in some apartment that happens to open up.
" If Oakland had 4.5 million housing units suddenly appear that wouldn't summon an additional 4.5 million people into existence into the city."
I sort of disagree.
Imagine they built 4.5 million housing units in Oakland and it *didn't* summon 4.5 million new people. Then the houses would be empty and the developers wouldn't be making any money. So the developers (who in this case would be regretting their choice to build so many houses, but that's neither here nor there) would lower prices until it was a really good deal.
I don't think you would have to lower prices very much - there are lots of people who really want to live in a city (even a current-Oakland-sized city) and who would do so if the apartments were easily affordable. At some point prices in every other city in the world would have to go down to compete, and we would reach some equilibrium where Oakland was about the same size as other big cities and had about the same price.
There are only about 10 million people in the whole Bay Area and moving is very disruptive. If you had to lower prices enough that half the population of the Bay Area, including the people who have been there long enough to own homes, move to Oakland you would have to send prices crashing, not have them remain at about the same price.
1: You are assuming that the 4.5 million new homes are all built to be expensive. But that's unlikely, and a bad idea. Build 4.5 million low cost 1 - 2 bedroom apartments.
Now a whole bunch of people can stop having roommates, and move into their own place. Or at least stop having quite so many roommates.
2: This cuts the demand for the 3 - 4+ room places, which leads to a drop in price for those
3: "there are lots of people who really want to live in a city". You keep on claiming this. What I consistently fail to see you do is provide any proof that it's actually a true statement.
IMO, people who want to live in Oakland want to live there for the Bay Area weather and proximity to SF. Essentially none of them are going to move to Houston, Phoenix, Philadelphia, or San Antonio (pop 4 - 7 US cities) as an adequate replacement for Oakland.
And they're not going to move to Jersey City or Paterson NJ, either, even though those are #2 & 3 in population density
It's tempting to think that everyone out there is some sort of faceless hipster NPC who only wants to live in Oakland because it's a big city. But in reality, most people who want to live there are doing so for jobs or family or other external factors. In order to attract 4.5M new residents, Oakland would have to be significantly cheaper than other major cities and it would take decades to fill that much supply.
I agree completely. However Scott's position is that density is the big picture determinant of price (at least within the context of an overall housing-constrained jurisdiction with free intra-migration like the USA), and Detroit is an effective counter-example to that.
I don't think Detroit is a good comparison, even putting aside other factors.
Oakland is effectively a SF satellite, while Detroit is an independent city. Housing in Oakland is basically housing in the SF metropolitan area, but Detroit is just Detroit. Considering Detroit as an independent city, the graph in Scott's post that has Detroit on it, puts Detroit at about as much a deviation from the trend line as NYC. So it seems to fit the trend as well as anything else.
I agree that they wouldn't have to lower there prices that much if they built a smaller number of houses... but 4.5 million?
Sure there are a lot of people who want to live in cities. But there are also a lot of cities. Also people have all sorts of constraints like: wanting to live near their family or their jobs or not wanting to move etc.
And 4.5 milllion people is over 1% of the country. Getting 1% of the country to do anything is hard. Getting 1% of the country to uproot their entire life and move to Oakland sounds impossible. You'd have to make the apartments practically free.
Sure if you did make the apartments free and 4.5 million people moved in could you then raise the rents because now you've created a desirable location? Maybe. Although you might have to wait a few years for the amenities, jobs, culture, attractions etc to develop around the 4.5 million people.
Doesn't all need to be new arrivals. If there are ten million bay area residents, who in aggregate have at most two-thirds as much living space as they'd prefer (which seems plausible, given that many are stuck with multiple roommates or homeless, while anyone who somehow ended up with space they didn't want could soon find a buyer), increasing the bay area's overall housing stock by 50% might simply mean that existing residents become less crowded - thus less stressed and more productive.
Ok, that's a true and good point, but if people have "less space than they want" probably a big part of that is that space is expensive. So if building more units didn't "decrease the price per unit" then it wouldn't make existing residents less crowded, less stressed and more productive.
Could be some renter wants an extra ten or hundred square feet, and would gladly pay theoretical market rates for that amount of space, but a unit of the desired size simply does not exist within acceptable commuting range of their employer. http://www.threepanelsoul.com/comic/real-estate Even if prices don't strictly decrease, improving liquidity could mean less deadweight loss, better matches between all the hard-to-quantify quirks of supply and demand.
Overall, though, I figure a Georgist LVT is more likely to be the true long-term fix.
I think you're making a very common mistake here of confusing supply/demand with *quantity* supplied or quantity demanded. (This is very common! we teach students about this in micro 101 because it's so easy to make!)
What you're seeing is that the quantity supplied is correlated with housing prices (true!). But this is very different from establishing that the supply curve--i.e. the amount of housing that would be produced at any given price, and what moves up/down when we regulate/deregulate supply--is positively correlated with price. Figuring out what supply curves look like is a lot less intuitive and requires some high-grade econometrics, which is why economists had to set up a whole commission just to study this particular problem (the Cowles Commission).
In terms of resources for understanding how these concepts are different, a micro 101 textbook will cover this distinction. For the econometrics side of this, I've heard good things about Scott Cunningham's *Causal Inference Mixtape*, although I haven't personally used it.
Is this the concern I try to address with this paragraph:
"Could this be reverse causation - ie New York is very dense because its prices are so high (which incentivizes developers to squeeze the most out of every parcel of land)? Yes, obviously this is part of the effect. But equally obviously, it isn’t the full effect. Stripped of its density, Manhattan is just a little island off the US East Coast. There are plenty of little islands off the US East Coast - Maine alone has dozens - and none of them are as expensive to live in as Manhattan. Manhattan has a few extra natural amenities, like a river and a good harbor. But nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife. This induced demand effect is so strong that it overwhelms the fact that Manhattan has millions more houses than the empty North Dakota plain (or lower-tier cities like Des Moines or Cleveland). So empirically, as you move along the density spectrum from the empty North Dakota plain to Manhattan, housing prices go up."
That's part of it, but the mistake being made in that paragraph is the confusion of demand with quantity demanded. In particular, demand doesn't vary with quantity demanded.
However, the effect you're discussing here is kind of real in a sense. When the marginal utility of housing increases for *other* people, density arguably becomes more desirable for me, which is kind of like the demand curve shifting up. These are called bandwagon goods and discussed here:
In theory, the bandwagon effect could be so strong that parts of the demand curve are upward-sloping. Solutions like this are not, technically, prohibited by the laws of mathematics, just the laws of economics. (And arguably of physics--see paper for conditions where these kinds of bandwagon effects imply the amount of housing in the city would have to be negative).
In practice, this effect exists but just can't overcome the normal, non-weird economics that says "making more of a good makes the prices fall." Economists have spent 100 years looking for these weird kinds of demand curves and never managed to find one; moreover, such a curve would have bizarre implications, e.g. that building new offices providing high-paying jobs would cause housing costs in San Francisco to fall, while a drop in demand (like discovering the drinking water was contaminated) would push prices up.
Thanks for the link on Bandwagon Goods! I'm an economist (I assume are too?) and had somehow missed that potential exception to the Law of Demand. I often talk about Veblen Goods in my lectures - this will be another fun possible exception.
But I think this discussion calls for an analysis of why the bandwagon effect doesn't lead to increased prices specifically in this context. I'm writing up a longer top-level comment that will try to address that.
There's a number of people who would move to New York if the rent was lower, but it's not an inexhaustible number of people. Keeping housing limited means that the price of housing stays high. The only way to get it down is if supply rises to meet demand. We know that there is an artificial constraint of creating more supply in the housing market in these cities, so it's no suprise that supply is not meeting demand. Every apartment you build is a step closer to satisfying the demand that already exists.
I think that's the issue. The demand is there already, building housing doesn't create demand, it just allows the demand that already exists to be satisfied.
I don't even know what to say further than that. I'm just don't get the induced demand argument. You can't lower the price of something by restricting supply, that just doesn't make sense. London and New York have expensive housing because they restrict supply, not because they encourage it.
This is what I was thinking. In a theoretical city where the number of people who want to live there is exactly equal to the number of housing units available, the housing prices would be very reasonable - but also, a new person wanting to move in couldn't get a house at any price.
I think this analysis is mostly good, but it simplifies the demand for big cities too much by assuming it is linear with city size, when it's more likely to be exponential.
A slightly denser Oakland isn't going to make people who like NYC level density move there. A much, much denser Oakland might, which is where you would start to see the rise in price.
Essentially the "less parsimonious" answer you scorn is probably more accurate
Also what I was thinking. I often hear people say "just look around at all the construction, clearly we're building housing and it doesn't bring down prices!" But generally the population is increasing more than the new units of housing can support. Building even less would just exacerbate that.
> There's a number of people who would move to New York if the rent was lower, but it's not an inexhaustible number of people.
I think the idea is that if you could build enough to housing to let all those people move to New York, it would become an even more attractive place to live and there would be another set of people wanting to move there if the rent was lower.
I get that, but if they're moving there because the rent is lower then building all that new housing lowered housing costs! And if the new demand causes housing prices to rise, then that demand will disappear, because the rent isn't lower anymore.
I think what one also needs to consider is that $1 is in a sense worth less in NYC than in North Dakota – everything is more expensive in NYC but people also have higher incomes. (I think similarly, 1€ is worth less in Germany than in Latvia. It must be like that in order to balance supply and demand of things from Germany and Latvia, or something like that.)
So, I wonder what that housing price graph would look like if you corrected for that effect.
There's data out there for median percentage of income spent on housing by metro area. I don't have anything on hand but IIRC New York City is still comfortably on top.
Also, there's a whole complex of tradable and non-tradable goods and services. You can buy an iPhone from Apple's website and the price is the same anywhere in the United States, but if you want to buy housing in New York City, then there aren't any non-NYC substitutes. The result is that there are some goods that are sold at a national (or even international) price, and others where there are big geographical differences in price. That makes PPP calculations difficult. If you double your income and treble your housing costs by moving to NYC, housing might go from a third to half your income, and you'd still be better off because your non-housing expenditure is mostly on tradable goods (or on food, where the pricing is higher in NYC but not to the same degree).
Price of a house is a function of 2 things: price of land and price of constructing a drywall box with a toilet. Upzoning Oakland definitely wouldn't drive the price of land down, but it would split the land price more ways. So instead of 1 person paying for a 5000 sqft lot, you could have 10 people paying for that same 5000 sqft lot. Even if the price doubles, the price per person goes way down. The cost of construction is higher for building tall skyscrapers vs building single story drywall boxes, but the difference is on the order of 1.5-2x, so as long as the cost of land makes up more than half the cost of your house, then you have margin to decrease that price by building taller. There's probably in theory an optimal density given the supply/demand and construction costs for each parcel and in Oakland, the optimal density is clearly much much larger and best determined by the free market, not city bureaucrats.
The price of housing is strictly determined by supply and demand. Your definition ends up being pretty circular - given fixed construction costs, the price of land rises to equalize supply and demand. In a lot of places, construction costs are irrelevant because new housing is basically illegal to build. And in others, the equilibrium price of housing is actually less than construction costs, so existing houses sell for less than they cost to build, and no new housing gets built. Your distinction is mostly relevant only when it's possible to build new housing, and you're trying to determine how much new housing to build in a certain plot of land.
It seems to me that the "density increases prices" is not a direct effect, but part of a feedback loop. People are not attracted to more people per se. But to the things those people create (jobs, parties, theaters etc. ). If you just build a lot of houses you won't immediately get these effects, so you can't turn a small village into New York overnight. If you build new houses you get a temporary drop in prices. Untill the new people that live in these houses have allowed for more development to occur (they build a new buisiness or they are customers for the new theater). After that prices increase again. If you then build new houses the prices will lower again. So constant development of houses result in lower prices.
This is what I was going to post. You have to consider the time dimension. Build a huge number of houses and prices will crash for a long time, but eventually recover. In practice, though, they will be built at a slower rate corresponding better with the increase in amenities, and the price won't change too drastically up or down over the short term.
Yes thank you! Except I'm not sure about your last sentence. Call the short term price-lowering effect "dampening". Could you not have perpetual dampening from constant development of houses, while also seeing a longer term trend of prices going up?
I think there are two forces affecting prices in opposing directions, and you need to know the numbers to know the overall effect. If we build new housing at an extremely.high rate,.we should be able to outpace the delayed effect of making the city more desirable. That's the scenario described by your last sentence. But at a relatively lower rate of building, we'll be making the city more desirable faster than we can eat up demand .
The YIMBY interpretation of the positive association between price and density is that virtually every city in the country adopted a strict zoning regime sometime in the mid 20th century, and the degree to which these laws caused a supply squeeze is mediated by density.
To falsify that we’d need a dense city to drastically liberalize development such that supply spikes upward and see what direction prices move. There aren’t really enough examples of this yet. Outside the U.S. there’s Auckland, which seems to support the YIMBY thesis. But not much that qualifies domestically.
How much liberalization do the YIMBYs think this would take?
In my theory, it would need to be enough to absorb the entire country's housing-seeking population, so maybe a number in the tens of millions of houses.
In Auckland, it took upzoning about 3/4 of the core urban area from single-family. Multifamily housing starts spiked and rents were flat six years later while they rose in the rest of New Zealand.
Six years isn't a long time for induced demand to operate, though. In the short term you get intra-city movement which lowers prices, but in the long term you get inter-city (or inter-national) movement which may raise them again.
Build fifty thousand new housing units in Auckland and you've got a hundred thousand new people moving in (whether from Palmerston North or China) while prices basically stay flat. But now Auckland is a bigger city, it has a greater share of the New Zealand economy, which means it's even more likely to be the destination of choice for people who might otherwise go to Christchurch/Wellington (or even Sydney/Melbourne).
I like the considerations of time scales here, it seems like the missing piece of the puzzle. Bringing housing on line would intuitively drop housing prices locally in the short term, which allows a segment of people willing to rent/buy at the new price but not at the old one to move in. But then it's a bit more believable that increased economic activity due to density and size would build up over time, and shift the demand curve with it.
My general impression is that most New Zealanders who would want to live in Auckland already live there (mostly people who don't really want to be in New Zealand but can't yet afford to live in New York or wherever).
Auckland seems like a weird example because Auckland also competes with Sydney/Melbourne/Brisbane - a pretty significant number of NZ-ers who work in Australian capitals.
If the rent decreased in Auckland but pay increased in Sydney, many would-be Aucklanders will still work in Sydney.
Who is this "house seeking population"? Faceless hipster NPCs?
Obviously you wouldn't move to another city just because it was hip and cheap. You live in the Bay Area because you have friends, family, a job, and deep roots. Maybe other people are mostly like you and this "house seeking population" is actually rather small and insignificant?
Possible typo: “ But if becoming just as big as Manhattan or London would make Oakland more expensive, shouldn’t we assume that a little step in that direction would make it a little bit less expensive?” Shouldn’t that “less” be another “more”?
You lost me at "So I don’t understand why Matt believes that building a few new apartments in some city - a very small move along that spectrum - would do anything other than make local prices go up." How would they make prices go up? The would just accommodate the latent demand (unless those newcomers have somehow a stronger preference for city housing and willing to pay in excess of existing ones). Of course, one may observe an average increase because the new construction is probably of higher quality/more luxurious, but presumably you want to look at quality-adjusted prices.
I think your mixing up the agglomeration effects of density, which is what induces the demand, and the housing supply. You can't just build a city and expect people to move in, China has tried that. But if you have the agglomeration effects of density and shortage of housing due to artificial constraints, which we have all across the US, then you get dense areas with high housing costs.
>Reporting in 2018, Shepard noted that "Today, China’s so-called ghost cities that were so prevalently showcased in 2013 and 2014 are no longer global intrigues. They have filled up to the point of being functioning, normal cities".
Tokyo and NYC both attract tons of new residents But Tokyo's housing rents have been stable, while NYC rents keep rising.
Why? Tokyo has permissive housing construction laws. NYC makes building new housing almost illegal.
Yes, dense cities are attractive, and that makes them get more dense over time. But it only makes them more expensive if you forbid new housing to keep up with the new residents.
Should increasing the supply of housing not induce demand until that supply had been soaked up and the new people have started doing exciting things that induce demand?
So as long as the increased supply keeps ahead of the demand then housing prices shouldn’t go up, but go down by some proportion
There's two things going on here: confusing shifts in demand with movement along the demand curve, and getting causation backwards.
You're assuming density causes prosperity, rather than prosperity causing density. There are ways the former can happen, but the bigger thing is that, for a wide range of historical reasons, you can make a lot of money in NYC and SF, so lots of people want to live there, so they get very dense. This is the prosperity shifting demand right, so at any given price, more people want to live there; this drives prices up, and they go higher the more fixed supply is.
If you built a bunch of housing in Oakland, lots of people would move there because it's cheaper, which is movement along the demand curve; it's still the same number of people who want to live there at any price. Now, it's possible that the increased number of people living there makes the city more prosperous (this is the phenomenon of induced demand), which would shift demand right, but there are way more differences between NYC/SF and Oakland than just the density, so I don't think it would shift demand enough to offset this. In particular, if it's just a small increase in small, it's also a small increase in density, so there's almost no shift in demand (but there is movement along the curve).
I think Scott is well informed enough about economics to recognize the difference between shifting demand and shifting along demand. I think what he's arguing is that the first effect, density causing prosperity (in both increased productivity, and increased desirability), is locally greater than the effects of shifting supply along the demand curve.
I agree that he's probably wrong about that, but I don't think it's a simple economic fallacy.
If the argument is, "Increasing supply COULD increase prices for that reason," I'd agree; I think that's not what will happen, but it's economically possible. But the argument is, "That IS what would happen, and I don't see why that wouldn't happen," which begins to look like simple economic fallacy to me.
Strikes me that the missing factor in this analysis is jobs/industry.
Consider two scenarios: in one (Scenario A), a city permits a bunch of new apartments, but no new offices. In another, (Scenario B) a city permits a bunch of offices but no new apartments.
Obviously the simple existence of an office doesn't guarantee a tenant...but it doesn't hurt (more available offices means it's easier to start a new business). Lots of offices means lots of office workers, means lots of people with professional salaries hunting apartments...I don't think it's crazy to argue that apartment rent is going to go down in Scenario A, and up in Scenario B.
And of course none of these cities appeared from nowhere. You start with a favorable port (usually). Some businesses supporting the operation of the port; then some industry taking advantage of the port; now services for all the people working at that stuff; now corporate headquarters for the growing businesses here. And so on and upward as the network value of the business and industrial cluster goes, achieving true takeoff when you get a New York or London style global financial hub, or a San Fransisco tech hub.
There's clearly a back-and-forth dependence with housing there; the business cluster can't grow if it can't find workers. But I'd argue the housing cost calculation isn't more housing -> bigger city -> more desirable -> higher prices. It's more like industry cluster -> more industry -> more desirable -> higher prices. And critically, that suggests that at any point in that industry network effect takeoff you can add new housing at a rate that will bring down the price of an apartment, because the new apartments aren't the critical factor in driving the business cluster value spiral.
Or to put it another way: NYC isn't the most expensive place because they built the densest housing, NYC is the most expensive place because of the network effect of being the business and financial hub of the richest economy in the history of the world, coupled with regulations on housing artificially restricting access to living near that business and financial hub.
I agree with most of your reasoning, but it's important to keep in mind that the prosperity of an industry depends on its ability to attract workers and pay them less than their productivity. Once housing gets more expensive and they have to start paying their workers more for them to be willing to live in that city, industry growth slows down. If you believe there's not just pent-up demand for urban amenities, but also pent-up labor demand, where firms would hire a lot more people if wages came down slightly, then that could lead to building a bunch more housing causing prices to barely budge. And if agglomeration effects and urban amenities increase by a lot because of that increase in housing, you could even see housing prices increase.
Isn't the Tokyo example just what happens when you exhaust the pool of Japanese people who want to live in big cities? (Or maybe not exhaust -- my guess is that Tokyo is more expensive than random Japanese small towns -- but the gap is not as large as in the US because the fraction of the population wishing to move is smaller). The reason for this is that Japan's population hit a peak at some point in the late 21st century and has since been shrinking; I think if every new Japanese generation was larger than the one before it prices in Tokyo might still be soaring.
I am so old, I a) remember when Tokyo had the craziest prices anywhere. When their "Pentagon" sold its main building there and thus could cover half of the defence expenditure. b) I personally met Japanese in London 1992 who told me about their "rabbit-houses". The Japanese (and West-European) population may shrink; their demand for nicer, bigger homes is still far from satisfied. 100 million having 15 sqm/each need LESS housing than 50 million each insisting on 40 sqm. (Germany 1991: 35 sqm - as is Portugal now, as is Hamburg now. Germany 2022: 48 sqm).
You're assuming that cities want to decrease prices. Palo Alto homeowners only care about 1 thing in life: the price of their home. If they could drive up the price of their home by building more, they absolutely would do that. In reality, they know that building more homes would mean more competition for them and also nicer, newer competition. Who would buy a 1200 sqft home built in 1950 when you can get a nice new 2000 sqft townhouse for less?
Oh, I'm aware. I'm shopping for a used California shitbox right now for exactly this reason. But my point is that in an efficient market, you wouldn't have any incentive to do this because there are people out there who are much better at developing than I am, so any improvements I can make to the property are vastly less efficient than the improvements someone else can make. At equilibrium, the price of a new townhouse should exactly equal the value of the land + the cost of construction. But in reality, the markup is significant because the permits themselves have enormous value.
I’m no economist but it seems there are a few things going on here:
1. Constraining supply when there’s high demand increases prices: this is the main YIMBY argument and I think it makes sense.
2. Currently, dense places are also expensive. Sometimes this is used to argue density doesn’t decrease prices, but surely part of it is about a third variable, namely demand. Again I think this is the standard YIMBY retort to the observed positive correlation between density and prices: nyc isn’t expensive because it’s dense--density and cost are both responses to demand.
3. Demand is driven by a bunch of things, likely including a high density of people (extent of the market, etc). I think this is largely the point you’re making here, right?
I agree that the relationship is probably complex because demand isn’t constant and (possibly) is driven in part by supply. But I think even that could be an oversimplification. People don’t just move to dense cities because they have lots of housing units, they move in the search for opportunity (economic and otherwise). So building more supply per se doesn’t necessarily increase demand: in large part it meets existing latent demand, as per 1 and 2. But to the extent 3 is true, then it’s probably also true that: increasing supply satisfies that demand, increasing number of people, which could in turn increase demand as per increasing extent of the market. Which I think is the feedback loop you’re identifying.
I just don’t think it’s a clean relationship or clear feedback loop though: increasing housing units doesn’t predictably increase demand, presumably--otherwise non-superstar cities like Detroit could just build more housing and would see increased demand and economic growth; but that’s not the relationship we see (afaik). This implies that a large part of demand is independent from (not caused by) housing stock, which is also what a YIMBY would argue, I think. Which means that to the extent supply is limited and demand is high, building more supply is important for satisfying that demand.
But I don’t know. I’m just speculating and this admittedly feels difficult to tease out empirically. It’d be a start to draw some DAGs, though.
If you read Matt's piece, it's quick walkthrough of "standard econ says if supply goes up and demand stays put, prices go down. Empirical work confirms this is also true for housing."
Alexander seems to have an intuition that this is the reverse of what's actually happening and thus put together this post.
Maybe I'm crazy but I thought I remembered an old Krugman paper on the positive network effects of large urban areas, written to explain why the trend of suburbanization was reversing in the 80s or 90s.
Like, there's nice things about SF and the Bay but most people want to be there for the tech scene. If you're a startup, it's worth paying $80k/year for the founder to live in SF because all the VCs and talent is there. Let's say that benefit is worth $100k/year over living in North Dakota. Alright, so if you build 20% more housing and 20% more startups and VCs move in, say decamping from Denver, then regardless of what the rent is, it's now worth $120k/year for the founder to live there because there's more VCs and more talent and more support there.
Like, I'm sure I read this in an old Krugman paper, I cannot find it, but if the primary appeal of a city or location is the network effect for a specific industry and/or general networking effects (like dating options in NY vs North Dakota) then increasing the supply can easily increase the value more than it increases the supply.
> This is a coordination problem: if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work.
There's a much worse problem involved: everyone who already owns property in a city doesn't want the property prices there to go down. "The city" might want that, whatever that might mean, but individual home owners don't. Nobody who bought a house for $1,000,000 wants it to cost $500,000 after the housing supply in the area doubles. All those NIMBY talking points about the crime and whatnot mask the real problem: they don't want to lose money because their house price decreases.
This is not a coordination problem and you got the incentives exactly backwards.
I don't see an ethical way of solving this problem, in a way that that isn't like, "I want to move into your city but the prices are too high so the people in your city should have half of their wealth wiped out so that I, not a resident currently, could move in".
That is, sure, building a megacity on the plains of South Dakota would work and then the property owners in other megacities complaining would look just as ethically unfounded as people complaining about NIMBYs. I think that it's a good idea.
You are delusional if you think the crime/QoL concerns aren’t the main concerns for most NIMBYS. I would bet an infinite amount of money that on a per capita basis the people objecting to the new apartment building on the end of the block are more concerned about that than property prices. You just couldn’t be more wrong about this.
The QoL concerns are super real, there is a huge difference in neighborhoods outside walking distance of low income housing and those within walking distance. That is practically 60% what the suburbs are about.
I'm not saying that crime/QoL concerns aren't real.
I'm saying that if you entirely eliminated them, by, say, targeting "affordable housing" at middle class families without any special exceptions, you will still have a pushback from the property owners when you ask them to support a policy that would wipe a million bucks from their net worth overnight.
There are obvious ways to not bring meth addicts to an area while building it up, there's no way around this fundamental issue, which is why it is fundamental. At this point I'm beginning to suspect that this is by design, that everyone on the ground is a NIMBY because of this reason, but "YIMBY"(NIMBY)s specifically include methhead provisions in their plans to give NIMBY(NIMBY)s a respectable reason to resist their overtures, so nothing ever happens.
>There are obvious ways to not bring meth addicts to an area while building it up
Yeah but the government policy mostly doesn't interact with them because the government policy is generally to demand affordable housing be a decent slice of any project that sees government dollars.
It's not clear that falling home prices are bad for owner-occupiers. It reduces your net worth, but it also reduces the amount of wealth you need for housing, and which is tied down in it. If you don't plan to move and don't have children, it doesn't affect you at all.
If you want to eventually save some money and move to a bigger home, or if you want it easier for your children to buy homes in the same city, falling home prices are good for you. Home sizes generally gradually increase as a society gets richer, so it should be a significant benefit to many people if they can buy additional housing space for less money.
It's bad for you if you are looking to move to a smaller home (but you're most likely to want that when your children move out, but they need to be able to afford homes of their own for that), or if you're looking to move to a different town.
It's also good for net tenants (people who use more real estate than they own), bad for net landlords (who own more real estate than they use).
A particular problem is that cheaper housing in a city is bad for anyone who considers moving elsewhere at some point. But this is precisely a sort of tragedy of commons between cities that a higher level of government can solve. If a national government forces every city to have policies that reduce housing prices, then the reduction in the value of your home is compensated by that you can buy a home for less money, even if you move to a different city.
You're missing the basic tradeoff of a city: the closer to the central business district, the higher the prices. The bigger the city in total population, the higher the price in the central business district, because there are more people fighting for that desirable place with the best transportation network access to everywhere else. This central area is expensive because of demand, but also because of physical constraints, skyscrapers are inherently more expensive than wood-frame buildings. The higher the skyscraper, the more costly it is. New housing will never make Manhattan affordable.
Where there is room for affordability is on the periphery and on transportation lines going into the central business district. This is the main lesson of Tokyo. One might look at Tokyo's central business district's prices and tiny expensive apartments and conclude market urbanism is a failure to achieve anything. But along the train lines that go into Tokyo, things get rapidly more affordable. YIMBYs should still support bigger skyscrapers in central business districts, but they should only look for affordability further out in 6 story buildings within walking distance of high-quality public transit lines.
So if NYC upzoned single family homes in the periphery burrows and improved transit, housing in Manhattan would probably get more expensive, even as there was increased affordability for the area from which one could commute into Manhattan. It's possible in the short run we might have uneven growth in demand that could continue to outstrip supply. Trains can move lots of people, cheap 6 story buildings can accommodate lots of people, and even if the ocean blocks expansion in one direction, that still leaves a half circle that grows the area people can live in quadratically. There's lots of capacity to meet demand to live within commuting distance of a desirable city center if there's political will to build transit and allow housing.
Edit: After reading other responses, I think I might agree. It's unreasonable for YIMBYs to expect small increases in housing supply to necessarily decrease short-run prices. Achieving affordability would be a long-run project. Short-run expectations should be heavily managed.
So, a good plan for cities might be to put in light rail (or other equivalent transit) going out in multiple directions, and aim for dense housing near every stop?
Yes, absolutely. Increased high-capacity transportation has to be a part of the conversation. Ideally there would be tolls to maximize car throughput and expansion of trains and buses that scale much better than cars.
Lots of European cities are like that. It's pretty great. You can be a half-hour commute from the city centre whilst living within walking distance of the countryside.
Why do you think that upzoning in the periphery would increase housing costs downtown? Seems like the only way that would happen in a big increase in induced demand. Otherwise, people who were previously living downtown would decide to decamp outwards, lowering downtown demand and thus prices.
I think it depends. It's definitely possible what you're describing could happen. It's especially likely if there was an extreme and artificial scarcity propping up prices that is suddenly allowed to relax. It's also possible that as the city grows outwards its amenities, job opportunities, and prestige would also grow, attracting new immigrants. This increase in desirability of a city could happen even faster than development. If this happens there will be more intense bidding wars for the most desirable parts of town. I don't think it's a given, but YIMBYs should embrace this possiblity and recognize that it's a good thing for people to have access to such a vibrant city.
Density is not a destination or a characteristic of an area (and it's unfortunate we talk about it that way in Yimbyland).
- The more pedantically correct Yimby claim should be "increasing supply elasticity in the housing market, via regulatory reform, will reduce housing prices relative to local incomes and blunt price increases during economic expansions as well as set up loca housing markets for bigger price reductions during recessions (because we let developers build themselves off a cliff at the top of the market)."
Density doesn't drive prices.
- Prices drive density (within the constraints of the local land use regime), and prices are driven by demand. Yes, if we allowed denser construction, which definitionally would mean a reduction in per capita land consumption, ///relative/// prices would decline and more people could move in to a high demand area...but now we're talking about more people moving in to a high demand area ///because of the decline in relative prices///.
All cities are not perfect substitutes for each other for prospective residents.
- There surely some people doing the digital nomad thing or choosing which McKinsey office to work from in their late 20s, but I see no evidence that this population is large enough to have any appreciable impact on housing prices. Folks' personal and professional networks aren't perfectly distributed across all major cities.
This seems to me the key missing point from Scott's article, as mentioned by a few commenters here: "There surely some people doing the digital nomad thing or choosing which McKinsey office to work from in their late 20s, but I see no evidence that this population is large enough to have any appreciable impact on housing prices."
The work-from-anywheres are numerous enough to move the needle in Vail and Tahoe, but not in Oakland (also, the WFH revolution led to an exodus from the densest places, which cuts against Scott's density-as-amenity hypothesis).
What Scott is missing is that "density" isn't one thing. To a first approximation, it's comprised of JOBS and HOUSING. These are complements. If the amount of JOBS density increases, the price of HOUSING increases. If the amount of HOUSING density increases, holding JOBS constant, then the price of HOUSING falls.
This isn't at all counterintuitive and comes out of the canonical Alonso, Muth, Mills model (although without my cartoonish names).
Addendum: A lot of people in the comments are saying "but Tokyo". An equally good rebuttal is "but Cleveland". Metro Cleveland is a lot denser than the average spot in America, and its wages are just below the US average. But the balance between jobs and housing is so out of whack from job loss that housing is now quite cheap (about 2/3 the national avg).
Economics PhD student here, and first comment here.
I think Scott's basic framework is mostly right, but could use some tidying. His starting graphs basically depict a supply curve -- a positive relationship between prices and quantity, because if prices are higher then developers build more houses. But he's confusing a shift of demand along a supply curve with a shift of the supply curve itself.
Here is what I think Scott is trying to say. There is a simple supply and demand model that YIMBYs appeal to, with a simple result that pushing out the supply curve increases quantity and lowers prices, hooray. Scott is saying that there is a knock-on demand effect, what he calls "induced demand" and what activists call "gentrification" and what economists call "endogenous amenities".
This is a thing that definitely exists, but the relative sizes of the effects will determine what the end result is, and we also have to bear in mind that development occurs in response to changes in price. And the studies that Yglesias points to are essentially concerned with precisely disentangling and measuring these effects. The results generally say that the supply and demand curves are such that the price ends up lower overall, due to a combination of the slopes of the curves and the sizes of the shifts. We frequently do observe increasing prices and development together, but this is because the increase in prices causes development, which then (as the studies show) causes prices to be lower than if development had not occurred.
So that is why density does not cause price increases -- increases in price cause development, which causes a counterfactual reduction in price, which outweighs the effect of the endogenous amenity of density.
"that is why density does not cause price increases"
But... it clearly does. Several different economists have said this to me, and I still can't make head nor tail of it. How can you reconcile your claim (or the claim of certain published papers) with the brute fact that in every place in the world, higher density is correlated with higher prices?
Is the answer some fancy definition of "cause"? If we said instead: "increasing density is likely to lead to higher prices," would that be better?
No, it is the standard definition of cause. The positive correlation of density and prices is the supply curve. Developers build houses where they will get a large return. It's a causal relationship, but it's not the one that we are concerned with when we talk about NIMBYs and YIMBYs.
If we change policy in a YIMBY direction, this is a shift of, not along, the supply curve. Now, for every potential price, there are more houses. Because there is a downward-sloping demand curve, the actual observed price goes down. I'd draw a picture for you if I could.
It is quite common that people basically just don't buy that. But it is one of the most important occasions where we need to remember that correlation and causation are different. People see that a neighborhood has skyrocketing prices and new construction. But the prices are causing the construction, not the other way around. Imagine that same neighborhood with skyrocketing prices, but no construction is allowed (the supply curve is a vertical line). The price increase is coming from increased demand, and if we prohibit construction then the price ends up higher than it would have been.
But wait, there are upper income liberal urban cosmopolitans who like density and nightlife and avocado toast! Yes, there might be a third force as Scott discussed; the shift in supply will cause greater density and then attract rich people who are willing to pay more and this creates an additional demand effect. Yes, this is real, but it is smaller than the other effect. When you put them together, the price goes down on net.
It's tricky because rich people moving into the neighborhood could indeed be the cause of the initial price increase! And if we build more houses, this attracts more rich people! But building houses is not the root cause of the original rich people (gentrification happens for a variety of reasons), and although it can attract more rich people, this ends up being a small effect.
Thank you for helping to clear this up. There's way too many people who don't understand how the laws of supply and demand apply to housing because too often they see the effects of the housing supply curve. Have you seen the working paper "Folk Economics and the Persistence of Political Opposition to New Housing"?
Thanks, I appreciate this effort. But I found it completely unconvincing. The reason is this one sentence in the middle: "...the actual observed price goes down."
But, it doesn't. That's the whole point of Scott's basic observation. It is blindingly obvious to anyone that in general, with greater density, the actual observed price goes up. Like, always. I'd like to see one, just one nice clear example of a price actually going down with increased density. (Not that one counterexample would be enough, but it would be nice to have one!)
So you didn't actually address the contradiction that I asked about:
How can you reconcile your claim with the brute fact that in every place in the world, higher density is correlated with higher prices?
All you did was deny my brute fact. And... that's nonsense. My brute fact is true. If you can't give an explanation that actually takes account of this basic fact about the world, then *your economics isn't working.*
The price goes down relative the counterfactual where the new construction didn't take place. That change is just swamped by the overall change in pricing in the area.
It's like if a famer goes to the market and see that egg prices are through the roof because of a massive shortage. So next week he shows up with a couple dozen eggs that his hens laid, intending to sell them. But this week it's Easter so even more people want to buy eggs this week and prices are even higher than last week!
Your "bare fact" is the equivalent of yelling at the farmer that by bringing his eggs to market, he's increased the demand and driven prices higher. (Perhaps he told his friends he'd be bringing eggs and they got excited?) But that's absurd; prices are higher because demand went up.
And if you want to argue that the effect of the farmer's friends being excited for his eggs was a larger effect on demand than Easter, then we've moved from "bare facts" and onto empirical questions, which, to return to housing, were addressed in papers discussed higher up on this thread.
This is the contribution of various recent urban economics papers. To show that the causal effect goes one way when the correlation goes the other way is difficult, basically how we do this is with some kind of natural experiment. Of course it is very easy to do bad natural experiments and very difficult to do good ones.
So how do we know that the quasi-experiments used by these papers are any good? Well, it's difficult because it's highly technical. Pennington argues that residential fires are as good as random and empty out lots that can then host high-rises. Asquith et al and Li say that the timing of when regulatory approvals come in are as good as random and so we can look at the time series of local prices around the time that new buildings are finished. In these papers, economists generally also include a bunch of stuff as controls and think carefully about the kinds of biases that can manifest and how they can be mitigated.
Finally, we can make an appeal to the notion that the research and researchers have been validated by the field. The Asquith et al paper is published in a good journal. Li's paper is published too. Pennington's paper is not yet published, but it is the capstone to her PhD that got her a job at the Census Bureau, and will likely be published in the next year or two.
I don't love appealing to authority, but experts in the area using the best methods available have found that yes, prices go down after construction. This is fairly intuitive for most people when considering other markets, if something becomes less scarce then naturally the price goes down. But for some reason it is not intuitive when it comes to housing.
Thanks. It would be nice if there was a nice, clear example that anyone could understand without fighting through a thicket of potential confounders. The fact that I've asked several economists, and none has been able to give me one leaves me... curious (e.g. Scott Sumner over at Econlog, who also responded to this post in an unsatisfactory way).
"But for some reason it is not intuitive when it comes to housing." - yeah, that's because intuitions come from experience, and the experience of every person on the planet is that denser means more expensive.
I'm willing to believe the examples found in those papers. But don't they seem to you like a couple of rather small counterflows in the middle of a much bigger trend? If it takes sophisticated analyses using 21st century data techniques to spot this phenomenon, then it doesn't seem like it's a very general law, does it? The general law is: density correlates with price.
We're unlikely to get this sorted out here in this thread, but I suggest this to you: if you really don't love appealing to authority, then find a way to communicate it better. Because nothing that's been said here (or at Econlog) comes remotely close to changing my mind. Scott Alexander will speak for himself, but it sounds like he sees the same things that I see. You have people here who will genuinely listen (but don't have time for an economics PhD). It would be cool if you, or someone, could explain it to us.
"But don't they seem to you like a couple of rather small counterflows in the middle of a much bigger trend?"
The critical thing is the nature of the mechanisms. If governments consciously work to build housing, it mitigates the pressure on prices from other things (increased demand for housing due to employment access and amenities).
Look, the best way to communicate this whole thing is with a supply and demand graph. You can show every dynamic that we are arguing about. The fancy research basically just confirms that the insights from basic supply do apply in this situation.
"It would be nice if there was a nice, clear example that anyone could understand without fighting through a thicket of potential confounders"
Here is a thought experiment. Imagine that suddenly, every person on earth owned ten houses, without changing relative geography due to a discovery of ten extra dimensions or something. What would happen to the price of houses? Would everywhere suddenly become as expensive as NYC and London? No, houses would no longer be scarce, they would be practically worthless. We are looking at two different points on a downward-sloping demand curve. If the amount of housing in the Bay Area doubled overnight (again, due to magic) then it would decrease prices because housing is less scarce. If you want to argue that this would increase prices, then you have to argue that there is a huge number of people who strongly prefer high density and would be willing to pay those prices. But... that's absurd. People mostly live in cities because of job opportunities. It would require demand curves to slope up, for people to like higher prices, which happens in rare cases but mostly if an economist observes this it means they messed something up in the model or the analysis.
But how does this thought experiment differ exactly from reality, where there is a strong correlation between density and prices? Because the thought experiment is about what would happen if the houses appeared due to something happening outside the market (God, or the government). In the real world, some places are highly valued for one reason or another, and those are the ones that attract profit-maximizing housing developers. If we could do something to lower the production cost of housing -- like getting rid of zoning and regulations -- then this is moving the supply curve, which means we are moving to a new point on the demand curve, just like in the thought experiment which means quantity is increasing and price is decreasing.
I'm not sure that the demand-increasing effect of density is big enough to make a substantial difference in practice. E.g. if lots of housing, enough to constitute a large fraction of the total, were built quickly in an already large city, then the opportunities arising from density would go up, & probably so would demand. But on the margin, the effect of each unit of housing on the opportunities arising from density is minuscule, so that that marginal upward effect on prices would probably be outweighed by the downward effect of normal supply & demand. (& of course, if a similarly enormous amount of housing were built quickly in a small city, it probably wouldn't cause demand to increase in the same way because there would be no guarantee that enough people would move there to generate the opportunities produced by greater density.)
My guess is that price as a function of housing supply would follow a relationship along the lines of Price=M*Quantity+B, where M is negative but B increases enough to offset that if the population density goes up by a lot (this depends on other things besides quantity supplied, like the local economy, so that New York, a typical small city, & the empty field in North Dakota can't be modeled as two points on the same line).
Good piece. As a longtime gentle YIMBY skeptic, I've always been a little bemused that the same crowd insisting that the rental market is 'just supply and demand' would be horrified if you said 'immigration obviously reduces wages, don't you know about supply and demand'. They would rush to explain to you that no, wages are much more complex than an Economics 101 understanding of supply & demand, that the new immigrants create demand for new goods and services and so actually create more jobs by their presence, and so on. I would personally agree with this pro-immigration argument, I just think it's funny that to the YIMBY crowd simplistic 'supply & demand' explains real estate prices but doesn't explain wages.
Cities are huge agglomerations of network effects- they're valuable precisely because there are more potential employers, romantic partners, friends, business connections, activities and more- it's quite possible that a higher population makes the city more valuable and so raises rents! (And wages). I think Devon Zuegel had a post about this from a few years ago. Anyways, 101ism is a bad way to understand complex systems
IDK, as a YIMBY I'd never claim that immigration directly raises wages... The evidence is very clear that migrant workers work for less than natives in many industries. Remember not too long ago when there was a massive shortage of migrant farm workers and native Americans couldn't be persuaded to do the work...?
I'm still pro-immigration; it's good for the economy in a thousand ways and a moral good to boot.
Letting people escape grinding poverty and murderous regimes like the one in Venezuela is a moral good; letting people move freely (within reason) around the world in pursuit of economic security is a moral good.
I think the basic problem is that you're ignoring other covariates in your regression, most importantly the demand to live in a city. As a result, the regression coefficient is incorrect. This is a well-known problem in statistics, called the omitted variable bias (https://en.wikipedia.org/wiki/Omitted-variable_bias). I believe if you account for the other variables then the regression coefficient will be negative as expected from economic reasoning.
This is why marginal analysis is important in economics. While comparing two situations many variables will be different, so it isn't clear exactly how the outcome is related to one variable in particular. In marginal analysis the two cases are pretty much the same and the only difference is the marginal change in one variable. So any change in the outcome can be attributed to that variable.
I think the answer to this hugely depends on your internal mental flowchart. This post seems to suggest a model of:
housing -> cool place -> high prices
Which I think buries the step that is:
housing -> support for cool amenities -> cool plate -> high prices
This in turn allows for some finer grained analyses: If Norman, OK (the lowest population density city in the US) built even a moderately large amount of housing, it probably would crash housing market there - no matter how much housing there is, it's not going to experience a housing boom. On the other hand, Austin TX strikes me as too far down the path of becoming a "cool city" to avoid price growth by building housing. The marginal person probably avoids moving to Austin at this point because it's too expensive for the existing amenities, rather than because there's not enough to do there. And finally a city like NYC or SF is probably already "too cool" to realistically discourage interest by preventing construction.
Oakland then becomes a bit of a weird case - it's close enough to a major high cost area that if it got cooler it really might start growing new amenities (restaurants, better (perception of?) public safety, better public transit, more people you know, etc.) and the increased amenities might in turn drive increased demand. But it's not really cool enough that its growth is locked in, at least as far as I can tell.
I think the "ground truth" here is probably somewhere between your and Matt's position - construction really seems to have a local, short term, effect in raising prices; construction is a key element in becoming a successful big city, which is correlated with higher prices; and the exact trajectory of a city between "low cost, mid sized city" and "high cost megapolis" is probably determined by some amount of coordination problems that are fairly opque.
I think you're dramatically overstating the influence of amenities on people's housing choices. The real issue is jobs. If you can't find a job in the coolest city in the world with affordable housing, you won't last long there. Of course, increased housing boosts labor supply, likely increasing the number of companies employing people there, but not enough to raise wages and thus willingness to pay for housing.
I don't think it's obvious that there is any agglomeration effect from the data presented.
Yes, there are some Americans who want to live in a big city. This is part of what makes New York more attractive than Lubbock, TX for a random 30 year old. But your charts make a comparison of density within a class of "big US cities". Do you really think people consider Houston and SF, and think "yeah I'm going to live in SF because it's really dense. I know it's half the population, I just want the density." It doesn't pass the common-sense test.
The reason people move to SF and NY is because of jobs and culture, not specifically how scarce housing is. In fact, that is an obvious reason people don't move to those cities. The culture/jobs demand drives up house prices, and consequently makes cities more dense. But if you just build more houses, quantity supplied is rising due to strong demand. There's nothing magic about density itself. If you build more houses, you have a shift right in supply. This lowers prices.
It's a fair argument to say, "well why hasn't this worked anywhere in America?" I guess the argument would be, it hasn't really been done on a sufficient scale, so any supply-side effects are overwhelmed by demand-side effects. But I'm not confident in this. Just not convinced that building houses has any positive causal effect on local house prices.
> It's a fair argument to say, "well why hasn't this worked anywhere in America?" I guess the argument would be, it hasn't really been done on a sufficient scale, so any supply-side effects are overwhelmed by demand-side effects.
I'm not sure that it's even really true that there aren't cases of supply-side reform working in a dramatically visible obvious large-scale way, but it is important to say clearly that there are an extremely large number of papers claiming to find supply-side reform lowering prices. I really don't see what the justification is for what you're saying here, other than perhaps a general sense that everything is always terrible and nothing changes, such that any possible solution is already discredited.
> They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife.
Ok, but these things are not synonymous with density. In fact, having more office space, museum space, restaurant and nightclub space, etc. means having *lower* population density, ceteris paribus, because you can't live in any of those other types of building. People would still want these things if there were no big dense cities. Either they wouldn't exist, or people would still try to live in the places where those things are available, which be more expensive than NYC is today. Basically, I think that the effect of density -> amenities is much smaller than the other way around. Cities are built for economic reasons--you say " Manhattan has a few extra natural amenities, like a river and a good harbor. But nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife." but this isn't really true. The harbor is why the city exists at this location in the first place. It's no longer the direct reason why NYC is an economic hub, but its current major industries (finance, research, media, tech, etc.) are there in large part because it was previously a center of immigration, trade, and manufacturing.
Building more housing would not turn Oakland into SF or NYC.
Consider also that the population of Manhattan peaked around *World War 1* (https://en.wikipedia.org/wiki/Demographics_of_Manhattan) at around *40%* more than today. Do you think it was cheaper to live in back then, or more expensive? Given the average salary of a factory or port worker, I'm going to guess cheaper.
>. But doesn’t induced demand violate the economic law of supply and demand?
> if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work.
I don't think this is what the data really show. At this point, building housing in the expensive areas would just serve the already existing amenities that are already drawing people there. And it seems like it's a fairly common development pattern in the US for suburbs to be more expensive than the city they surround. But also, many towns don't *want* their own housing prices to be cheap. "Diminished home values" is one of the most common NIMBY talking points against, well, everything. If you own a home, then expensive housing is good for you, and bad for everyone else.
Ok, really silly. We are comparing the overall "life opportunities" of North Dakota and NYC and then wondering why housing is cheap & low density in N Dakota? Really? Maybe application of common sense should come first before writing.
A great deal of explanatory power is often unlocked by requiring annoyingly precise, proven explanations for "common sense" phenomena. People are not likely to accept ideas that are false in an extremely obviously checkable way, therefore such misconceptions and bad ideas as exist in the world will tend to give mostly correct explanations of "common sense" phenomena most of the time. Indeed often any given "common sense" phenomenon has nothing close to a majority-accepted explanation even among people who all agree that it is a matter of common sense.
Sorted by population density, NY #1, Jersey City New Jersey is #2, and Paterson New Jersey is #3.
Newark is in the top 10, and Philadelphia and Yonkers are in the top 15.
So your thesis appears solidly disproven.
People either want to live in city X, or they want to live in a small set of cities Y. They do not want to live in "any city Z with sufficient population density"
I've anecdotally observed a couple things that could be rounded to "preferring any big city".
One is a strong desire for one or more features of living in big cities. Aspects that seem to appeal to some people include ready access to clubs/nightlife and a wide selection of restaurants, not needing a car for most things, enough density to support in-person niche communities and businesses that cater to them, multiple prospective large employers in very close geographical proximity, and ready access to cultural amenities (theaters, museums, etc).
The other is a desire to live in an intensely "blue tribe" cultural and political environment. This tends to correlate pretty strongly with urban density: city centers are almost always intensely blue, suburbs tend towards purple, and rural areas are usually strongly red. This seems to be particularly intense among young adults who grew up in conservative rural communities whose values they have rejected or which have rejected them, but I've also seem it from people who have lived their entire lives in "blue" communities. This attitude seems to be strongly interrelated with being LGBT or becoming atheist, for obvious reasons.
Both of these aren't just "density for density's sake", although they do correlate with density. There are definitely large, dense urban areas that strongly fit all of the above (most notably NYC), as well as rural and suburban areas that would be strongly unappealing to people who want the above. But off the top of my head I can also think of smaller cities (Santa Cruz, etc) and suburbs (Palo Alto, Redmond, etc) that combine many of the above features. And there's a definite spread among mid-sized cities in how well they fit the bill (e.g. Indianapolis vs Portland).
For the purposes of the original post, I think this points to an "it's complicated" conclusion to the extent it's a large-scale social thing and not just something that seems unusually salient to me (and Scott) because of peer-group feature bubble effects. There are definite network effects where increasing density would tend to improve the features and make an area more appealing to certain people as it got denser, but a lot of medium-density areas are already strongly appealing to many of these same people, and it's not clear for any given area whether YIMBY-driven network effects would shift the demand curve up enough to overcome the price effects of the downward shift in the supply curve.
Rather than disagreeing with the conclusion, I want to object to the whole framing of focusing on the effects on housing prices.
It’s not immediately clear what police goals should be with respect to home prices. Existing homeowners who think of their homes as investments would like prices to go up; renters and new homebuyers want prices to go down. Numbers on both sides of this issue are close enough that neither position is a political slam-dunk, and nobody on either side is going to change their mind easily (unless they buy a house I guess), because they’re all voting in their own economic interests.
So the end result of focusing on home values is always going to be political paralysis, and framing the issue in those terms already gives the game away to NIMBY forces that profit from political paralysis.
Nah, it's clear that the political system has an enormous bias towards demographics who are more likely to own homes. Libertarians love to rant and rave about scenarios where 51% of the people gets together to democratically rob the other 49%, thereby temporarily enriching themselves but destabilizing and impoverishing the long-term society. It doesn't make any sense because abstract atomized self-interest alone provides no incentive to actually go out and pull the lever, it's inherently an other-regarding act. Worldwide, attacks on commercially-minded minority groups justified as "affirmative action" or "economic democracy" are probably the most common failure mode. In the West, though, the homeowner's cartel is maybe the clearest example of a "two wolves and a sheep" democratic failure mode – so of course actually existing libertarians are at best ambivalent on it, and often outright for it.
I think it should be a non-controversial opinion that homes being an investment is genuinely terrible. I think the only reason it isn't is that history developed in a certain way, but imagine if any other necessity of life was like this. If food, or water, or electricity costs grew 10x over 40 years, and the response was, "well, silo-owners think of their grain as an investment, so there's no good political path to making bread affordable." It would be far better if homes depreciated as aggressively as cars.
Homes (as in structures) do depreciation (not as fast as cars: I live in a nearly 100 year old house but would not drive a 100 year old car.).
However the land/location upon which the house/condo/apt sits generally appreciates!!! Because "they're not making anymore land". Cf go west young man ...
Land is generally speaking inelastic. You can't make more.
Housing (the walls, etc) is elastic. You can build more.
Structures don't depreciate only so long as they are updated and kept up. (Additional labor and capital).
As to the land value, it's not really the soil that is going up in value it's the location. It's not the house on the land creating the value, its the proximity to the other lots with houses on them. A lot with a house usually is proximate to electric, water, sewer, road -- location location location
Even if you maintain a car in peak condition for its mileage, it's going to lose a lot of value.
I am not a real estate expert so I'm only speculating here, but I would put better than chance odds on a bare plot of land sitting right next to a housing development appreciating in value more slowly than the plots with homes on them. If homes depreciate in value then it should be the opposite, due to the house itself dragging down the overall value of the land.
Yeah, the post seems to treat cheaper housing as an end-goal. It shouldn't be one. There's no shortage of bad places with cheap housing.
Building more housing only results in increasing housing costs if the place becomes more desirable *even after taking housing costs into account* (most likely in terms of more salary left even after rent), so much that the increase in desirability more than makes up for the increase in housing cost. If that happens, it's good for both homeowners and renters.
It's theoretically not impossible that housing housing prices would increase with density indefinitely, *if* productivity increases with density indefinitely, and some of that goes towards housing. I don't think that would happen indefinitely though. And a city could "defect" by staying a worse place with cheaper housing, but I don't see what it would gain from that.
I don't have strong opinions on the details, but I would be cautious about false assumptions of linearity. Part of what makes places like Manhattan and London expensive is the network effect, which makes them desirable. Density is one variable that contributes to their network effect, but:
1) it is not the only such variable, and
2) even only considering density, network desirability is not a linear function of density.
It doesn't seem crazy to me that, due to other variables, add a little bit of housing, in a way that doesn't much change network effects, could move prices in the opposite direction from adding a great deal of housing, that did.
"I don't think there are enough immigrants to really affect things."
Given that 31-39% of the Bay is foreign-born _right now_ and the global population of mobile individuals ready to leave their homes to work for a wage lower than prevailing Bay Area wages is at least a billion, maybe more... how can it not affect things? Net immigration is in the millions per year to the US... all of them by definition need somewhere to live... how the Bay vs. the US. vs. the World a self-contained proposition?
I think we might agree to a rough model of "Demand = Price + Supply", and lets first consider what happens when demand is fixed: high demand expresses in high price and supply. Randomly generating some cities with high and low demand, you'll see high price and supply co-occur, as in your correlations. But once these cities are made and their demand is fixed, a hypothetical urban planner sees price and supply trade off each other, so increasing supply is how you decrease prices.
Now obviously demand is not fixed, and supply up -> price down -> demand up could happen (and I would wager does)! But what is the coefficient? If X>1 and each new home makes more than one person want to additionally live there, then building new homes raises prices, while for X<1 econ 101 holds and increasing supply decreases demand. This is precisely where you need to look at the empirical literature to measure X, and it says upzoning lowers costs.
I'm looking out my window at the crowds gathered to catch a glimpse of the celebrities arriving at the Met Gala in a few hours.
No matter the number of new housing units built, would Oakland ever have something like the Met Gala or in the case of LA, the Oscars? Maybe in a hundred years. It takes a great deal of time and luck to become a New York or an LA.
As for Miami, it's a contender, but way too early to tell.
Whether you think it's disgusting or not isn't the point. The fact that it takes place in NYC is an example of why a lot of people want to live here. To be close to fashion, art, and celebrity culture.
1. This is why I'm so excited about the recent YIMBY bills passed at the state level in California. I think a change at the state level is the only way to move forward instead of hoping that each NIMBY city changes their minds individually.
2. This argument contradicts the stereotypical NIMBY reasoning of "if you build that apartment building 2 blocks away, it'll add more supply and the value of my home will go down". They should support housing, because the value of their property might actually increase!
3. If there's really people out there who are willing to choose "any big city", shouldn't these people move to the other cities as prices keep going up and up in NYC and SF? Maybe people and companies will start moving to Austin, Miami, Atlanta, Cleveland, Detroit, Sacramento, Minneapolis, etc. Honestly SF and NYC are not worth their high price *right now* in my opinion.
Out of those others you mention, only Cleveland and Detroit have the same level of historic cultural amenities as New York and San Francisco, and only Miami and Atlanta have comparable levels of new ones. The others are actually substantially less significant as metro areas.
>This argument contradicts the stereotypical NIMBY reasoning of "if you build that apartment building 2 blocks away, it'll add more supply and the value of my home will go down". They should support housing, because the value of their property might actually increase!
I've offered a variation of this argument in in-person NIMBY/YIMBY discussions when property values are brought up in favor of NIMBY positions. The intuition pump I lead with is "a piece of land you can build a high-rise apartment complex on is probably worth more than a piece of land you can only build a small one-story house on."
I think you are in general right that agglomeration effects are real, which is why bigger cities have higher value to residents. I agree that people move locations. But I think you can go a step further. If one city is growing faster and densifying, surely those people are not demanding homes in other cities and those cities build slower. This is part of the spatial equilibrium story that further makes claims about “build density and get cheap homes” less plausible.
It is not reverse causation but rather the existence of a confounder - the attractiveness of the location. Imagine cloning that island off the coast of Maine and gluing it to Manhattan. Many people will want to move to the clone, but few will want to live on the Maine island. 20 years from now, after developers have built housing on the NY island, it will be both denser and more expensive than the Maine island.
Also, don't forget that demand is the willingness AND ability to buy. Those dense cities also have lots of well paid people. That increases demand and drives up prices. You need to control for income before concluding that denser places are more expensive.
Edit: Point 3: I just noticed that the Y axis is pct of income spent on housing. That will also be affected by income. Someone who takes home 10K after taxes will struggle if he pays a third of his income for housing. Someone who takes home 50K can afford to spend half of it on housing and still have plenty left over.
Popularity breeds popularity; that's a "network effect," and it holds for cities just like for music concerts or second languages.
But does popularity breed prices? That depends. Scalped tickets to hot concerts are super-expensive; learning English isn't.
Both "tickets to the popular concert" and "English proficiency" have network effects, but only one has limited quantities available. The price effect is obvious.
American cities, and most cities worldwide, limit the quantity of housing. So in most cities, popularity acts like concert tickets: density goes with high prices.
A very few cities like Tokyo don't limit the quantity of housing. So there, popularity acts like English proficiency: density goes with flat prices.
I think there are both amenity and disamenity effects from density, but the real thing that pushes up housing costs is having lots of jobs nearby. To some extent, jobs will tend to cluster near housing, but both job decentralisation in the post-war era and re-centralisation since the 90s show it mostly happens independently of housing growth in this our very regulated market.
I also think you too quickly rule out the reverse causation - it's pretty obvious that higher demand for living in a location pushes up land value, and that higher land values incentivise denser construction.
I think to some extent we can say that e.g. big multinational auto plants really have been attracted to growable areas. It's probably at least as large an explanation for why they moved South as Southern labor laws or Southern workforce development is.
I think this is missing something by categorizing a city as entirely "lots of people (and their housing)." You can do better by modeling cities as containing 2 categories of stuff: housing and attractions. People want to move to a city because of attractions. Building more housing raises the number of people able to live in a city without increasing the number of people who *want* to live there--possibly, in fact, decreasing it (because people want to live in areas with high attactions per (area, resident, etc)) In this model, there are 4 different ways you can move--increase housing, decrease housing, increase attractions, decrease attractions--each with obvious effects on pricing.
So, really, if we want cheaper housing in (say) NYC, we should bulldoze central park, close all the museums and restaurants, and ban broadway plays.
I am so excited that you've finally thought yourself almost all the way around to becoming a NIMBY like me.
The final bit you're missing, I think, is that the best solution is to build a bunch more housing everywhere _except_ the biggest metros. The San Francisco Bay Area has eight million people, which is too many, and its geography is amazingly poorly suited for a giant metro area (what with the huge bay in the middle, and the steep hills, and the earthquakes).
We need to find ways to stimulate growth in cities in the 100K-1M range, and maybe the 1M-3M range, without cramming more people into the small number of overcrowded megalopolises that already exist.
A great many cities in the 100k-1M range, and even some 1M-3M cities, already have minimal restrictions on density. What you actually want to do is deter growth and wall people out in such a way that they will settle for less desirable areas, in which they will be poorer and worse off and their children will have a narrower range of possibilities. You have merely changed the language around in a cognitive dissonance reduction strategy to put the emphasis on the downstream, secondary consequence that growth will be squeezed out to other cities, which you are presenting as some kind of difficult development task that needs wise investments to accomplish, when it is just the inevitable downstream effect of the privileges you are attempting to claim for yourself.
> A great many cities in the 100k-1M range, and even some 1M-3M cities, already have minimal restrictions on density
Right, that's a nice thing about cities in that size range, you don't really have to restrict density because nobody is going to build 50-storey skyscrapers in a small city anyway.
> What you actually want to do is deter growth and wall people out in such a way that they will settle for less desirable areas, in which they will be poorer and worse off and their children will have a narrower range of possibilities
No, what I want to do is to wall people out in such a way that they will settle new areas, build fantastic new cities without the restrictions of bad planning decisions made in the 18th-20th centuries.
San Francisco in the 1950s was a fantastic place, let's build another one of those in Crescent City, rather than throwing ever more people into the decaying husk of that once-great city.
You are clearly unfamiliar with urban planning issues at an extremely basic level and your purported opinions about what small towns should do is very clearly some ad hoc nonsense you've invented to rationalize your s.f. nativism.
You are unable to identify cranks and have allowed your comments on housing issues to fill up with cranks. Evidently it is now to the point where you ban non-cranks for being angry at having to interact with your preferred cranks and debunk their crank ideas such as "50 story buildings do not exist outside cities with millions of inhabitants, and would be economic madness".
"I’m pretty annoyed by comments that say just things like “This is a bad post” or “You are clearly misinformed” without any elaboration. This is true whether it’s responding to me or to a commenter. I’m going to start banning these if I see them from now on. Feel free to challenge or criticize anything, but please share your reasoning. I will grudgingly allow things of the form “I’m an expert in this field and I just want to warn people this is wrong, though I don’t have enough time to explain how”. But if it’s just “u suck”, that’s a banning."
I think you'd have avoided the warning if you'd elaborated.
But you're still trying to wall people out, preventing them from fulfilling their preferences. If San Francisco is so bad, and if new cities would be so great, why do you need to stop people from moving there in order to make that plan happen? And why should current residents of SF be privileged over other people who might want to live there instead?
It matters what is being built. People don’t move to NYC because there are so many houses there. It is the industry and culture. If you are building more things like stock exchanges and museums, housing prices will go up at a constant housing density. That doesn’t mean building more houses will make housing prices go up.
Economically desirable and actually desirable are two different things.
I like to think about Jakarta. I've never been to Jakarta, but I've never met anyone who had a good thing to say about it. It's crowded, polluted, ugly, and impossible to get around. It's so bad that the Indonesian government has decided to up and move themselves out of their own capital city just so that the politicians and civil servants don't have to live in goddamn Jakarta. And yet, for some reason, a whopping 31 million people choose to live in the Jakarta metro area. Why? Because that's where all the jobs are. Jakarta is a Molochian trap, which has somehow sucked all the economic activity out of the rest of Indonesia (give or take the occasional tourist area). Every year, even more people move to Jakarta, meaning it's an even larger fraction of the Indonesian economy, meaning that even more people need to move to Jakarta.
My point is that if you build more density you might wind up making something that's more economically appealing while also being a much worse place to live.
I think you might find similar effects in any country with a "primate city" (https://en.wikipedia.org/wiki/Primate_city) and low state capacity. The Jakarta city government might like to do a better job preserving quality of life there, even with all the density, but they can't. People say a lot of the same things regarding urban hazards with New York City, but life there is clearly better, it's just more expensive.
But the Molochian trap theory is interesting: do you think people keep moving to Jakarta because economic opportunities in other cities are actually getting worse due to Jakarta's dominance? Or does Jakarta just keep getting better and better? In Indonesia, people might be moving there away from the crushing poverty of subsistence farming, not because they lose their jobs in other cities.
I think the unstated assumption is that size in and of itself is what attracts more people to a city and hence increases demand and prices, rather than something unique about the cities, like architecture or neighborhoods. It’s not intuitive to me that New York sized Houston becomes popular just because it’s big. (This hints that other features that made cities desirable started the flywheel.)
The "induced demand" argument essentially says that there are a significant amount of people who don't want to live in area X now, but would if it were a bigger city. I can kind of see the argument for this in some cities, but who could possibly be thinking this about NYC and the Bay Area? Those are already *the* places to be - building more housing can't make them any more so.
Also, I'm going to nitpick the density-vs-pricing graphs you picked. The first one is weighted by a bunch of unlabeled data points on the lower end, and the second one shows a frankly unimpressive R-squared value.
Off topic I know but I can not find the SSC post talking about how scarcity leads to politics and scott makes up a fictional example of if there was 10% of the available water all the interest groups would fight for it but with enough water it is a nonissue. It could be a ACT post but I think its older.
I think the hypothesis isn't clearly defined, and the question is phrased in a way that makes a correct answer impossible. If building more houses causes local prices to go down for 4 years, and to go up from then on, did it make house prices go down, or up? If building more houses causes others to build more amenities, and attracts more businesses, creating more jobs... how far down that chain can we go, and still attribute raise in local house prices to building more houses?
Each of those additional steps--building museums, creating new businesses, etc.--costs additional money. It seems to me that the credit for the rise in housing prices should be distributed among the different factors proportionally to their capital (or other) investment.
You're approaching the question like a foundationalist, who believes that assigning credit for a result to a single cause is unproblematic. Correct epistemology must allow the dynamics of recurrent causal networks to be computed iteratively, and an answer to be given in a form that could reproduce dynamics like "price goes down for 4 years and then goes up".
It might be interesting to look at the Spanish market for a possible counterpoint.
Spain has a very uneven population, with most concentrated in the coast and the center. The sparse parts of the country are very sparse, and the dense ones are very dense.
In the rally to 2008 Spain was building A LOT of new units [1]. Prices were rising at a very rapid rate. At the same time population was growing fast, mainly due to immigration [2].
When the bubble burst in 2008, home prices started going down[3]. Not surprising considering the inflated prices and the massive uptick in unemployment [4]. However what's surprising to me is that this price slump lasted a really long time, and only recently we are approaching prices close to the top of the bubble. Is is true that population growth slowed down a lot, and for a few years between 2013 and 2016 total population actually went down. However median salaries [5] sort of grew steadily over the period, again, not accounting for unemployment. Still, the bottom of prices seems to have happened around 2016, when unemployment had been decreasing from it's peak for a few years.
Of course there are multiple interrelated causes happening at once in this case, but my take is that high density helped to tame housing price for a relatively long time, even as economy recovered from the recession.
I think a lot of the studies showing building reduces costs locally are accurate in the short term, but the reason you're right is that it takes time for the new supply to attract out-of-area residents, increasing the population, and increasing desirability. A lot of this can be a multi-year cycle, i.e. New York builds some housing, on the margin your friends want to move there, they do, 3 years later a critical mass of them is there, and you move there as well. And then at this point, it actually did contribute to a raising price.
I think what you and Matt are both saying could be consistent. For example, it might well be the case that on the margin adding more housing to New York doesn't increase its "New Yorkiness", i.e. its having of Broadway, Wall Street, and so on, because those are features of being the #1 city, not features of being a city of N million people. In this model there could be discontinuities when you get enough extra people to cause some sort of runaway migration to your city, but it wouldn't increase demand more than supply on the margin.
Of course this could totally be wrong, and it could be that with 5% more people New York would _also_ become the center of software in the US or something.
A topic close to my heart - and I suppose many other's too. Thanks for this. I am EXTREMELY skeptical of any claim that building more homes lowers prices or eases affordability for families. I live in an area that built tens of thousands of new units and rents in these buildings basically monotonically increase.
There are a few main factors as I see it (well, maybe it's really just one):
1. Living in a globalized world. More houses for sale is just more inventory from which wealthy domestic and international buyers can select from. If there is an ephemeral drop in price, it will entice more of these buyers until the situation returns to exactly as it was before.
2. Everyone in the housing market (buyers and sellers) have wisened up and are playing the same game. With the explosion of equities and real-estate following the zero-interest rate environment for so long, people's net worth blossomed. Though equities are down a little, most have now wisened up and have moved that wealth into money market and related bond funds that are earning them a nice 5-6% interest rate. This means lots of people have lots of money - in my area development just keeps going further out and, even in April 2023, open houses are packed and houses sell after 2 days for 100s of K over asking - often in cash. Just as before, if creation of new housing temporarily lowers price due to a higher supply, it invites an even larger horde of potential buyers who are in the (n-1)th tier of wealth - and then it returns to the equilibrium of before, where everything beyond the affordability of almost everyone, yet any house on the market (unless utterly dilapidated). Building more houses just invites more buyers from more places -- and rinse and repeat.
3. Building new housing (particularly in wealthy, economically dynamic areas) increases the population and with that comes more business, jobs, investment and all the things that make a place desirable and expensive. The ultimate attractor of the system is to be unaffordable. If it was affordable, everyone would buy it all up until it was unaffordable all over again. I think the logic is as simple as that. Maybe a wealth tax? And/or a severe recession where people lose jobs and wealth and HAVE to sell are the only things that would change this.
I think you're mixing up cause and effect in your example. New housing keeps getting built because of continuously rising demand for housing in your city. You're watching increasing demand move along the supply curve - there's a lot of housing development that doesn't make sense at lower prices, but does at higher ones, so it gets built when prices rise or are expected to rise. If they stopped building housing, prices would rise even more.
And even in your argument, people in the (n-1)th tier of wealth can't big up prices quite as high as those in the nth tier. So building new housing would indeed increase prices in the long run, albeit marginally.
I think the YIMBY argument is that it's interesting that altering the amount of housing in an area, resulting in higher density in that area, doesn't result in higher prices. You seem to be saying "ah yes, but under our current planning laws, more people moving to a city does increase prices in that city".
This seems like the same argument seen from different angles. You're making the point that in the past, prices rose with density on a city-wide basis, even if that doesn't hold for small areas within a city. Which sounds like something YIMBYs would agree with.
I think the response might be "yes, the point of the small scale studies is that they suggest it's not increased density itself that increases prices. It's something else, something that only shows up at a larger scale, over a longer time period, and we think that that something else is the overarching planning regime".
And that's where Tokyo comes in - you can say, look, there's another wealthy, developed country with far less restrictive planning laws, and in that country increasing density doesn't seem to lead to increasing prices.
If you've got a vetocracy, increasing the number of people with vetos will probably decrease the number of laws passed. But that doesn't mean that it is inevitable that larger populations are more inclined to paralysis. It means you have to change your system of government.
I'm skeptical about this model at the city level but I think there's some truth to it at the micro-neighborhood level. Building ten new homes on my block would not meaningfully increase affordability of my immediate area, since this block is more or less fungible with dozens or hundreds of other blocks surrounding it. If anything, it makes the micro-neighborhood slightly "fresher" and should increase property values in the immediate area (for example, because those existing properties are now adjacent to brand new homes instead of overgrown vacant lots or crumbling warehouses). This is the core of the NIMBY problem in my view: building housing on my block has diffuse affordability benefits far beyond my block but very concentrated harms (living through construction, etc).
According to AAA (old data from three years ago) the cost to own a car in America is about $800/month, including depreciation, insurance, gas etc. So living in a community where you can take transit or a ride share easily can make up a significant portion of higher rent. Some. Not all. Just something to keep in mind in moderate priced regions.
Re: SF; a few years ago I saw a study where the researchers kept drilling down on why NIMBY's hated new development, and the biggest draw was hatred of already rich developers getting even more rich. So the green monster called jealousy may be a factor in a classism response.
The driver that both sides seem to be missing — or at least are not being explicit about — is that _density is necessary but not sufficient for valuable things beyond more housing_.
In particular, density allows for thick labor markets and increased specialization, making people more productive; and thick social markets, making life more enjoyable (try finding a date today to take to a show tomorrow in NYC vs. SF!). Those things take time for cities to develop and are dependent on things other than density, but they are valuable, and so folks will pay for them if they come to exist years down the line.
That's why:
- building more housing in NYC will immediately decrease rental prices
- building a huge amount of housing in rural China won't increase rental prices alone
- ...but building a huge city in rural China _and_ having an industry cluster form around it — such that people have productive work and enjoyable lives — _will_ increase rental prices
- inner city Detroit is both dense and extremely cheap, and building more housing won't change that
To believe that building more housing in NYC would increase rental prices in five years, we need to believe that more density makes living in NYC _even_ more valuable. Is that the case? I'm not sure — maybe beyond a certain point of density, it doesn't make us more productive or our lives more enjoyable. Or maybe there's no limit.
Regardless, the model of "Density Increases Local But Decreases Global Prices" is unambiguously wrong for places that can't build those other things — inner-city Detroit as an example.
I mostly agree and find this a good sum-up. Except: _density is necessary but not sufficient for valuable things beyond more housing_
'Necessary' is too much said. There can "valuable things beyond more housing" that do not rely on density. Thinking e.g. about some smallish mountain places with very high costs for example.
This is also a good example to emphasize that 'demand' clearly doesn't depend only on the amount of people who are living in a place all year around and their personal demand for space/person. Some places more than others significantly suffer (in terms of prices) from a high demand for second or third homes in that place.
>The two densest US cities, ie the cities with the greatest housing supply per square kilometer, are New York City and San Francisco. These are also the 1st and 3rd most expensive cities in the US.
Let's distinguish between the housing stock (quantity of homes) and the supply curve, which represents the quantity of homes as a function of price. Also note that price is determined by the intersection of the supply and demand curves.
>For example, if my home city of Oakland (population 500,000) became ten times denser, it would build 4.5 million new units and end up about as dense as Manhattan or London.
Are you thinking of a shift in the supply curve (moving along the demand curve), or a shift in the demand curve (moving along the supply curve)? If you shift supply, prices go down and quantity goes up; if you shift demand, prices go up and quantity goes up.
>Right now, more Americans prefer to live in big cities than there are housing units in big cities, so prices go up and these people can’t afford their dream. As new cities become “big” (by these people’s criteria), they’ll move to those cities, increasing demand.
Assume a two-sector supply and demand model, where we have graphs for Big cities and Small cities.
In the initial equilibrium, prices in Big cities are higher, because more people want to live there than there are homes. But note that Small city people still show up in the demand curve for Big cities: they're in the section below the equilibrium price, because their willingness-to-pay is low.
Now suppose that a Small city (somehow) transforms into a Big one. This shifts supply right in the Big city market, reducing price. If the price reduction is large enough, we move down the Big city demand curve so that some Small city people are now willing to pay the lower Big city market price. Note that Big city demand hasn't increased; it was always there.
(Exercise for the reader: what happens in the Small city market?)
At the micro-economic level, adding more housing units can indeed "lower" the median household price in a given metro area. Even in an affordable city like New Orleans while simultaneously increasing the adjacent cost of housing in certain neighborhoods via market stimulation. The best example I can give is an affordable housing project I worked on that was comprised of 79 affordable units for working artists (income qualified). It was renovating an abandoned school in the historically black neighborhood of Treme. The school had been left abandoned since Katrina (2005) and the immediate surrounding blocks reflected the slow decline of the nieghborhood hollowed out by dis-investment, subsequent broken-window crime and poverty.
Shortly after our project began construction, local builders and individuals began buying adjacent abandoned properties and either renovating/constructing new single and 2-family homes. By the time our project had been completed, the 79 units helped to lower the "overall" median rental price yet the adjacent neighborhood saw an increase in housing costs as gentrification took hold. This story repeats itself in other cities I've worked in like Denver, Washington D.C., Nashville, and Dallas. Phoenix was the outlier in that there's so much sprawl, gentrification can't really happen.
I have yet to see an in-depth study that quantifies the impacts of new housing units on market pricing at the overall median price level for a city and the immediate local affects of those same units on a particular neighborhood. I think the NIMBYs and YIMBYs talk past each other in this regard where each point to the relevant data that best supports their position without taking into account the complexity of how increased housing density affects are regional/metro and hyper-local. Which is why you have YIMBYs like Matt claiming more housing ultimately lowers the median housing price (nominally/briefly) while NIMBYs claim every new neighborhood development causes housing prices to rise and gentrification by yuppies/hipsters/bohos push out the the BIPOCLGBTQ+ artist/teacher/essential oil craftsbeing/zen gardner/retiree.
Sure. Housing as social policy is complicated and gotten more complicated over the years. I've watched my hometown Denver and the greater metro area struggle for several decades to keep housing affordable despite increased multifamily and mixed-use developments, and transit-oriented developments along the lightrail corridors, it's pushed housing costs up and out into the outlying suburbs which then sees costs go up w/ marginal density increases in the burbs. Hard to infill single-family lots w/ multi-family stuff if zoning doesn't adapt.
There's actually a working paper that comes pretty close to exactly what you're looking for: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3867764 "Does Building New Housing Cause Displacement?: The Supply and Demand Effects of Construction in San Francisco"
The author looks only at cases where new housing was constructed because the previous building burned down - not caused by increasing demand for housing at that site. She finds that hyperlocal rents do go down by a tiny bit, and local businesses do better - the best of both worlds.
Thanks for the link. It's unfortunate though that her study only focused on replacement units and impacts. I can see why rents would drop a tiny bit because you're really only reducing market demand by the loss replacement for the displaced tenants. But I plan to keep looking for additional studies.
I actually need to research the tax & rental records for the Treme neighborhood and see what the long-term impacts have been since those 79 units came on-line 5 years ago. That immediate neighborhood saw a bump in economic investment and increased property values in 2018 as result of the redevelopment but did the prices stabilize or continue to go up? If they stabilized and overall rental/purchase prices dropped then that may translate to an overall drop in the median rental/ownership costs that YIMBYs cheer but may result in a temporary rise in hyperlocal housing costs as the initial capital investment works through the system.
Which may mean NIMBYs can really only hang their hats on a short-term "rising" housing cost impacts to block projects. And there are probably some low-cost policies to blunt that short-term impact.
The conclusions you draw from your urban density & housing affordability correlation graphs are falling prey to the classic correlation is not causation problem. You acknowledge the potential reverse causation effect, but there are other reasons correlations don't imply causal relationships that you are missing from this analysis. In particular, you are not accounting for an omitted variable that affects both urban density and housing affordability: desire to live in e.g. Oakland vs. Manhattan, AKA housing demand. You correctly identify that induced demand is a thing that sometimes happens, but induced demand does not describe the whole dynamics of density and housing prices--you yourself say: “[People are] moving [to large cities] because they want to be in a big city - with friends, jobs, museums, and nightlife.” These are related but not perfectly correlated with density of housing for a multitude of reasons. Not all big cities are interchangeable.
Or: there are three relevant factors to the theoretical YIMBY argument about how marginally building more houses lowers housing prices, and you are kind of ignoring how demand/desire to live in a specific place is a separate thing from density, and should be controlled for when you graph a price function of density. This omitted variable biases your causal conclusions.
At least, that’s my read. If I got any of your arguments/thinking wrong, I do apologize.
Whether the induced demand effect overwhelms the regular more supply lowers prices effect at the marginal level is an empirical question, which the studies Matt provides try to answer.
Coming back to this, trying to explain my thoughts better.
The supply and demand argument states: holding demand & other factors constant, if you increase supply, prices for a good drops.
For housing, the possibility of an induced demand effect is a good point to raise. The induced demand argument states: if you increase supply, you automatically increase demand as well, possibly leading to an increase in prices given your all-else-equal increase in supply.
Distinguishing between these two theoretical possibilities is an empirical problem. But you cannot answer this empirically by simply looking at the correlation between supply (housing density) and prices, because a positive correlation between these two variables is possible in a world where the simple supply and demand framework is true!
Elaborating, you can see a positive relationship between supply/housing density and prices at the city level even if increased supply lowers prices, because it is possible there are other factors that are positively correlated with both supply/housing density and housing prices: for example, weather, amenities, jobs, presence of family/friends, etc. I consider these things determinants of housing demand alongside the induced demand effect. If they indeed exist, then you can see a positive correlation between supply/housing density and prices even if increased supply actually lowers prices, because e.g. nice amenities will increase demand for living in a specific city, leading to an increase in not only prices but also supply to meet that demand. Demand is the omitted variable in your causal conclusions drawn from the density/price graphs.
A good study on this topic will not look at the overall correlation between density and prices, but try to see how a marginal unit added to supply affects prices, because that is what will answer the empirical question at hand, and actually distinguish between the two theoretical worlds (one where the regular supply-and-demand theory reigns, and the other where the induced demand effect overwhelms the simple supply-decreases-prices theory).
Terminology comment: “induced demand” in economics traditionally refers to when a supply increase increases demand but decreases prices as well, at least according to quick Google search. Not exactly sure what the thing we’re using it for (supply increase increases demand and prices both) is technically called. Maybe it’s still called induced demand but you specify the effect on prices.
“For example, if my home city of Oakland (population 500,000) became ten times denser, it would build 4.5 million new units and end up about as dense as Manhattan or London. But Manhattan and London have the highest house prices in their respective countries, primarily because of their density and the opportunities density provides. I don’t see why Oakland being able to tell a different story of how it reached Manhattan/London density levels (“it was because we were YIMBYs and deliberately cultivated density to lower prices”) would make the end result any different from the real Manhattan or London. But if becoming just as big as Manhattan or London would make Oakland more expensive, shouldn’t we assume that a little step in that direction would make it a little bit more expensive”
If Oakland all of a sudden had 10x the housing supply I would NOT think it would be as expensive as New York. I think you would have a ton of empty housing and princes would be dirt cheap as people tried to get something for their homes for which there was not enough demand...
The reason we don’t see his is that no developer is going to build a ton of supply beyond demand. Since it’s so hard to build this is rarely the problem. But we see it when cities de-populate. There was a time when Detroit homes in some areas were going for ~free. If someone added a bunch more supply in Detroit it would be unlikely to “induce more demand than supply”
It seems like a lot of the argument rests on “we can all agree it is true at the extremes, so doesn’t that counter the studies that show it is not true at the micro level”. But if someone (me!) doesn’t believe the extreme argument then the studies that show that induced demand does not outweigh increased supply effects seem totally plausible.
So I disagree with this argument for a lot of reasons.
I think the first (and easiest) counterargument is a money-on-the-table one. Let's suppose you're right; that if a town has a density similar to Athens, GA (where I live, good sized town, 100Kish people), then it should have housing prices similar to Athens (about 300K for a single-family home). Athens has lots of ordinances about what can and cannot be built, you are going to have to apply for permits, etc (this is true anywhere). So, just buy up 100 square miles of land in rural Georgia and build a similar sized amount of housing. If you did this, your profits should be astronomical, since you would have very little regulation to fight (this is especially true of building an Oakland sized city in not Oakland). But we don't see venture firms actually building brand new cities wholesale in America, so maybe this should tell us that there actually isn't money on the table here.
2: I think that this has been mentioned before, but jobs are probably a bigger driver of rent. I think this is especially true in single-employer cities. If you consider most rust-belt towns, their land value dropped like a rock not because more/less houses were built, but because the factories closed and were automated/went abroad (this happened to my hometown). You can even see this in bigger cities like Rochester, NY, which has a pretty high population density for a city, but not an extraordinary cost of living. It used to have Kodak as its #1 employer, but when Kodak closed, the city took a huge hit. Maybe I'm wrong about the numbers, I'm open to someone beating me back with hard data, but this is my overall impression that a lot of cities/towns lose land value from loss of employers, not housing issues.
3. I think that there's an important replacement rate issue. I do think that you're right in general, that as a city grows, housing becomes more expensive. But what I think is going to matter is how quickly housing grows relative to population; if a city could maintain 10% of its occupations as uninhabited, then I think it's land prices are going to be lower than a city with 1% uninhabited, even if their populations grow in lockstep. I think though that as a city gets bigger, its regulations are going to make it harder and harder to add new housing, and so the percent of uninhabited places is going to slowly drop, adding to the rent increases.
There is also a question of why any property owner would build so quickly that it forced prices down. There is an inter-temporal equilibrium here too as I explain in this paper.
Many people simply assume that changing planning rules will change how fast new building happens. Sure, it will probably change where it happens, but probably not how fast more housing is built across all substitute locations.
Cameron this is an incredibly obvious 101 fallacy where you are conflating the purported class interests of a dispersed group of owners with the individual interest of any one owner.
I have now downgraded my previous understanding of you. Formerly I regarded you as akin to one of those creationist biologists who goes out and gets assigned by their ministry to do a biology PhD so they'll have a creationist PhD they can point to. But it is clear from this comment that the creationist biologists are ahead of you, because I have never heard of one of them, like, being confused about what a cell is or something.
It is incredible that you were able to get this far. You are an obvious fraud. Go away and get a real job.
i think it would be helpful think in terms of elasticities rather than in levels. wine (nyc/sf) is more expensive than coffee (north dakota). but if demand for either increases, price responds very little because supply is inelastic. if more people want coffee, coffee producers just harvest a few more beans, hire a bit more labour, etc. marginal cost barely increases, and if the market is competitive same for the price. if housing supply were elastic, there would still be a gap between nyc/sf and north dakota (like the gap between wine/coffee), but it would be much less. the current difference reflects inherent factors (better amenities and higher real wages in nyc/sf) and the "distortion" of inelastic supply causing excess demand to drive a wedge between prices
the point about cities being in competition is just another way of saying demand is elastic (since cities are close substitutes for each other), so any increase in supply in a city won't lower own-city prices much. this isn't a problem if the people deciding on how many houses to build are "price-takers" (i.e., they don't consider the effect of their housing construction on overall prices). as long as MB > MC at current prices, they'll build and the market will clear. the current situation--where interest groups who *want* prices to rise use regulation to make supply inelastic--is the opposite. it's more like local political economy oligopsony than classical general equilibrium perfect competition.
i also like to think of it in terms of flows rather than stocks. suppose there are 1m houses in your city (stock). mostly people occupy their houses year after year. every year, 10k people show up in your city looking for a house. if there are fewer than 10k vacant houses V, they bid up prices. if there are more than 10k vacant houses, prices drop. it's the ratio of vacancies to people looking to search V/10k (what economists call "tightness") that determines the price (i.e., it's the 10k flow not the 1m stock)
if a city had a one-time extreme increase in its housing stock, but then implemented laws to make the future housing stock inelastic (i.e. the history of ny/sf), you would see low prices for a few decades, then over time as demand increases eventually prices would explode. this makes me optimistic because it means we don't have to make huge permanent investments in the housing stock, we just need to loosen things up enough so that every year, the number of houses coming onto the market exceeds the number of people looking for houses. this seems more manageable
Increasing supply has 2 effects (abstracting from the land price vs building cost distinction for now):
1) For any negatively sloping demand curve, it lowers prices.
2) Increasing density makes the city a more desirable place to live and increases wages through agglomeration effects. This shifts the demand curve for living in that city upwards/to the right, increasing prices
I think you're making the case that the positive correlation b/w density and prices tells you that effect 2) usually dominates and is what would likely dominate in Oakland if the Oakland were to build more housing.
I don't think this inference works because many amenities that make a city desirable aren't perfectly correlated with/entirely caused by higher density. That is, dense regions can be expensive for two reasons:
A) They happened to have nice amenities for reasons that are not caused by their density (e.g. nice beaches nearby). These nice amenities increase demand and prices.
B) Density causes better jobs and better amenities as in point 2) above.
A) would cause the correlation between density and prices to be positive (if weaker) even absent B).
For an example of A), were NYC density to reduce by 20%, Broadway wouldn't decrease in quality by 20%. Similarly, if Miami decreased it's population by 20%, I don't think it's amenities (the beaches) get 20% worse.
Similarly, if Oakland increased density by 20%, it becomes a moderately more desirable place to live because of B). However, if A) explains a substantial share of the variation in desirability, then Oakland doesn't attain the amenity/desirability/price level of a city that currently has 20% more density than it.
I think this means that it's totally plausible (though not guaranteed) that effect 1) is larger than effect 2) and that an increase in supply lowers prices. Indeed, this is what Matt's studies seem to show.
This is what I try to argue against in the paragraph:
"Could this be reverse causation - ie New York is very dense because its prices are so high (which incentivizes developers to squeeze the most out of every parcel of land)? Yes, obviously this is part of the effect. But equally obviously, it isn’t the full effect. Stripped of its density, Manhattan is just a little island off the US East Coast. There are plenty of little islands off the US East Coast - Maine alone has dozens - and none of them are as expensive to live in as Manhattan. Manhattan has a few extra natural amenities, like a river and a good harbor. But nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife. This induced demand effect is so strong that it overwhelms the fact that Manhattan has millions more houses than the empty North Dakota plain (or lower-tier cities like Des Moines or Cleveland). So empirically, as you move along the density spectrum from the empty North Dakota plain to Manhattan, housing prices go up."
TBH I think part of the issue is how you define the "urban area". It's a bit circular - I'm assuming "urban area" (defined independently of administrative division as your source says) means area above a certain density.
So you're measuring "the area around city X above density cutoff Y, measured by average population density".
A big part of the average density is how big a surrounding suburban area above the cutoff you have. The highest ranked areas on here aren't all high rises, they're *geographically constrained*.
Chicago is less geographically constrained, it has the same-ish population density as Miami in the city proper, but its "urban area" is twice as big and its "urban density" is significantly lower. Because there's more space to have a long tail of "not very dense, but dense enough to be a part of the 'urban area'"
I think we agree that exogenously increasing density has the directional effect of nicer amenities and higher demand. I think what we're disagreeing about is that this higher demand effect will overwhelm the first order supply effects in all/most cases.
Say in time t-1 we loosen land use regs, which has the first order effect of allowing 10% more people to live in Oakland and average rents to marginally decrease in time t. Now, two (stylized) things could happen in time t+1:
1) A large chunk of the people who have moved in were ex Biotech CEOs and employees from Boston and actors and musicians from Broadway who create new fast growing companies in Oakland and massively improve its cultural scene respectively. I agree that in this situation rents go up in Oakland
2) The people who moved in were a slightly talented version of Oakland's current population. The higher density means that a few new restaurants are possible that previously weren't and some new niche businesses are possible that previously weren't, but fundamentally, Oakland is only marginally more desirable than it was before. In this situation I think rents most likely go down.
There's obviously lots of intermediate options between 1) and 2) (these are stylized) but I think the median/modal upzoning causes something closer to 2) than 1).
In short: Most upzonings: you get slightly cheaper housing + slightly nicer city, but occasionally the added density creates something like SV or Broadway, in which case you get higher prices.
I think the way you move along the density spectrum matters. In principle you could pick any spot on the (density, price) plane, but naturally occurring city formation picks points along that upward sloping line. This would probably not be the case if you artificially (exogenously) introduced new housing units, for instance through a government program that does not care about the constraints faced by market actors. Looking for historical experiments of this kind can reveal the causal relationship between density and prices. Alternatively you could try to formulate a predictive model from first principles, the way physicists do. A starting point would be Fick’s law of diffusion with a negative diffusion coefficient to describe people’s bunching behavior into which you would have to work price dynamics somehow. I suspect there is extensive literature on both approaches.
I think this is a good frame. It’s also helpful to think of the supply side, which in theory can cal prices. There you’d expect housing costs to be higher as density increases because land prices go up and you’re building more complex tall buildings (this doesn’t have to be true, perhaps once you have subway network, say, you can build more efficient apartment buildings at scale). Say it’s true though, that’ll create an upward sloping supply curve. More density means higher prices, exactly as you expect! (Upward sloping demand possibly too, pretty plausible as the world is increasingly urbanizes).
However, apartments in these cities being studied are wildly more expensive than the cost to build. Or the costs involve a large amount of regulatory costs in waiting and paying off interested parties and fighting locals and whatnot. In this world easing supply constraints raises prices by making the city more attractive and increases some costs (land price up), but those effects are dominated by reducing regulatory costs/rents and alleviating excess demand.
The missing link here is that by just focusing on housing prices, we are ignoring the other key components that go into what make people better off (what economists usually define as "utility"). People don't just isolate one component when making a decision, they consider the bundle as a whole.
Let's say that people's well-being has only two components: 1) quality of local amenities and 2) budget for non-housing consumption (think especially of tradable goods like iPhones and airfare).
It can make sense to move to NY from a lower cost city if you value the local amenities highly (walkability, Broadway), even if you keep the same income. You can consume fewer iPhones but you're still better off.
Now let's throw another important wrinkle in here: income. Big cities literally make some industries more productive (knowledge spillovers, scale), and some component of that productivity is captured by workers in higher wages. If moving to NY changes your after tax income from $50k to $100k, you can change your housing expense from 20% to 50% of your income and still have a larger budget for non-housing expenses ($40k to $50k) in this example.
The point is that narrowly focusing on minimizing housing prices is a dead end, because the other components of utility will tend to overwhelm it.
The YIMBY argument should be that construction lowers housing prices *holding everything else constant*, which increases utility - more people living in high productivity areas (more economic output for everyone) and having access to amenities that require density (if that's what they desire, and people wouldn't move to bigger cities voluntarily if they didn't want it).
There’s also a demographics issue here. When I was 24 and single, I would have moved to any of 5-10 big cities where I was offered a good job and had at least one friend. When I was 28 and in a relationship, I would have moved to any of 3-5 large cities where we could both get jobs and had at least two friends. When we were 35 and had to decide where to raise our kids, we really only had two large cities in mind, and we picked the one with grandparents in it. The fluidity of the market is constrained by how many people are in brackets like these at any given time. Also, I wasn’t buying property at 24, so we’re really talking about a supply of renters who might be willing to stick around and compete for houses long after they’ve moved. I’m not sure how you control for that.
Yes, building more housing only increases housing prices if it makes the place more desirable even after taking higher housing costs into account (so much that the increase in demand outweighs the increase in supply). If so, it's a huge deadweight loss to prevent this.
If building more housing in a city would increase the value of real estate in that city, perhaps we can count on political forces in that city causing more such housing to be built. (Renters might not like it, but they probably don't have nearly as much influence over the housing approval process as land developers.) Consequently, cities that are not seeking to increase the quantity of housing are likely cities where building more housing would lower the price of housing.
Because induced demand only works when there's a certain amount of latent demand. There exists a population of people who kinda-sorta want to move to New York City but don't because prices are too high. There's zero people who kinda-sorta want to move to Lacy TX but are priced out.
There’s also the question of whether cities can actually generate a sharp increase in housing supply from the usual policies that YIMBYs advocate, such as mass upzoning. There are good reasons to be skeptical. Recent work by Cameron Murray has explained why “landbanking” is so common and why rates of supply in cities are closely tied to market demand conditions, not to zoning policies. You should check out his research:
There's a relatively clean theoretical answer, which is that demand is a function of social features (like good food, cultural events, ability to find your niche, variety of jobs...), and social features are a *superlinear function of population.* Social stuff is dependent on the number of possible pairwise interactions.. city X with population double that of Y will produce more than twice the number of patents, creative collaborations, etc... as well as more than twice the amount of crime, all things equal.
If social features scale superlinearly (and demand depends on it) and housing scales linearly, then you'll see housing prices go up as density increases. If you add housing without adding density, say by building outwards, you won't see the same sort of price increases.
But that's not all... what we should really look at is density and point to point travel time. A city that spreads out with good travel infrastructure may have housing prices similar to a city that builds up with mediocre travel infrastructure. I'd guess that population, how many other people you can reach within a fixed unit of time, and housing stock together predict most housing prices.
This analysis seems to have trouble explaining why anyone would ever build a detached suburban-style development in, say, Houston; all new construction everywhere should look as much like Kowloon Walled City as it is legally and architecturally possible to do so, because from the developer's perspective, density is a free money-making machine. In fact we basically never see anything like this, suggesting that short of maybe some Neom-like scheme on a truly grandiose scale, it is impossible for agglomeration-effect-induced-demand from normal building projects to come anywhere close to outweighing the supply increase.
What is the upper limit on geographically mobile yuppies ?
China is able to erect new ghost cities for a million+ people in a decade. If yuppies flood to a town, then there are no technological barriers to building at a pace of 100k/yr. I can't imagine 100k yuppies moving to Oakland every year. Inevitably, there will be a surplus and prices will go down.
The rise in local prices only persists when supply is limited. In fact, the local increase you speak off, is no different than scalpers re-selling new consoles at extortionate prices. This only lasts until manufacturers can get all their supply chains ready for the massive demand. Eventually, the manufacturers catch up, and the massive demand allows them to build their product at much lower costs due to scaling benefits.
With the deterioration of mid-western cities and their terrible weather, I'm surprised that internal migration to fair-weather states is as low as it is.
Everyone keeps wanting to bring up Tokyo, but they're ignoring the third biggest city in the US: Chicago. Chicago has world-class urban amenities and a broad range of high-paying employers. But housing prices are significantly lower there than in comparable US cities because they've consistently made it easier to build new housing.
Of course, you can bring up other reasons why Chicago might be less attractive, like Illinois politics and taxation, cold weather, crime, etc., but I don't think those are enough to explain the huge gap in housing costs. This kind of disproves Scott's model that there's a huge pool of people in the US who just want to live in a big city and growing bigger might attract them. If they were really as location-agnostic as Scott claims, they'd all be living in Chicago now. (Or maybe Dallas or Houston, the fourth and fifth largest metro areas in the country, that again have significantly lower housing costs).
So according to your hypothesis, homeowners should support construction of new housing nearby, because it will increase prices of the homes that they own. But typically we see the opposite. Are homeowners wrong?
I think homeowners care much more about quality of life than about land value per se.
There are much stronger arguments that upzoning increases land value (ie per acre) than housing prices (ie per unit), since upzoning increases the number of units that can be built per acre. I don't know for sure that homeowners understand these arguments, but the smart ones do. If they're still opposed to upzoning, then I think it's for quality of life reasons - which is, in fact, what they're always saying.
Why couldn't they just sell their expensive low-quality land and use it to buy quality of life somewhere else? And don't tell me it's because *every* suburban landowner has deep community roots and will live there forever. Entitled townie landowners routinely calumniate their neighbors who are long-term renters as some kind of rootless transients who are supposedly bad for the neighborhood because they lack a stake, but mysteriously never seem to think this about anyone who buys property, even if they are quite openly very loosely attached to the area. So the admission rule to the cartel pretty clearly seems to be based on financial interests and not some more abstract stake in the qualities of a particular place you are especially attached to.
Because in reality there's friction. You don't need community roots to want to keep your house, and to want it quiet and the street around it free from construction. Moving is a pain. A big pain, in many cases. I'm currently renting, and still would need a major difference in rent/ quality/ location to overcome these factors.
Whether this individual preference overcomes the societal needs is a separate discussion, and I happen to be somewhat pro-YIMBY, but pretending people who disagree with you are all insincere entitled villains is not productive - or fair.
Anyone interested in this topic should read the paper from Moretti and Hsieh on it. Examines the effects of reducing regulation for land use and how it’s related to employment, wages, and city size.
Maybe Houston and Austin are instructive here? Similar climate, similar amenities, similar density,, similar per capita GDP. The salient difference is land-use policies, and the rents in Austin are 50% higher. There's a lot of artificial scarcity baked in to housing prices in some places.
I'm tempted to ask if part of the issue is that the areas with more expensive homes relative to wages are simply areas with more established money.
On some level, in a classic economist "assume a can opener" sense, it's odd to have this difference between areas. If in some areas housing prices were higher relative to wages, you'd expect a movement in wages or in housing prices (or in people moving) to equalize it. Various reasons why that wouldn't happen ... maybe it's reduced costs in other parts of the budget (e.g. cars), maybe it's that they're more attractive places to live so people pay more for a better product, maybe something else.
Or maybe it's that in the areas with higher prices relative to wages, there's an added element of housing being bought with old wealth instead of wages.
In this view, some project city YIMBY utopia built out in the plains in Nebraska would be cheaper than NYC, simply because there's no rich trust fund babies.
I think the issue is that you are treating all types of building as the same, MattY is separating out hones and other stuff. People don't want to live somewhere because of the homes available (otherwise there wouldn't be lots of cheap property in the rust belt) but the other stuff. If you build more homes but keep the supply of everything else low (schools, shops, jobs, parks, etc) the prices will go down. If you build lots of nice new stuff but keep houses fixed price of housing goes up.
The big picture concept you're grasping is "spatial equilibrium", the idea that migration equalises quality of life. Quality of life has pull factors like "friends, jobs, museums, and nightlife" (agglomeration) and push factors like rents, travel times, and crowding disamenity. Basically, quality of life equals wages plus fun things minus costs and not-so-fun things, and this residual equalises across space. Imagine water levels equalising when the tide changes.
BTW there's two parts to "equalising". One is the direction: people migrate from worse to better. That's your "perpetual motion machine". Another is the impact: in-migration bids up rents, bids down wages, increases congestion, and worsens crowding. That's what stops the machine.
Example: Oakland gets cheaper and induces in-migration. More people = more bars = more fun, yay! In-migration continues. Bartender wages fall. Rents rise. Traffic gets slower. Bar fights increase. People stop arriving. Oakland is bigger. Maybe it's more expensive, or maybe it's cheaper if the growth was managed badly and had high amenity costs. Falling rents can represent falling demand just as much as they can represent rising supply.
This is spatial equilibrium, and it eats up housing price gains faster than we can induce housing suppliers to deliver them.
We totally need better write-ups of this concept. It's critical for zoning debates, and very underappreciated. Many people assume upzoning will change supply without changing demand. But that's wrong. (Some economists even embed this in models of housing density by assuming a "closed city")
Cameron Murray's stuff covers so many parts of this.
Doesn't this theory require induced demand to increase demand at >1:1?
Oakland has 500,000 housing units, plus 10,000 people looking for housing.
Oakland builds 1 housing unit.
Oakland has 500,001 housing units.
What happens next:
1. YIMBY: Oakland has 9,999 people looking for housing, so housing prices fall.
2. Scott: Two people hear that Oakland is a larger city with better night life and try to move to Oakland. There are 10,001 people looking for housing. Housing prices rise.
It seems like Scott's smoothly parsimonious pricing function requires that any increase in housing supply/population generates a >1:1 increase in demand. So if someone moves to an empty patch of land, that should induce two people to want to move there. Otherwise, constructing a second house on that land would cause housing prices to stay flat or fall.
I think you're saying "each marginal unit of housing built increases marginal demand more than it does supply", if I'm reading it correctly. I think this is obviously wrong -- the creation of 10 units of housing does not also create with it 10 people wanting to live there. If we think of it as a ratio of number of units demand created per unit built, the ratio is clearly not 0, but it's also obvious to me (with no evidence whatsoever) that it's less than one. Close to 1, perhaps, but not 1. The ratio also clearly depends on how big the city already is -- it's closer to 1 in NYC, and closer to 0 in the middle of the great plains.
There are also lagging factors here -- if you magic'ed 10 million houses in SF tomorrow, it'll take many years for the population to actually move there (after everybody already there all spread out to their own house). So the game is to build faster than people can move, otherwise house prices will go up as you build because you're not building enough.
Edit: I think your insight of the mobile young'un is broadly correct -- NYC is currently too expensive, so they don't move there. So the demand curve for these cities is actually very flat -- you can build 10% more and houses will barely budge. Another way of saying that house prices are inelastic to demand in big cities.
There is a problem with using median local income in this analysis. Restricting housing construction will generally raise rents which will price out the poorest residents, all things being equal (of course there are considerations like preferences around amenities and floor space and so on). This is part of why SF median income went up so much. Therefore building housing will lower measured median income as poorer residents move in, even though the incumbent residents are as rich as they were before (again ignoring effects on wages and so on). So you might expect housing construction to lower rent (a real benefit) and median income (a fake statistical artifact), thus keeping rent/median income where it was.
A good concrete example would be to think of someone working at Wells Fargo in SF 15 years ago. Even though rent/median income might not be that much higher in SF (growth of tech / low income people pushed out), for the typical incumbent SF resident, rent/income has probably gone up a lot, because banking wages (in this example) are determined nationally. (And then WF responds by moving jobs to NC to keep things in equilibrium). So construction is just this process in reverse - rent/median income will still constant but the typical resident will be better off.
I think what this misses is that demand is both number of people and ability/willingness to pay. The thing that NY has but other places on the eastern seaboard don’t is the global headquarters of the finance world. By connecting into that, the ability to pay goes up. Adding housing to the middle of Idaho doesn’t create a financial center and therefore doesn’t increase demand.
Not that this probably affects the central thesis here much, butfor any discussion of 'demand for housing' it's worth bearing in mind that the cost of housing is to an uncertain but significant degree artifically bouyed by its emergence as an apparently 'evergreen' investment asset. People buy urban property because the value is likely to rise, a prophecy which has become self-fulfilling over time.
I think you’re wrong because you seem to be misunderstanding the causation and some other factors at play.
Housing is not expensive in New York because it’s dense, but because that’s where the money and work to be done are. (Which began with the harbor, the river, etc.) That affects not just housing prices, but salaries, migration patterns, opportunities, culture, politics and regulations, square footage, demographics, etc. And yes, all that feeds on itself to increase demand which puts upward pressure on prices. But only because demand rises faster than supply – which is caused by people seeking money and work, not housing.
It won’t work if you start with the supply side. You can’t build a new New York, or 10x Oakland’s economy, by simply building enough housing.
People don’t move to places with housing, but to places with money and work (even if they can’t get a hold of it, as slums around the world illustrate). Ideally places with work and money would be the same places that have housing, but as so many dying towns, bereft of corner-stone industry, testify to, it’s not. Having the housing doesn’t guarantee the work.
Building more houses where there is high demand for housing *does* contribute to an already hot local economy, but has a net downward effect on housing prices.
PS: Note that new housing is always new, i.e. high quality, built for people with money, often in rapidly gentrifying neighborhoods. Newly built housing is rarely itself affordable housing (to local politicians’ chagrin). But it will make other, older housing, in adjacent or comparable areas relatively more affordable. Even if all prices go up, the prices for the old housing won’t increase as much as they would if there were less housing.
That also means that to understand housing prices for a city, you have to include the cost of housing for everyone who works in the city, even if they commute and don’t live inside city limits. (If public transportation is good, it’s not necessarily a bad thing to live in the suburbs or a nearby town.) We shouldn’t expect the average housing prices in SF proper or Manhattan to reflect the average rent/mortgage paid by the people who work there.
PPS: The difference between New York and Not-New York affects all the numbers: mean, median, modal, top and bottom percentile. I don’t think there’s any good number you can use to compare the cost and value of living in New York, to the cost and value of living on a plain in North Dakota or anywhere like it.
You’d get a better picture if you compare housing prices in different parts of New York State or NY metro area, which can be seen as part of the same market if you squint. And you don’t have to travel very far from Manhattan, before the housing market looks very different.
For good, generalizable understanding, it would probably be even better to use cities and regions that don’t have multiple world-class universities and industry epicenters, that attract people from the entire planet (and so doesn’t have practically infinite housing demand, like NY and SF). Looking at more normal cities will probably give a better picture of how supply and demand works in the housing market.
I think you would actively have to fight really hard to build a city with lots of people but no companies, restaurants, art, et cetera. The natural process would be for all of these things to come together. People move in, they want places to eat, so restaurants open up, et cetera. Employers move to cities because there are lots of people looking for jobs there so they get a good selection of employees, etc.
I think if Podunk built 4.5 million houses it's possible nobody would move in, but I think most desirable cities that have housing shortages now are desirable enough to prime the pump and continue the virtuous residents -> amenities -> residents cycle.
How does your theory explain the depopulating towns and cities throughout the rust belt? Albany, say? There's lots of housing there - so why aren't housing prices super high? Why aren't they bustling metropolises?
Plus, it seems totally plausible that a large enough building effort somewhere could start that pump. If Podunk managed to build a million houses, then they'll be cheap, and people who can work remotely will want to move in, starting the cycle.
Concerns about crime and poor infrastructure, or competition from places that *are* growing extremely quickly, like Arizona/Boise/Austin? I'm mostly guessing here.
The problem is that you can’t run an economy on amenities alone. If everyone just cuts each others hair and makes each others food, the city gets negative cash flow. (It doesn’t help that the first people to move to cheaper housing are typically the poor, who don’t have money to prime the pump. But even if trust fund babies moved in, and kept the economy afloat for a while, it wouldn’t be sustainable.)
A city needs some sort of primary or secondary industry to create value or bring it in from the outside. Those don’t just appear organically because people move somewhere, and the presence of employees alone is not enough to attract such businesses.
It may help that remote workers and industries that rely on them continue to take over the economy, but it’s not enough. There will always be other selection pressures for the economy than just housing cost: business taxes, geography and time zones, politics, climate, infrastructure, energy costs, social security, crime rate, educational opportunities, culture, etc. This is why cities (Detroit, Cleveland, St. Louis, Baltimore) shrink despite lots of affordable housing and potential employees.
Do you think your thesis applies to Atlanta? Chicago? Dallas? Seattle?
NYC and SF are special cases because they occupy a uniquely privileged position in our culture as a result of which demand outstrips supply by an extraordinary amount. This makes the price elasticity of demand exceptionally low. But I don’t think it changes the sign.
I was going to say this is a minor technicality, but actually the more I think about it, the more it may be a significant issue. In the early 2010's, the little town of Williston in the plains of North Dakota was actually *the most expensive* housing market in the United States:
It turns out that oil companies were willing to pay a lot for workers, and anyone who could have worked in construction could get more in oil, so construction got really expensive, and supply was not able to rise to meet demand. They probably developed *some* amenities that weren't there before, but the rise in price was really supply and demand, rather than the agglomeration effect for amenities.
The rest of Japan doesn't need good housing policy - it has declining population. Japan as a whole has declining population, but there's still some people that haven't moved to Tokyo, and as they do, Tokyo is still slightly growing (I believe).
Obviously, the time scale matters here. Certainly, if you simply disallowed anything more than single family dwellings you could prevent a sleepy town from becoming a major metropolis. So, certainly in the long term, there can be such a thing as induced demand (though whether this holds in expectation is unclear...not all possible cities will become cities). And what you are doing there is basically making the city less of an attractive place to live than it would have otherwise (maybe not to the people who want to live in a sleepy village but to the average person).
But, in the near term, we can model the amenities/jobs in the city as relatively constant. Or, to put the point differently, no one is deciding where to move by looking at the total number of units in that metro area. They look at the amenities and the price.
Thus, the only plausible way you draw more people to the city by building units is if house prices go down. In other words, absent the price signal what induces demand?
Now, in the longer term, more people draw more buisnesses, more restaurants etc etc... So certainly in the longer term you can induce demand but that happens after more people move in so on a longer time scale.
So yes, it's plausible that in the long term more housing leads to higher prices but only via reducing the prices on the margin in the short term.
Edward Glaeser (Triumph of the City) here would point out the relevance of the Z-axis (building height) and regulations preserving building stock, and in particular low building stock. San Francisco doesn’t have a lot of tall buildings. It has a lot of historic low buildings. So too does Manhattan, which brought us the elevator but also brought some of the preservation orientation that you are probably seeing in the data. Both cities could be denser and taller than they are. Enrico Moretti at Berkeley (where I teach) has a good paper on this that I will find and post a link to.
Japan has experienced a demographic transition, with an older population and few children, leading to negative population growth. There are whole villages where housing is very cheap since their owners have aged and their children are uninterested in the rural lifestyle. It's interesting that the problem is always "not enough houses (or water, or food, or jobs)" as opposed to "too many people".
Bottom line: more construction doesn't cause higher prices, ever, except in the sense that demolishing a 20-unit "average" apartment building and replacing it with a 20-unit "premium" apartment building will cause rents for that building to go up. There will also be a small effect on the immediate neighborhood, causing rents in nearby buildings to increase slightly due to the neighborhood being seen as more "premium". But housing prices in nearby neighborhoods will go down, because there is more supply of housing in the city.
You're wrong t think of housing prices as being driven primarily by housing density. Local desirability is far more important. In my part of Connecticut, house prices in low-density Avon are much higher than high-density Hartford or New Haven, because people with lots of money to spend on housing want to move to "desirable" communities - and one of the prime factors in making a community desirable is the quality of public schools. And public school "quality" (as measured by things like graduation rates, SAT scores, absenteeism, etc.) is influenced much more by the students attending the school than by any action the school teachers or administrators can take. So, house prices are high in rich towns because rich people want to live in the rich towns, so their children will associate with the children of other rich people, and absorb bourgeois expectations.
Re-consider your Oakland thought experiment: If Oakland were to build 10 times as much housing, why exactly would people with high housing budgets want to move in? They'd be moving into a hard-luck seaport city with poor schools and high crime. It wouldn't be for the awesome urban amenities, because Oakland doesn't have them. And no one will build them until the yuppies (or whoever has the money to demand the amenities) move in. Which won't happen because there's nothing to draw them in.
Extend your thought experiment to that wide-open plain in North Dakota: If you build a dense city with 3 million housing units to support a population of 5 million people, who exactly do you think will move in? Aside from the oil field workers. Would San Francisco tech workers move there as a more affordable alternative to San Francisco? If they want San Francisco's amenities, they won't move until your instant North Dakota city has the amenities. And who will build the bars and coffee houses the tech workers want if there are no tech workers for customers?
I think people are getting too caught up on the extreme thought experiment. Obviously you don't build five million new housing units in the middle of nowhere; what you want to do is to build marginal housing units in areas where there's marginal demand (and not already too many people).
So I dunno, maybe you build twenty thousand new housing units in Eugene OR or Boise ID, places that are already kinda nice and could be made more attractive by adding more people. Ideally you'd make everybody happy by ensuring that the increased demand does in fact raise house prices (so the current residents will be happy) but not nearly enough to put them at San Francisco levels (so the people choosing Eugene over SF will be happy too).
You can go further. What you really want to do is to attract young, mobile, middle-class white people. Once Eugene gets a sufficient influx of these people, it will quickly develop a reputation as a cool place to move after college so that it will attract people who'd otherwise be on the margin of moving to San Francisco. You need to build and subsidise the sorts of things that this sort of person would enjoy; maybe you build a government-subsidised bar district where bar owners can pay reduced rent and people can get cheap drinks... given that this is an investment in growing the tax base of town significantly, you've got a lot of money to play with.
(I have never been to Eugene OR, it just looks like a nice place on the map.)
I think you have to separate out *housing* density from job and amenity density. The places you're describing have a lot of both. But they're not the same thing. Think even more micro-level and this is obvious. The most expensive real estate in any given area tends to be in a central business district with lots of jobs and amenities but not an especially large residential population.
If you increase housing without adding more jobs or more bars or more museums, then you're not inducing any more housing demand. You're just creating supply and prices will go down. There's a tendency of course for housing to induce amenities which induce housing demand and so on. But if you just build a bunch more housing (especially in an area that's already pretty saturated and doesn't have space for new amenity development), you're not setting up that circular dynamic. A lot of the big ticket amenities are fixed in the medium-run anyway. You can double the size of NYC, and they're still not going to build a second Met or bring in two more baseball teams.
There are some weird, off-diagonal places out there to confirm this. City of Industry, California has a population of 264 and a density of 17/square mile, which sounds rural. But it also has 67,000 jobs, and it's quite expensive there. On the other hand, the densest cities in the US technically speaking are several New Jersey suburbs of NYC, all of which are much cheaper than the city itself because they don't have much to draw people in. The slums of major cities in the developing world are some of the most densely populated places you'll find, but they've got amenities and they're very cheap (consider that the most densely large populated cities in the world are Manila, Dhaka, and Kathmandu).
If Oakland builds only so many new houses that all the related factors of attractiveness would be perceived the same (diversity and density of jobs , higher quantity and quality of cultural/ social/ medical infrastructure etc.) I believe *this one* specific activity would lead prices to go down or at least to stagnate. The problem might be, that if Oakland builds only so many houses & the level of attractiveness stays exactly the same, the demand-effect of people wanting to move to Oakland is already surpassing the effect of the additional houses. So in effect prices go up. However, they do not go up as much as they would have without the additional homes. So Oakland, even if they were the only ones to build new homes, in this scenario is better off than if they didn't. (Except if they are perceived to be the only place around with a great YIMBY culture and sensible politicians, which might also increase attractiveness. But then it's *not* purely the number of homes again.)
I believe there are thresholds, and the attractiveness of our exemplary place O. rises only if there are so many more people, that this attracts, say, a new university, two major industries, a new high quality theatre ... or at least lots of new restaurants and cafes and local arts culture (I don't know Oakland, so using examples from my area). In other words, if it is perceived to be a bigger *and* therefore more high-quality / more opportunities / hipper/ ... place.
I would be interested to see good data, how density correlates with housing prices in my country. And how city size correlates with the latter. Or what about European cities ... okay, that's maybe a bit unfair.
And yes, I think building new homes makes sense, but I think housing prices need to be tackled by other means.
If you're specifically interested in: lowering housing prices for 'already inhabitants' of the place, or to enable children who grew up there to find affordable housing, or if you were specifically interested in providing more affordable housing for persons with low income, or to allow especially 'newcomers' to the city to find affordable housing: for all of those a combination of building new housing with specific regulation (for those new homes only) according to your specific goals could work well. At least in my country, where you're obliged to register with the local administration in all your living places within two weeks upon arrival.
>Or doesn’t it (as Yglesias argues) allow an economic perpetual motion machine, where you just keep building houses and generate infinity money as the price of each keeps going up?
Apropos of nothing, the canonical Urban Land Rent model in Econ, Alonso-Muth-Mills, assumes all workers labor at the platonic center of the city, an infinitely tall skyscraper which uses no land. I often think of this building and its employees.
Here's why you're wrong in a single sentence: Demand causes high prices, not new units.
Prices are high in SF and NYC because those are desirable places to live for a huge number of people. People all over the country and the world would live there if they could, and prices reflect that. The fact that the densest cities are the most expensive is true. But the high prices are not caused by density - rather, the density and the high prices are both a consequence of crushingly high demand.
" the density and the high prices are both a consequence of crushingly high demand."
As I tried to explain in the post, it seems like the "crushingly high demand" is itself a consequence of density. There is crushingly high demand for real estate on Manhattan, but not real estate on some otherwise-identical East Coast small island, because Manhattan is dense and the other island isn't.
As a thought experiment, suppose someone built a Manhattan-sized city on Chebeague Island (a random island in Maine, currently only 300 people, land value currently in the 5 digits per acre). Would land values most likely go up or down? If you agree they would go up, what is causing the increase, if not the increased density?
One major underlying variable could be attractiveness of the place. Attractiveness, which can stem from different elements: the status of the city as (local) capital, the natural environment in the surroundings, the city's image as being hip or you name it, the amount of available jobs and career prospects, the quality of cultural infrastructure (theatre or whatever you are into), the perceived likelihood to find like-minded people, etc.
The more attractive, the more people want to live there, the more dense/bigger it becomes and also the prices rise at the same time.
Some of those elements that drive 'attractiveness' are *linked* to density, but they *are not* density. I believe desity is an unperfect proxy for some of those (number of high quality theaters) - and unrelated to others (beauty of the natural surroundings).
> As a thought experiment, suppose someone built a Manhattan-sized city on Chebeague Island (a random island in Maine, currently only 300 people, land value currently in the 5 digits per acre). Would land values most likely go up or down? If you agree they would go up, what is causing the increase, if not the increased density?
A city is not merely a collection of buildings. Who is living in the new housing? Who is working in the new offices? Who is shopping in the new stores? These are all questions of demand, and the price of the land values is going to heavily depend on whether we conjured new people ready to hit the ground running.
It seems likely that building a large amount of new integrated infrastructure will increase property values, but this isn't guaranteed - sometimes constructed stuff has negative value, and we can call this "urban blight". It would be weird for an entire city to be blight, but then again it would also be weird for a city to be constructed with no pre-existing demand.
And I have to call you out for a bit of sleight of hand here, Scott - Yglesias is concerned with housing prices and that's what you engage with for the most part of the main post, but here you mention *land* values specifically. Putting on the Georgism hat, that's an enormously important distinction to be equivocating. In fact, the land values won't change at all - by tautologically useless definition!
If you waved a magic wand and conjured a few million new homes on Chebeague, I have no idea what would happen to the housing price. You'd probably obliterate any ability to enforce property law, so they'd go down in a de-facto sense if nothing else. It seems quite likely that by the time the dust settled you'd have an empty decaying cityscape, so definitely lower than present.
If you conjured 300 homes on Chebeague, I bet prices would definitely go down in the short and medium term. Probably the long term too by my guess, but harder to say.
If you conjured a few million new homes with new residents and industry fully running, then I expect prices to skyrocket. But again, that's an effect of demand rather than supply. I do not take it as a given that demand will automatically and elastically materialize in the presence of supply.
One could also describe a feedback loop that involves density and high-demand somewhere: there is a high demand for a certain place, more people moving to a place leads to higher density, this leads to more industry being attracted and more needs for culture, which leads to more jobs & more new theatres set up, which leads to the place being more attractive, ...
Why is it important to distinguish between 'density' 'high demand' and 'attractiveness of the place'? Because it impacts the hypothesis that more housing leads to more density leads to higher prices. Whenever more density doesn't lead to 'higher *perceived* level of attrativeness', then in this model, it also shouldn't increase prices.
There's a feedback loop, but what matters here is the elasticity, which is less than one. We can measure this empirically.
New housing lowers prices via the mechanism of adding supply, which is basic economics and how we expect markets to work.
New housing could raise prices if it also made the city a more desirable place to live and shifted people's preferences, such that there was more demand to live there after the new housing is built.
If you think it's unclear which of these effects would dominate, luckily we have empirical data that over and over and over shows adding housing supply does indeed lower prices on a local level. This is a fairly well established result that replicates well.
You currently seem like you're at the stage of understanding the thought experiments pretty well, but not understanding them on a DEEP level. For example with your hypothetical, this has actually happened before! Kind of. China built a bunch of 'ghost cities' basically out of nothing, and while there was an initial craze of speculation and tons of investment and building... nobody went to live in those cities most of the time. And now they're deeply distressed assets worth basically nothing. When nobody actually lives in the ghost city, it doesn't matter that they have super dense housing. There's no demand. (the only reason they might be worth something is that the CCP very, very much does not want to pop their huge housing bubble and is likely to bail out some of the parties involved)
edit: I'm actually thinking about drawing out the weighted DAG graphs here to make the conceptual stuff easier, but it would be pretty long. I'd love to do this as a guest post.
If Oakland were to build many more houses, this wouldn't be a "ghost city", it would be responding to natural existing demand, in pretty much the same way New York City and other great cities were created. I still don't understand why the result would be different.
The ghost city comment was purely to your point about 'what if we built a bunch of skyscrapers on a random island in Maine'. China did *basically* that, and it went pretty badly for them.
For a case like Oakland, you'd again have to turn to the actual evidence. You can lay out theoretical models for prices moving in either direction, so it's up to empirics to tell us what happens. And empirics tell us that new construction lowers rent, and that's a very consistent finding.
What is the natural demand in Oakland today? What would it be the day after you built 5 million houses? There isn't a natural existing demand for 5 million houses in Oakland today, nor would there be the day after you built them. Induced demand might get you there eventually, but it wouldn't be overnight.
The fact that your model of density = demand cant explain the time delay indicates that you are missing important variables from your analysis.
At the margin, an additional unit of housing increases in “density amenity value” and increases the supply of housing. When the elasticity of demand is larger than the elasticity of “density amenity value”, an increase in housing units leads to lower prices. Empirically this has been found consistently
"As I tried to explain in the post, it seems like the "crushingly high demand" is itself a consequence of density."
Perhaps a downstream consequence, but there are other variables between them that explain the time response. People do not seek out high density any more than they seek out the crushingly high rents. They seek out Jobs.
If there were no jobs on Chebeaque, your island would sit vacant and not increase in land value, or perhaps go down.
Conversely, put a million well paid job listings for Chebeaque, and the people, density, and land value would follow.
I agree there is a relation between density and value, but it is not a two variable feedback.
You are identifying an effect that probably exists: if you make a city denser via building more housing units and having people move there, you will increase demand because the city becomes more attractive due to agglomeration effects. This theoretically raises the price of housing.
But there is an opposing force at play—the increase in supply. If the supply increase outpaces the induced demand, competition is introduced into the housing market and theoretically the price of housing goes down. The question is whether supply effects outstrip the demand effects or the other way around.
[This paragraph has been edited, apologies for being wrong and confusing before.] A simplistic thought experiment. If you build 100 houses and that induces the demand of 150 people—you have moved the demand curve more than you have move the supply curve and prices go up. If you build 100 houses and only 50 move in, there are fifty vacant units exerting competitive forces on the price of housing, making it go down. Both are possible in a world where density is observed to be positively correlated with prices across cities, but there are factors other than density affecting demand. The question is which one happens in ours. The answer can be different for different cities at different densities.
On other determinants of demand: demand for housing does not just depend on the presence of housing and/or people. Think to when the world ecomony was primarily agricultural. I am oversimplifying here too, but you had to live near a water source to make a living. You could magically instantiate a million houses in an arid desert but no one would move there if they could not survive. Why did people build settlements along rivers instead of a random distrubution across the Earth’s surface? Why didn’t we just all stay in that one place in Africa if the density of everywhere else was 0? The basis of your argument rests on density being the unique determinant of demand for housing and the rest of the variation being random noise, but that is a difficult claim to defend. And as long as there is something other than supply of houses that affects desire to live somewhere, you cannot draw conclusions from simply looking at the correlation between supply and prices across disparate locations. You must do something else to distinguish between the 150 world and 50 world, because those other determinants of demand are probably affecting city size and prices.
Of course present day technologies make living near a river less relevant to whether you can find a job. But you still see the other determinants of housing demand at play in dying coal towns. I’m skeptical you could really make a new Manhattan* in the middle of nowhere simply by virtue of building a bunch of houses. How will you get people to move there? What opportunities will you offer them? How will they make money and live?
[* EDIT: I realize the question is not about making a new Manhattan but rising land value(? I will suppose you just meant housing prices here instead). But what sort of conclusions are you drawing about the effect of density if housing prices do rise but not to the level of Manhattan? If that happens, why the difference in prices between the two locations if the density is the same?]
Also, housing density is not population density. I know I am being a little loose with the words, but it’s good to keep in mind. As long as it’s not true that a singular person moves in every time you build a singular housing unit, the statement holds. The theoretical question is whether half a person moves in or 1.5 of one for each unit built.
I generally agree with your hypothesis. More housing is more supply which should reduce prices. But a simplistic Georgist analysis would seem say that more housing increases the value of all the other property around it, which includes other housing. It doesn't seem impossible that in certain circumstances, the 2nd effect could outweigh the 1st.
I'm curious if any Georgists would like to weigh in on this one?
You vastly overestimate the percentage of Americans that want to live in a dense city. Some Americans do, but most don’t, so density is at best a wash and probably reduces demand. Thus, the causation flows almost entirely in the other direction, with high demand causing high prices which cause density.
When considering the price of a thing, demand is an important variable that can not be reduced to supply alone.
There are volumes of ink that can and have been spilled about the details, but you're not getting this to reduce to a function of one variable.
The argument is that, on the margin, increasing supply will reduce price of a particular good. An observation that the price of that good is currently highest where the total supply is highest doesn't really engage with the argument. Second-order effects are table stakes.
What about the following theory, which is consistent with both your arguments and the studies: if you build houses, prices will temporarily decrease, but then they will increase later after some amount of time (e.g. 20 years).
The delay in the price increase comes from the long time it takes for density effects to materialize: people don't just want to move to a dense city, they want to move to a city with jobs. However, it takes employers time to set up in a new city, and therefore, the increase in employment opportunities that follows from density might take time.
(As an aside, if people want to move to dense cities due to jobs and if those jobs materialize disproportionally in dense cities, then it is a bit of an economic perpetual motion machine; the efficiency gains from density must be *huge* to justify such a story.)
I found this a bit upside down and tried to put down some notes. Not ready yet, but as some points seem to recur in discussion ....
First, what if what if density doesn't drive prices, and prices do not drive density? What if instead, there is a third underlying variable that affects both. That variable might be attractiveness. Okay, the text mentions this.
Second, but what concretely is making a place or city attractive? Elements might be: the status of the city as (local) capital, the natural environment in the surroundings, the city's image as being hip or you name it, the amount of available jobs and career prospects, the quality of cultural infrastructure (theatre or whatever you are into), the perceived likelihood to find like-minded people, etc.
Third, what then is the relationship between attractiveness and density? I believe beyond a certain threshold density as such is not attractive to (most) people. I believe desity is an unperfect proxy for some of those factors of attractiveness (availability of high quality theaters) - and unrelated to others (beauty of the natural surroundings).
Forth, instead of calling it a proxy, one could also describe a feedback loop that involves density somewhere: more people moving to a place leads to higher density, this leads to more industry being attracted and more needs for culture, which leads to more jobs & more new theatres set up, which leads to the place being more attractive, ...
Fifth: why is this important: Because it impacts the hypothesis that more housing leads to more density leads to higher prices. Whenever more density doesn't lead to 'higher *perceived* level of attrativeness', then in this model, it also shouldn't increase prices.
Sixth: But what about the feedback loop? Well, it is probably happening in many areas, but there need to be other factors involved, and it doesn't need to happen always. Among others see next:
Seventh: There are probably also thresholds. Not every 1% of new housing leads to more attractiveness factors or the city being perceived as 'bigger'.
Eigth: Isn't city size the factor and not density? I suppose only few people really want to live in a dense place as such. Maybe city size is a better predictor for those attractiveness factors? Would be interested to see if prices are correlated better or worse.
Ninth: Correlation is not causation. That's clear to everybody here I suppose, but I had been missing a more explicit follow-through on this in the text.
Tenth: Why *perceived* level of attractiveness? It's all in the eye of the beholder.
TL;DR More housing lowers rents immediately. More density slowly increases rents.
I think it's important to be a bit more careful about the timing/delay of impact when thinking about the different steps in the causal diagram here.
Here's my mental model:
A) More newly built housing -> People in already in city consider moving to that newly built housing
B) Rent prices come down (on quality adjusted basis) -> People in other cities consider moving here
C) More people living in the city -> demand for the city goes up, since some people like living in denser places with more people and more businesses
D) Many high income people -> new businesses open that cater to high income preferences
E) Many high skill people living in a place -> more high paying employers set up offices in city
F) Many high paying jobs -> people want to live in the city (housing demand goes up)
In terms of how quickly these channels operate. I think A>B>C>D>E>F
Channel A is the fastest to act. So new housing very immediately affects the set of options of current residents and starts to lower rental prices (relative to what they would have been under the status quo).
This is partially offset by B, with people seeing the lower prices and considering moving to the city.
Channel B can at most partially offset the impact of A (since by definition B is people who are moving *because* the rental prices are lower). Considering moving to a new city is a slower process than moving within a city and as a result, this channel also generally reacts more slowly than A.
Channels C + D are related to the impact of the changing population on the desirability of the city (either directly through the influence of peers or via new businesses that open).
Both of these are even slower processes. It takes time for the population to expand in response to the new housing and for people inside/outside of the city to notice the changing demographics. Setting up a new business is also a bigger investment that takes more time compared to a family moving between apartments. Also notice that these channels only make sense if the population is growing, but if B is growth caused by lower prices, then it's still hard to see how this could lead to a net increase in rental prices (relative to status quo).
Channel E (employers choosing where to locate offices) is much much slower. Many cities wish they could convince more high paying employers to move to their city, but it takes a lot to overcome the inertia. Also high rents for housing and office space directly push against the desirability of a city to employers, since those add to the cost of moving to the city.
Channel F (people moving to areas with good jobs) doesn't happen until E happens, so it is yet more delay in the response.
In my view, the new housing lowers prices* in less than a year after the new housing. All of the other factors kick in much more slowly over a period of years, and at most partially offset the decrease in rents.
* on a quality adjusted basis, relative to the status quo of not building.
Not understanding why you are only talking about reverse causality as a possible challenge to your interpretation. What about omitted variable bias: there is some other underlying factor that is associated with density, which is in fact driving higher housing prices. I would tend to think that OMB is a huge problem here, as there are many very dense slums in the world that are not in fact not expensive at all, most famously Kowloon City.
I have a few guesses as to the origin of OMB, most importantly, jobs. There are certain locations that are just much better in terms of jobs. If you want a job in the media or finance, you should probably move to New York. If you want a job in government, you're going to have to move to DC. If you want a job in the movie business, LA is really your only choice.
If jobs are in fact driving much of the increase in housing demand, building extra housing is not going to raise housing prices. Moreover, if these are relatively high paying jobs, then people are still going to come even if you don't build anything, because they'll be able to afford more than the average resident in the area. And this is exactly what has happened in the bay area: the working and middle class has steadily been pushed out by tech professionals.
This seems like a far more natural interpretation than people move to an area simply because there are a ton of other people already in that location. New York's density is a strike against it in my book: too noisy, too crowded, too stinky.
My guess is that what you're really thinking about is agglomeration effects, but returns to agglomeration come from industrial agglomeration, not from residential agglomeration. It's a critical mass of businesses in a given location that makes it into a jobs hub and attracts migrants.
I think this this analysis suffers from three problems:
(1) Reducing a complex multiple variable and step interaction to two factors (housing density & cost). There are a large number of motivation factors which you touch on but then discard from your model to use density as a proxy(Jobs and income being the most significant).
(2) confusing a correlative measure (density) for a cause. Density correlates with cost because they are both result from the same cause (Jobs and income). If stripped of its jobs, Manhattan would have low housing cost, despite the high housing density. Conversely, If you built 5 million units in Oakland or the North Dakota, the cost plummet, at least initially. This transient phenomenon only makes sense if you include the omitted variables.
(3) Explaining examples of urban population decline. There are many cities which have experienced population decline due to loss of industry. If population density were the primary motivational driver, this would not be the case.
At best, it can be said that people follow jobs, Jobs & employers follow population density, and higher housing density and housing cost both *result* from competition for increasingly concentrated locations.
If jobs opportunities are held equal, people will flow from high cost to low, not the other way around.
I am skeptical of the two charts you showed at the top because: (1) They use survey data when there's better data available. (2) The category "Urban Area Corresponding to Major Metro" seems like it allows the authors some choice in what to include or not include. The second one also seems a bit arbitrary - including San Diego & Cleveland, but not Minneapolis. (3) Neither of these includes "Podunk" or "Empty Space", so connecting them to the hand-drawn chart is extrapolation.
Is it better to use housing price or housing price divided by income as the vertical axis? I could see arguments in both directions. Both housing price and income probably change as more housing is built.
I am also confused by the relative positions of Miami and San Francisco in the two charts. Was Miami significantly more expensive than San Francisco in 2015 and significantly less expensive in 2019? If no, then the error bars on the data are large enough for me to not trust the trendline. If yes, then maybe someone should figure out how to do what Miami did.
Some initial observations from looking for the highest things on the list: (1) The most expensive core-based statistical area is Vineyard Haven, MA, a little island off the east coast. Manhattan might be even more expensive - it's not listed separately - but Martha's Vineyard is more than twice as expensive as metro New York City. (2) San Jose, San Francisco, Los Angeles, and San Diego are all in the top 25, but so are Santa Maria, Santa Cruz, Napa, Salinas, San Luis Obispo, and Santa Rosa. It seems like California (or at least coastal CA) is unusually expensive, even for small cities. (3) Hawaii and Rocky Mountain ski towns (Jackson, WY, Breckenridge, CO, etc) are also unusually expensive.
My guess is that there is still somewhat of a positive trend between housing price and city size (or density), but that it is noisier than these graphs show, especially for smaller cities. It should be possible for a city which is currently surprisingly expensive relative to its size to shift down and to the right by building new housing. For example, on the top graph, if San Diego became like Las Vegas.
I agree that Tokyo should not be placed on these graphs. But it would be interesting to see where Tokyo lies on a graph with other Japanese cities. In a similar graph for Japan, is the slope positive or negative?
I can't follow your logic. Primarily cities are composed of a few moving parts. Primarily there is a source of a harbor or natural resource that fuels primary demand. Think of the ports in Chicago (and the stockyards during the turn of the century), or other major port cities. Indianapolis' main driver of economic growth is its interconnection of highways for example. These are elements of any city that can't be changed or relocated. The Chicago mercantile exchange is in Chicago because Chicago outbid St. Louis for stockyards (fascinatingly because they put in a sewer system) and because they have access to a river and ports. Surprisingly, not many people know that Cleveland, Ohio used to be much bigger than Chicago. This maps onto countries as well. Countries that are farther away from ports tend to be poorer, while countries that have large amounts of natural resources and are historically non-European tend to be resource cursed to exploitation.
If it were cheaper and more efficient (ie made more money) to have the Chicago Mercantile Exchange in Pidgeonforge TN it would be in Pidgeonforge TN. But it isn't.
So, cities that have a primary resource that can't be relocated tend to have a primary driver of economic growth that is stable through economic fluctuations. Software development can done anywhere, and often is, but the port structure of a Seattle or San Francisco won't change.
As to the cost driver of housing primarily? House prices in the long term appreciate in those places where costs are expected to go up. And prices are more likely to go up in those cities, over a ten, twenty or thirty year term, that are near resources that are structurally economically self sufficient. Were there some way in which Topeka Kansas had a structural comparative advantage over a port city on the coast then people would all move to Topeka Kansas and crowd around that source of economic development.
The farther you drive away from a major port the less expensive housing is, typically. Meanwhile ports tend to be geographically landlocked or have limiting geography, such as the LA basin, New York, or San Francisco.
Port cities are comparatively expensive because the ports are continual sustainable engines of economic growth that don't migrate with people with the fluctuations of the economy. That's it. There's not a whole lot of mystery here. This prisoner's dilemma unstable state Nash equilibrium notch is largely incorrect.
The NIMBY problem makes housing prices worse in those areas where people take over zoning commissions, but in cities that have a port housing in the long term will remain expensive. In cities without a port NIMBYism is much like price controls - all it will do is disincentivize housing even further and lead to urban blight. The less affect a port (and it's subsequent markets) has on sustainable long term effect on urban growth the worse NIMBYism will be for the economy because during a downturn prices will remain high. This is why NIMBYism in San Francisco is comparatively worse than say, NIMBYism in New York or Chicago as its economy is more heavily dependent on the tech sector which is highly cyclical. High prices during a downturn lead to people moving away, lead to empty store fronts and then urban blight which becomes self reinforcing.
You're overthinking it.
EDIT - On further review, I can't tell if you're joking or not. You could make everyone richer by burning money and causing a small amount of deflation, but I wouldn't recommend it. This looks like idiot bait.
I think what this argument is trying to show is, if Oakland got 10 times bigger, *with the same restrictions on housing development*, then the price of housing would go up. Which I think is correct, but it's controlling for the wrong thing, because loosening restrictions on housing development is precisely the mechanism that YIMBYs want to get more housing from. (One question about the scenario in the post is why people would build more housing if it's not easier to do so.)
What YIMBYs are saying is that reducing restrictions on housing leads to more housing and lower prices. This is clear from thinking about the supply and demand curves. In the absence of artificial restrictions on housing development, we would have a nice supply curve that goes from bottom left to top right. With restrictions, developers can't build as much as they would like, and basically the curve hits a wall at some amount of housing units. So the equilibrium with restrictions occurs at a lower quantity and higher price than the equilibrium without the restrictions.
The 1st order effect of loosening the restrictions is to move the situation closer to the equilibrium without the restrictions. If you read "The Economic Implications of Housing Supply" by Glaeser and Gyurko (2018), you see that the housing cost doesn't go too far above the minimum cost to build, if your restrictions aren't too bad and the housing market can adjust to demand (their example is Atlanta). For the Bay Area, the price is more than double the minimum production cost (these are both shown in their Figure 2). So there's a lot of room for prices to go down in places like the Bay Area.
What you're pointing out here is that there's a 2nd order effect, where having a bigger and denser city makes the demand go up. This is true, but I suspect that the effect is just smaller. "Growth, innovation, scaling, and the pace of life in cities" by Bettencourt et al. (2007) shows that if you double the size of your city, a lot of metrics around socioeconomic efficiency of the city goes up by ~15%. So things like your GDP per capita (and crime rates) grow by ~15% if you double the population, which explains why people want to move to big cities, and would make it more expensive to build housing (higher labor cost) and make people willing to pay more for housing, but it's not big enough to counteract the 1st order effect.
There's probably better studies to support what I'm saying, but these are just things I can think of off the top of my head.
Reading the Glaeser paper again, looks like they were actually arguing that the supply curve for housing looks very different from a diagonal line (it's very instructive for showing why Detroit, Atlanta, and San Francisco have different kinds of housing markets). But I think my argument in the comment still holds.
You're working with a theory that there is a pool of people who want to live in big cities, but individual big cities are to some extent substitutes for each other. This pool can be overwhelmed with sufficient supply, but if it is not overwhelmed then big cities will be expensive *because* they are big - there is unsatisfied demand for dense living.
I disagree. I think people want jobs, and they move to big cities because this is where the jobs are.
"But that's just adding another step! The jobs are in the big cities because that's where the other people are!"
To an extent this is true. You can set up a sandwich shop in Sydney and sell a lot more sandwiches than if you set up a sandwich shop in the Great Sandy Desert.
BUT it isn't enough! Each additional person creates LESS THAN one extra market-rate job. If this was not the case and density fed on itself in an ever-increasing way, we would see cities grow ever bigger and bigger, with the goliaths outcompeting the giants. Why do some people live in SF rather than New York City? It's not because SF is a discounted option relative to the more populous and therefore more desirable NYC.
As a further counterpoint, consider declining cities like Detroit. If density feeds on itself, and it is the mere fact of more people creating more demand, then these cities should have not depopulated. Detroit was bigger than many other cities that have not shrunk so it's not simply a scaled-up example of the broader urban immigration phenomenon.
What you're missing is that a city needs an underlying economic engine. This is very obvious in small towns where there is often one dominant local industry, and the whole town's fortunes rise and fall with it. Not everyone in Nangwarry works in the forestry industry, but it's the health of the forestry industry that decides what housing demand is like and how many sandwiches you can sell there.
This continues to be true even for mega cities like NYC or Tokyo. Yes, they have so many people that there are lots of jobs supporting all the other people there, doing things like cleaning, car repairs, etc. Yes, there are so many people that they are good places to set up industries that could be based anywhere but want a network of similarly-skilled people in close vicinity. But there is a fundamental driver of why these places are big - they have a geographically fixed multiplier of economic value that is extremely powerful. That engine is a port.
There is a reason that all of the world's biggest cities are located on coastlines, and it's the reason that Adam Smith identified in The Wealth of Nations. Sea trade is extremely efficient. If you have a port, you can cheaply trade with every other city that has a port. This in turn allows you to unlock greater division of labour and greater efficiency than would otherwise be possible.
That's not the whole story of course - you need to have things to trade through the port. But it's a key reason why everyone in SF and NY doesn't just move to somewhere like Austin where they're cool with building stuff and they can have a super-dense mega city.
I think D.'s and Robert Donnelly's comments together explain it well.
You're missing an intuitive understanding of causality that maps back to a logical framework. I recommend Judea Pearl's Structural Causal Models, which he explains simply in his Book of Why. Note that the Book of Why is imprecise in a few parts, but it's a good enough start. The "correct" explanation is given in "The Do-Calculus Revisited," also by Judea Pearl, though it's a harder read.
I want to address 2 points, the long term correlations vs short term studies and the potential gains for a defector city in scotts hypothetical.
For long term correlations, recall that its possible to be a failed city. Baltimore was the 2nd largest US city in 1840, now its 30, and not just because a bunch of western cities overtook it, many eastern ones did to. In regards to induced demand, if a city is a long term success, it will have many houses and high prices ie NYC. Within some margin of acceptable housing policy it could be expensive relative to its success or cheap, but still bound to that curve. The studies show how a city can overperfom its position on the curve. But it would be foolish to think you could easily control a citys overall success. A nimby policy on the premise of capping housing prices by capping city success is likely to become baltimore cheap, not upper west side 30
years ago cheap.
Success is relative. The defecting city would see short term increase in housing prices as it under perfoms its spot on the curve. Long term will be driven by success but intentionally restrictive policy is likely to cause the bad kind of price drop.
Suburbs dynamic is different because its success is largely a function of the nearby city thus exogenous. It can have no housing growth but still be very successful and therefore expensive.
I see statewide control a la CA as not primarily resolving a prisoners dilemna between big cities, but forcing suburbs to upzone along with the successful city they are attached to.
Finally, success is also good. The YIMBY appeal isnt just globally lower prices, you get 1) more successful city 2) overperform your spot on the curve. Win win.
how do we account for slums? clearly it's possible to build housing at very low cost in very high density locations, in the absence of any regulations.
If you believe that, at the margin, building a thousand new units of housing in Oakland would cause housing prices to rise because of the induced demand, then you must logically believe that at the margin, tearing down a thousand units of housing would cause housing prices to *decrease*. Do you?
I'll even throw in the explanation of why it "should": some of the people living in the houses that were just torn down will say "screw this, I'm moving back to Stockton", and some of the people on the outside planning to move to Oakland will say "meh, the city doesn't seem so hip and cool now that they tore down those apartments, so now I'm rethinking this move". Those are things that will absolutely happen. They are the mirror image of the things that will happen if new housing is built, that lead you to believe that building new housing locally increases rents.
I'm pretty sure you recognize that this is false - there will be *some* people who abandon their plans to live in Oakland if you tear down a thousand apartments, but there pretty obviously won't be so many of them as to drive down rents at the margin. And at the margin, the difference between -1000 units and 0 units, is going to be very similar to the difference between 0 units and +1000 units.
Alternately, I look forward to your argument that Oakland should help its fiscally stressed renters and can't-quite-afford-an-apartment homeless by tearing down homes.
We do get occasional natural experiments in what happens when you destroy a bunch of housing in a city. The Christchurch earthquake of 2011 destroyed about 10,000 houses in this city of 400,000 people, but only killed 185 people.
Did this earthquake cause a massive price spike as everybody rushed to cram into the remaining dwellings? Or did it cause a price reduction as people found the now-smaller city less amenable?
The answer is: surprisingly hard to find! Looks like it was kinda flat in the immediate aftermath as people decided to leave the city. Then by 2014 prices were increasing, but this was largely due to a spike in demand from increased building activity as tradesmen from across NZ moved to the city to get jobs rebuilding. (There's other factors too, of course, living next door to ruins is less amenable than living next door to empty land.)
I think I do believe this. Certainly if you tore down all the houses, turning it into an empty field, housing prices would decrease to the usual empty-field-in-California level. I'm not sure why it wouldn't be monotonic, so I expect this would decrease prices.
I think the main factor pushing against this would be inertia - people who already like living in Oakland would be reluctant to move. That doesn't apply in the building case.
I don't believe this. I think even if you entirely wiped San Francisco off the face of the map, it would get rebuilt, because the economic forces that caused it to become a city in the first place still apply.
Hiroshima got nuked, and then hit with a typhoon shortly after. It got rebuilt.
Rikuzentakata was mostly destroyed by the 2011 tsunami. It got rebuilt.
Cities like Mariupol and Bakhmut have been all but completely depopulated of civilians during extended fighting in the current Ukraine war. I fully expect them to be repopulated and rebuilt.
> I think even if you entirely wiped San Francisco off the face of the map, it would get rebuilt, because the economic forces that caused it to become a city in the first place still apply.
San Francisco used to be a major port, but it gave that up for the sake of its now-dead longshoremen's union.
The reason San Francisco appreciated in the recent past was that people wanted to move to Palo Alto but found they'd been priced out.
It's on terrible terrain; the reason you'd want a city there is really just to take advantage of the natural harbor. But since that's not currently in use, I don't see a lot of impetus for rebuilding. The other major natural advantage is beaches, for people who like living near beaches.
It shouldn't be monotonic *if* the amount of houses is not the variable driving the price, but linked to the variables driving the price. Linked in ways that are more complicated than 1 : 1. In what feels like 50 comments, this is exactly what is being argued.
>If you believe that, at the margin, building a thousand new units of housing in Oakland would cause housing prices to rise because of the induced demand, then you must logically believe that at the margin, tearing down a thousand units of housing would cause housing prices to *decrease*. Do you?
Many urban planners do believe equivalent claims in the context of street construction and induced demand for driving. The search term is "road diet".
I think the essential chain of causation is something like:
1. Faster economic growth causes higher prices
2. Higher prices cause higher density (and other negative externalities)
3. Higher density (et al.) causes slower economic growth
4. Slower economic growth causes lower prices
So you have a dynamic equilibrium. Density (and other negative externalities) is why economic growth and prices in clusters like NYC or Silicon Valley don't just explode upward endlessly. Density is a brake on growth and prices, not an accelerator. It is correlated with higher prices because higher density is needed to fully brake the growth of a region with greater economic potential, but the density doesn't cause higher prices but the opposite
> Wouldn’t the alternative be some kind of highly unparsimonious pricing function like this?
I don't get the argument of this graph. Doesn't your imaginary graph look like you're talking e.g. about Minneapolis-St Paul (on the real graph) and just pretend that all other cities fall exactly on the line?
> This is a coordination problem: if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work.
Well, you can also spin the opposite narrative just as easily!
Assume cities like high land prices (eg because it gives them more tax revenue, if they use property taxes or land value taxes). Then each individual city can get more revenue by building more, but overall all of them together might perhaps not make more money.
Building more would be a 'tragedy of commons' in this situation.
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Overall, I think your analysis is more-or-less correct, but that property taxes (or even better land value taxes) can fix the incentives for cities, so they can build up without having to coordinate with other cities.
Yes and no... the book I would point you to is Alain Bertaud's "Order Without Design" if you want a good, reasonably accessible foundation in how the economics of cities work.
Essentially a city is like a big party - it's a huge market that becomes exponentially more productive the larger it grows... so long as the city can effectively mitigate the downsides of proximity and density and avoid having the party fall apart after a few crucial guests leave. The biggest issue is maintaining mobility - most US cities are car-dependent. Car dependency allows cities to sprawl out and provide a lot of living space per person, but it also makes moving around very difficult above certain densities - thus making it hard to build an effective city of more than a few million. To get bigger, cities have to get more creative with their transportation networks.
New York and San Francisco are big, very successful parties that everyone is trying to get into. In one sense, they are unaffordable because it's very hard to get into them and allowing more people in would make them more affordable. But in another sense, it is the fact that so many productive and attractive people are clustered together in these cities that makes them so attractive and hence unaffordable.
It is certainly not true that building more housing makes prices go up. But to strong man this argument: ultra high prices are a drag on growth in very productive and attractive cities. Building more housing will lower prices, which will in turn allow more people to live in the city, further increasing its productivity and in turn attracting even more people, causing prices to eventually go up. Sort of like if you start turning away guests at your party just because you don't want to have a big party. Turning away people doesn't make your party more accessible (it makes it more exclusive obviously), but maybe it will stop the party from really gearing up and becoming even more popular.
So the real conflict is over urbanism: do you think it's a good thing for lots of people to be able to live together in cities and benefit from them? As a city planner and urbanist, my answer is yes: I think cities provide all kinds of benefits and I defer to people's expressed desire to live in cities. Outside of Manhattan, I would argue most US cities aren't very dense at all and that there's no reason to be afraid of letting them densify and shift towards different forms of transportation. Right now I think we have a chronic undersupply of the kinds of urban places people want to live in and that are capable of providing satisfying and high-paying job opportunities and life experiences in an advanced economy, so I support letting people build more cities.
He cites plenty of econ papers, going so far as to explain why the ones that concluded the opposite were mistaken or what they failed to include. I think you can start with his post and its links, and go as deep as you like to satisfy yourself about how it all works.
The key is that no city is a closed system: people move to different neighborhoods within a metro area, and new arrivals to the metro area have a choice as to which neighborhood they go to. Building new housing in one of them causes average rents to go up there because (A) you just built new housing, which is probably priced above median itself, and (B) the signaling that this is a good yuppie neighborhood causes follow-on moving. However, that construction and those moves *prevent* gentrification elsewhere in the metro area, because the people moving to the desirable city are able to buy new-construction housing rather than apartments in an older locals neighborhood. And the yuppies don't *really* want a 100-year-old apartment anyway (they'd rather the new construction), they'll just take it if that's all that's available in the neighborhood they want to live in, and they can afford to outbid others.
I've re-read both, and I don't think it is. Dunno if this reply is worth the effort, but here you go:
Firstly, to start with the same anecdotes you did, it's true, nobody moves to New York for the harbor. But *originally*, they did! NYC is the best deep-water harbor on the eastern seaboard, much like how SF is the best one on the west coast, and as a location to serve as a transportation break (cf. Kenneth T. Jackson's work), it thus was a natural location for the development of a great city. Its Dutch cultural roots, predating the English takeover by 50 years, made it a place of greater relative tolerance and mercantile focus, and thus it rose to be a great city and America's leading one in the post-WW2 world.
And I start there because it is that rise, that demand to be a part of that community - long predating any lack of available land to build on - which is the exogenous factor here. People want to live in cities, because that's where the jobs are. For hundreds of years, prior to the creation of good urban sewage management, the life expectancy of non-rich people moving to London was only a couple of years (!), because plague or fire or whatever would get them, and soon. But because that's where the jobs were, people kept moving there from the countryside in numbers equaling or exceeding the staggering urban death rate. If your city has a growing industry and money to be made, people will move there (even, in London's case, if it is likely to kill them swiftly). If it doesn't, people will slowly leave, or hover around replacement rate. We all understand this, it's documented beyond question, etc.
Oakland building 10x the housing is obviously silly, but if it were to build 10% new housing stock every year for a decade, you'd see a rapid influx of people who want to live in the bay area, who can afford market rate apartments and are willing to accept the BART or Bay Bridge as the lifestyle price to accomplish that. The demand is to live in the Bay Area, and whatever community can serve that demand gets the new people. At some point, Oakland would tap out that market, but in the meantime its population, average income, city budgets etc would balloon. It's possible the median rent paid in Oakland (all of it) would rise, but here are the two points that such a statistic ignores:
(1) The prices for pre-existing housing in Oakland would rise by far less (think of it like how retailers measure same-store sales, to control for the variable of new or closed stores)
(2) The housing in other parts of the Bay Area that didn't absorb lots of newcomers would remain much closer to where they had been, i.e. a lot of price hikes that would have happened there would thus not happen or be more muted (this is demonstrated by a lot of the papers Smith cites)
Moreover, (3) Had that construction not happened, the people who wanted to move to the Bay Area still would have done so, they just would have bid up the prices on what little housing remains, creating much higher rent hikes than the alternative.
Basically, a context-free statement of "rents will rise!" misses the forest for the trees. Building new-construction market-rate housing prevents or minimizes the rent rises that would have happened otherwise. Neighborhoods, whether they built or didn't build, benefit by not having huge rent hikes visited upon the middle-class communities who've been there for generations. You can't just look at what happens to rents in a vacuum, you can reasonably predict what would have happened to existing housing if you *didn't* build, and by that measure, rents will rise by LESS.
So it's misleading to characterize these dynamics by saying "building housing makes rents rise". If you are having a net increase in metro area population, rents are definitely going to rise, by a lot, if you do nothing. It's *that influx* that is the causal factor here. That is the demand, and the only question is whether supply can meet it (at a metro-area level) or whether supply shortages result in much higher price increases. Your choices are, build a lot (and decide where it's going, probably at a metro-area-level planning board) and have fewer residents displaced and fewer neighborhoods gentrified, or build less and have rents rise by more and have more displacement. There is not an option for "don't have rents rise", barring self-sabotaging your successful industries.
Are new builds like old builds? What's the elasticity of demand?
For example, in Pittsburgh's recent revitalization many of the new apartments are swankier and more upscale than lots of the old construction. A good deal of the renovation notably increases amenities. So yes there's more housing capacity but all the new capacity is more expensive for real reasons. So if you build new housing that's more expensive than average and people move in, you can raise the local price even as the movement of people decreases demand elsewhere. (And in fact, this is exactly what you see in Pittsburgh. Sure the new stuff is cheaper than LA/SF/NYC emigrants are used to, but now all the other prices have room and pressure to grow.)
If you build housing that resembles an average or a typical spread, you'd imagine it would decrease or at least not increase the price. You could make an elasticity argument a la Malthus, and argue that the price will fall, then some new marginal people might move in and the price would stabilized where it was previously because there was some reason it was that price in the first place.
To expect the local price to go down purely on the weight of new builds, you'd have to build so much housing that you overwhelm the elasticity of demand. In a place like Pittsburgh whose big appeal is "a cheaper silicon valley", there's probably significant elasticity! The cheaper you make it, the better that appeal! That could be an unrealistic amount of housing! If your goal is to lower prices you're better off making a structural change like WFH or public transit.
I feel like there should be a solution here where we let new development pay off renters in the area. For instance, maybe we give renters in any zone that approves new building in a year a share in future increases in overall property tax. It probably wouldn't have to be a very large amount before it convinced them it was worth allowing building (even if they may have to move away they keep that income stream).
We shouldn't need to pay off the renters. If building more housing increases housing prices because so many more people want to move to the place, that's because it becomes a better place *even after taking the increased rents into account*.
Alternative hypothesis: New York City and San Francisco (and maybe also LA) are weird exceptions because they control the commanding heights of the culture, and therefore are viewed as uniquely desirable places to live. They are desirable not because they are high density, but because they control the News Media / Social Media / Entertainment Industry respectively, and thus occupy a disproportionate amount of mindspace, making a lot of people willing to overpay to live in them.
Chicago / Houston etc don't occupy this kind of privileged position in the culture, and see much lower housing prices.
How does building attracts more people to the place if the marginal effect is raising housing costs?
Like, if your city has a market settled at 100 housings going for $100, that means at that price there's only 100 people that want housing there. If there were more than 100 people willing to pay $100, the price would go up until the market cleared.
If you build 1 housing and that makes the price go up to $101, now there's less people that want to live there than before! Building houses would make cities shrink in population.
I hope this shows that you are wrong to your satisfaction, but it still leaves us to explain the housing cost x density correlation.
Thing is housing cost is both construction and land costs. To the extent that land is necessary to access the gains from agglomeration it will eat them up as rent. In the Us this correlation between density and rent is caused by land being the binding constrain. Adding houses in a way that makes land less binding, like putting them on top of each other, eases on this constrain. Making land more important through regulation makes land eat up more of the gains of aglomeration.
How about this? Your town has 100 houses worth $100 each. You build one more house and sell it to an outsider for $99. But now your town is a slightly bigger, more happenin' place with a larger share of the area's economic activity, and all the people who would turn up their noses at living in a town of one hundred people are suddenly attracted to your bustling pop-101 town.
It doesn't make sense at this scale I admit, but can you see that building more houses might give a short-term price dip until they're all filled up, followed by an increase once they are?
If you built 10 houses on a North Dakotan plain and no one bought them, wouldn’t the price go down?….until such time that at least 1 or 2 people bought in…at which point the smallest sight of demand might at least plateau prices at a new (but below initial) level?
It seems to depend on (at least) an ill-defined balance of land availability vs scarcity, location desirability, and hence the result supply vs demand, to even begin to speculate on an answer. My suspicion is the relationship will not be linear. Adding 8 million people in Oakland doesn’t automatically bring with it Manhattan prices, unless you have with it manhattan amenities, and Manhattan geography.
Hold on; if this argument holds it is _exactly_ an argument against YIMBYism: YIMBYs harm themselves and those around them. (In housing prices. Maybe the better quality is worth it.)
Yes, it's better if everyone agrees to enforce YIMBYism globally in this model, but that's not how it works, and it does mean that people who oppose YIMBYism in their own location are acting economically rationally.
*Certainly* better quality is worth it if it results in higher housing prices. If it results in higher housing prices, that means more people want to live in the place in question than before, so much that the increased housing supply doesn't make up for it. If more people want to live there, that's because it becomes more desirable, even after taking the increased housing cost into account.
I think what's missing here is the type of housing being built: is it single family or apartment AND is that dense apartment market housing? Non-market housing isn't affected by the market as much and can be cheaper. It's also not profitable so isn't common.
It looks like if you build at least 20 units per 1000 per year, you're going to get low housing prices, no matter how attractive or dense your city is.
Would you disagree that it's good evidence for that question, or are you thinking about a different question?
Aren't these graphs just showing that houses are mostly built in the empty, politically-unorganized areas where prices are low, rather than in big cities full of NIMBYs where prices are high?
A possible counterexample here is Seattle. Like SF, Seattle's seen a massive amount of immigration over the last few decades, to a large extent of high-earning tech workers (in fact, proportionally more people have moved to Seattle than moved to SF in the last 30 years, both to the city itself & to the metro area). However, unlike SF, Seattle & the surrounding area also allowed a ton of construction, nearly all of which involved/involves large density increases on already-occupied land. The near-complete reconstruction of South Lake Union is the most striking instance, but you can see this happening all over the city (f.e. the ongoing transformations of Roosevelt & Northgate resulting from the opening of the most recent Link extension). Notably, Seattle's median rent also hasn't risen nearly as much; said median rent is far closer to the national average (possibly even slightly below at the moment, if Zillow's rent numbers are to be believed).
One important thing to note here is that Seattle's recent increases in housing supply have been mostly driven by large local increases in density. In some ways, the area faces the same kinds of geographical problems SF does (if not to the same extent), being quite hilly & hemmed in by water. In this, it's unlike the sunbelt cities that frequently get cited as evidence for "building housing to accommodate immigration keeps housing costs down", since there's little in the way of land to build on that doesn't already have something on it.
Possibly contributing is that the upzoning in the area hasn't been limited to one municipality. Several of Seattle's suburbs have also gotten in on the act, with cities like Redmond & Bellevue also seeing enough apartment-type housing construction to radically reshape (or, in the former case, practically create from whole cloth) their downtown cores. To the point about this being a coordination problem, perhaps part of Seattle's success is that the city & its suburbs managed to at least somewhat coordinate here.
Think of China's ghost cities / apartment blocks. Prices surely can't be that high there. Maybe the answer is that developers are good at their job, and build supply where theres demand for it?
I'm sceptical of the Chinese "ghost city" phenomenon. I haven't explored the issue rigorously but my impression is that in areas that were previously dismissed as "ghost cities" like Ordos Kangbashi, the population is now large and growing.
I think we in the west are so used to infrastructure bottlenecks and short sightedness and anti-construction policies that the idea of it being possible to build the housing and infrastructure to accomodate expected demand ten years in the future is completely foreign to us. Perhaps building brand new cities before they are even needed is what the YIMBY utopia looks like.
As of 2020, about 65 million "housing properties" (mostly apartments) in China were vacant. That's more than enough residences to house the population of Germany.
The current total seems to be less, though I'm reading descriptions of whether it's a lot less or a little. There doesn't seem to be any widely-accepted running account or total. The Chinese government does not estimate (or at least does not release) any official numbers on things like vacant home units. There definitely are examples of places formerly known as ghost cities which have come to life, and of others that have not. They aren't all the same physical size either which adds to the murkiness.
But the new context is that China's total national population during 2022 declined (according to official figures) for the first time since 2003. And it is projected to keep declining for at least a generation. Just four years ago the UN was projecting China's population to peak in 2033; they were off by a full decade.
COVID appears to have helped speed up that milestone but it is primarily rooted in ongoing trends. China's fertility rate didn't stop dropping despite the 2015 end of the "one-child" policy and is now only 1.15 children born to the average woman during her lifetime. That's lower than Italy's, Japan's, etc; no other large nation today has a fertility rate as low as China's. Meanwhile China remains a xenophobic society and few people resettle there from elsewhere who aren't ethnically Chinese.
Hence the UN now projects that India will supplant China as the world's most populous nation later this year. Though population figures for China before the mid-20th century were rough estimates, it is probable that no one living was alive the last time China was not the world's most populous nation.
All of which means: however ever many "ghost cities" it is that are still standing empty in China, they're likely staying that way now.
I don't think that follows at all. China experiences a lot of internal migration. Just because the overall population is declining does not mean that any given area will not have growth. See: Tokyo.
65 million vacant apartments sounds like a lot, but China is really really really big. A quick google tells me that China has a 12.1% vacancy rate as compared to 11.1% in the US. Doesn't seem like a difference worth getting excited about.
China _had_ a lot of internal migration. It has slowed down dramatically, and also no longer all flows into the cities.
No official vacancy rates are published in China and no specific definition of it exists there. Various think tanks and researchers both within that country and elsewhere have published estimates ranging from as low as 11 percent to as high as 24 percent. Those estimates have been for varying samples of Chinese cities, have used various definitions of housing vacancy rate, etc.
The best (as in most systematic) estimate yet produced has come from researchers at a university in Liaoning. They used night-time urban lightsheds captured by a new (2018 launch) Chinese satellite having a new level of light sensing technology which allows separating out light from parks and plazas. They covered a large sample (49 cities), and made their sample representative of city type, city size, regions within China, etc. They also crossed-referenced with local housing data to ensure accurate balancing of their sample and to confirm that the satellite was successfully identifying light coming from housing blocks.
They found vacancy rates of just under 20 percent in China's Tier 1 cities, and found rates above 20 percent in 40 of the 49 cities. They found the highest vacancy rates in western and northeastern cities, which are also the newest ones; that finding is consistent with the hypothesis of significant numbers of recently-built ghost cities.
English is the language with the most worldwide speakers. English is also the language with the most second-language teachers.
Does that mean that adding more teachers is an important way to increase the attractiveness of a second language?
Maybe, in extreme cases, but not really.
Convenient teaching is helpful, but not decisive, for people choosing their second language. Plentiful city-center housing is helpful, but not decisive, for people choosing their metro area.
In both cases the teaching/housing is a lagging variable that responds to, but only at less than 1-for-1 contributes to, the underlying desirability.
(BTW, Scott, I keep feeling that I haven't quite grasped your actual uncertainty, and I'm wasting both our time on things you already get. That's frustrating for me, and I bet for you too.
Maybe you can restate your thoughts more precisely in a week, after you've read everyone's responses?)
The problem is price and quantity are jointly determined by demand and supply. The exercise that Yglesias is proposing is akin to saying “imagine supply increases then price must decrease to a new equilibrium where more quantity (housing) is traded.”
This is nothing more than the standard Econ101 law of demand applied to housing markets.
The correlations that you show are a big no-no in econometrics. You don’t just regress quantity on prices (or viceversa) and give that anything close to a causal interpretation. Why? Because demand and supply jointly determine prices and quantities. Large traded quantities might be associated with high prices if demand is high relative to supply, low prices if supply is high relative to demand, or anything in between.
The most reasonable explanation for the correlation we see is that places in where supply is large demand extra large (NYC), so prices are high. In contrast, in places with low supply of housing demand is non-existent (North Dakota countryside), and therefore prices are be low. If you run a regression of prices on quantities you’ll get a positive coefficient, but the effect has nothing to do with quantities and prices and everything to do with the fact that in places where supply is high demand is even higher, and in places with low supply demand is close to zero.
If we go meta and ask why is demand so much larger than supply in NYC, this argument naturally ties to YIMBYism. The reason is that supply is artificially constrained in NYC through red tape and regulation. Removing this red tape and regulation will increase supply and drive prices down.
I think that paragraph shows the problem of thinking in terms of quantities and prices rather than demand and supply. NY isn’t more dense because of its high prices. If you liberate supply by eliminate building restrictions we should expect higher density and lower prices! The extreme correlation we see is largely an artifact of the regulation.
Would you agree that if we partly liberate supply, by (for example) building 100,000 extra units in NYC once, but otherwise keeping the same regime, NYC might get more expensive?
That's not what you would expect from standard supply and demand (i.e. upward sloping supply curve and downward sloping demand curve), which Calcifer is appealing to.
There are of course known examples of goods that don't follow normal supply and demand rules. E.g. Veblen goods where the price is a part of the appeal - think Louis Vuitton bags or Lamborghini cars. People who buy them do so in large part to show off their wealth. So higher prices make them more desirable.
But AFAIK all the economic research shows that housing follows normal supply and demand.
I have an extremely strong prior against it. Downward slopping demand is sacred mantra in economics. Virtually 100% of economic research finds downward slopping demand, and if demand is downward slopping increasing supply will reduce prices.
Even in the minimum wage literature, a large part of the debate centers around whether the effect of minimum wage on employment is large or small (i.e., whether raising prices leads to a large or small decrease in demand for labor). Recent new research looking at monopsony power in labor markets claims that increases in minimum wage might lead to an increase in employment. This story, however, is 100% consistent with downward slopping demand.
For your story to work out, you'd need super strong network externalities, where, for a given price, each person that moves to NY induces more than one additional person move. This seems highly unlikely.
The key fact your missing is if you wave a magic wand and 10x San Francisco you wouldn't 10x all jobs. You would 10x the # of waiters, and garbage men but you wouldn't 10x the # of 500k/yr Google site reliability engineers. And it's the latter not the former that are driving up prices.
I mean, yes, by basic rules of supply and demand. But only in our world.
Most of America is very, very sparsely developed. There is just a plain huge amount of land with no one living in it, and another vast amount of land with very few people living in it. While on the other hand, there are very few Manhattans. There are more, but still very few, medium dense places somewhere in-between.
Some people want to live in more dense places, because they get the benefits of being near others packed more densely. While on the other hand, some people would prefer to live in less dense places, because they get the benefit of more land and space to themselves. And some prefer something in between.
Empirically, the demand for dense spaces is very high compared to the supply. And the demand slopes upwards with density, while supply slopes downwards. You can tell this is true because of the high prices of housing per sq ft in dense regions.
Whereas empirically, we are vastly oversupplied with distant rural zones where you can live far away from anyone else. You can tell this is true because of the low price of housing per sq ft in less dense regions.
This seems so natural to us that it's hard to imagine it being any other way. But that's just an artifact of having lots and lots and lots of land that is mostly empty.
Imagine living in a world where most of the land is super dense mega-packed city, far more than anyone can use, but where apartments are still plentiful as water. Where MegaManhattan goes on for miles and miles and miles and has so much housing that even though it's incredibly dense, there's still plenty of apartments vacant to move into.
And also imagine that relative to our world, there is a very small amount of empty land. Only a few places in this world where there is vast open space. Only 10,000 total homes exist, in this low density region.
Which is more expensive now: high density, or low density? Obviously in this other world the answer is low density. The demand for such low density housing would vastly outstrip the supply, whereas the plentiful apartments throughout MegaManhattan would ensure prices stay low.
There is nothing intrinsically expensive about high density regions, or low density regions. We just chronically underbuild high density by making it illegal to construct more, so prices stay high. If you make it impossible to build in a desirable low density region, you get sky high prices also (see: Aspen, CO, which is incredibly expensive vs its density).
"There is nothing intrinsically expensive about high density regions" except building the highrises necessary to make the region high-density. See also: Chinese ghost cities.
Highrises can actually be cheaper per square foot to construct than most suburban tract housing, because of all the shared infrastructure. But they're certainly not more expensive. If it was fundamental construction costs, cities would be cheaper than rural.
Of course building housing in the middle of nowhere without people in it is a bad deal, but that's v different from building housing in a city where millions already live nearby.
I am not an economist, but I made an observation that got me thinking, and I came to a plausible explanation.
The observation: there are quite a few leftie environmentalists who insist that adding extra lanes to congested roads is pointless - the added supply will only induce more demand, so the road will stay just as congested.
Then they change the topic and demand that new, affordable housing is built in crowded cities. Hmmmmm.
So here's my simplified picture: smart, ambitious people move to big cities not because they want to, but because they have to, to find suitable jobs both for them and their equally highly-qualified spouse.
Big companies move to big cities because only there do they have a sufficient pool of smart, talented employees. Also, wealthy cities can offer good infrastucture and other incentives, and the wealthy bosses can shrug off the high costs of living and enjoy the cultural amenities.
Small companies move to big cities because that's where their clients are - the big companies and their well-paid employees.
Employees of small companies move there because it's still better to pay outrageously high rents than to be unemployed in a dead town.
All of this works the better, the more densely the city is packed (mostly in terms of "how many people can you reach with a 45-min ride in whatever means of transportation").
Nowhere in this argument did "it's fun to live in big, densely packed cities" enter the picture, except for the privileged few.
So as long as there are smallish cities and villages that the moloch monopoly city can suck dry, all that happens when you build another block of affordable housing in a big city is that the ratchet is cranked another notch toward "everyone lives in overcrowded, expensive urban hellscapes where only the richest few actually enjoy living".
How about we try to make smaller, less expensive cities more attractive to companies instead?
"there are quite a few leftie environmentalists who insist that adding extra lanes to congested roads is pointless - the added supply will only induce more demand, so the road will stay just as congested."
Isn't this one of the claims with the best empirical back-up in all of traffic management? I read a lot of interviews with various experts (mostly from various European countries), and I don't think I have ever seen someone doubting this as the main trend. And those were not lefties.
That may very well be, and in many cases the lefties may be correct (I have seen some cases where traffic indeed got better after adding a lane, but that may be the exception).
My point is that the people who make this argument never seem to consider the obvious extension to building housing in crowded cities - the cities are crowded because people feel compelled to move to where many people already are, and adding more only makes it worse.
I hate the "induced demand" argument about roads. It's as if the purpose of roads is to not be driven on.
Yes, if you build more roads people can drive more. That's why you do it. They aren't driving because they enjoy sitting in traffic, they are doing it because they have things they want to go and do, and adding road capacity allows them to do take more of those valuable journeys.
It's such a ridiculous argument. You might as well go to Coca Cola and tell them "Our research says that if you produce more cans of soft drink they will just get bought and drunk, so no point doing it."
This sounds like a giant argument for a Land Value Tax. It is the only option which would increase building everywhere therefor decreasing home prices everywhere.
One option to increase building everywhere is to have a higher level of government (national, state) force all cities to permit more building.
If a higher level of government imposes a land value tax instead, the tax revenue goes to the higher level of government, and building more housing would increase land values (if not necessarily home values), then the tax *reduces* a city's incentive to permit more building, because the resulting increase in land value is taken away by the higher level of government.
If a land value tax goes to the city government, it would result in spiralling land values and taxes. Land rent is a mechanism that caps the number of people who want and can afford to live in the city to the number of people there is space for in the city. The city government would presumably pay out the tax to the residents in the form of services, or possibly cash, effectively returning (part of) the land rent to the tenants. This would increase the desirability and affordability of living in the city, which would result in even higher rents, which would result in even higher land value taxes and payouts to the residents, and so on.
A 100% LVT going to the city government would effectively act as a form of rent control, capping land rents at 0, which is typically well below market clearing levels, resulting in all sorts of anomalies. A less than 100% LVT would result in land prices inflating to the point where land rent after tax is as much as land rent would be without the tax.
It should be very easy to convince you this is wrong:
So I don’t understand why Matt believes that building a few new apartments in some city - a very small move along that spectrum - would do anything other than make local prices go up
You are treating your model as though R2 is one. Your own data show its not. If there are cities both well above and well below trend line AND studies show small increases in supply controlled for other factors can reduce prices, then maybe take those results at face value. Or at least find data that show otherwise.
Theres no reason SD cant look at miamis dot and think, maybe we could get there with different policy decisions. It doesnt require a wierd divot in the curve.
If you want to be concerned that the larger scale relation cannot be improved, that is at least supported by your data. But movement along this curve is a long term change and multi factored and not strictly a function of how much upzoning happens in a given year
I think you’re conflating housing prices with amenities. Look at prices in Dallas vs Seattle. Seattle prices are higher than Dallas despite having fewer houses, because there is more demand, because there are more amenities such as restaurants, cultural activities, events, and high-paying jobs. This holds true even in small, expensive cities like Boulder, where there are popular amenities (beautiful outdoor activities, quaint downtown, etc), but not much housing. Large cities, by virtue of having more people, generally have more amenities. So there is a correlation, not causation.
To be clear, you may think that having more houses causes more people which cause more amenities, and it can be messy, but if that we’re purely the case we’d see no cities shrink while others grow, but we see that all the time.
Is induced demand is based more on the rank-order size of the city or the absolute size? I suspect the former is a big factor because there are dozens of large cities that don't even cross the mind of the sort of people who "would be happy to live in Seattle, or NYC, or the Bay". I count 56 metro areas above 1 million, and 15 metro areas above 4 million on this list: https://en.wikipedia.org/wiki/Metropolitan_statistical_area
There’s clearly a positive feedback loop causing urbanization. This is why cities exist in the first place and get larger and denser. (Contrast with farmers.)
The strength of the feedback loop varies by city and neighborhood. Some cities pull more people in and others don’t. We should expect higher-priced neighborhoods to have more of a draw for some reason.
Positive feedback loops can go on for quite a while but don’t necessarily go on forever. For example, demand for student housing from a university is limited depending on the growth rate of the university, and it might not be growing at all.
So I think this can’t be answered from first principles. You need to look at what’s driving demand locally. Will it continue?
I have long thought that dense California cities should be encouraging large employers to move, or at least expand more elsewhere. When an employer from a high-priced city moves to a city that needs more jobs, both places benefit.
"Both places benefit" - I totally agree in principle. Of course, to answer the question "why doesn't anyone do it, then?", we need to look in more detail at WHO benefits. A mayor who declares "nah, we're full, take your well-paid jobs elsewhere" probably wouldn't benefit. Neither do the businessmen who donate to his electoral campaign.
"But Manhattan and London have the highest house prices in their respective countries, primarily because of their density and the opportunities density provides" implies a commutative relation that does not actually exist.
Yes, at the macro level, greater density -> more specialization -> more jobs/opportunities. But with transportation tech and cultural assumptions that commute time is the employee's problem, we have managed to severe the connection the other direction, such that we can create lots of opportunities/jobs/industry without also creating the resulting density.
I don't have the data handy to make plots, but there's a "natural" density of housing to match a given density of jobs within a metro area. A lot of our currently prosperous cities have made policy choices to prevent the housing density to grow to match the opportunity density. At that point, building more houses does *not* correspondingly increase the opportunities/make the city more desirable. It just enables the people in the existing jobs to be closer to them on average. If you built enough to actually start increasing opportunities again, then sure, prices will rise, but until then you aren't actually moving up that size/cost curve you started with.
I don't think you have justified excluding non-US metros, like Tokyo, or Auckland. Doesn't this lead to the natural conclusion that there is a sufficient level of housing to build, and that the problem is that the USA's many metros are structured to prevent housing? It seems like you're just arguing that US metros are bad at building housing, which is also what Matt Yglesias is arguing.
Your argument relies heavily on cherry-picked examples (New York City, San Francisco, North Dakota) and does not account for the broader housing market in the United States. This selective approach fails to consider the variety of factors that contribute to housing prices in different cities, and makes your argument less credible.
The assumption that density is the primary driver of high housing prices in cities like New York and San Francisco is simplistic and ignores the myriad of factors that contribute to their housing costs. Factors such as land scarcity, regulatory barriers, and high demand due to economic opportunities should not be overlooked.
The hypothetical scenario of Oakland becoming ten times denser is an extreme and unrealistic example. It fails to consider the gradual changes and adjustments that would occur in the housing market over time. Your argument does not account for the possibility that increased housing supply could eventually outpace demand, leading to stable or even lower housing prices.
Your claim that there is an inherent "coordination problem" between cities when it comes to upzoning and housing supply is unsubstantiated. You do not provide any evidence or examples to support this assertion, and it appears to be conjecture rather than grounded in economic theory or empirical evidence.
You fail to address the role of elasticities in the supply and demand relationship within housing markets. By not considering how elastic the demand for housing might be, your argument misses a key component in the analysis. If demand is relatively elastic, even small increases in housing supply could lead to lower housing prices.
Any way to analyze housing markets without considering the blatant and heavy handed manipulation of the real estate markets (either for gdp or property taxes) seems..... mildly optimistic about the price mechanism.
Mortgages are 30 year things and there's always some government program, theres going to be massive lag with unclear data at minimum.
Prices work best when the value of money is effectively linear, there are repeat costumers and products are interchangeable; which simply isn't the case for housing. You shouldn't assume that real estate has sane prices, and from deducing how a sane system would react to a change, conclude which effect.
I think you are using ill-fitting metrics and it confuses you.
Prices are high where the supply is less than the demand. Absolute values of supply and demand are not relevant. So the prices/density graph is not helpful. Most of the causality there is reversed and the second order effects depend on variables for which density is itself a proxy: amount of amenities and opportunities.
If the amount of amenities and opportunities in a place is increased, demand for houses will rise, thus housing prices also rise, and until possible new houses are build, increasing density. If you just increase density without creating new jobs, nighclubs, museums and other places of interests that will motivate more people to want to live there, the prices will fall.
Let me rephrase the argument: positive network externalities to building densely in cities are so large that building more housing actually causes existing units to be so much more desirable that its price goes up, despite the additional supply.
This might be true (it's certainly logically possible), but I suspect it's false on the current margin in most housing markets, even really weird ones like Oakland or Manhattan. This seems to be what the empirical evidence says, as far as I know.
Notably, if this were true the cost of overly restrictive zoning is significantly greater than the consensus view.
The stats I see are that 3.1M people work in Manhattan and 1.6m live there. Clearly Oakland is different - probably the flow is into SF. Anyway if any large proportion of the people who work in manhattan would prefer to live there there’s a lot of housing to be built before prices stabilise.
One example of where building a huge amount likely lowered price is Chicago's far northern lakefront just south of Evanston, where a huge number of ~30 story apartment buildings were built along Lake Michigan in, I'm guessing, the 1960s. By the 1990s, condos in them seemed pretty cheap.
In general, though, the U.S. doesn't have that many places where developers were allowed to run hog wild building high rises. In contrast, Sao Paulo, Brazil struck me as having an immense number of residential high rises by American standards.
Southern California, for example, has only a tiny number of high rises along the Pacific.
Someone on here, or another Substack comment section, said that the recent revealed American preferences in housing outside NY, and maybe SF, was a house with 3-4 beds and a yard or garden. Cities with those kinds of housing stock are expanding, the rest (excluding the two I mentioned) are declining or static. Looking at population flows in the last few years that seems to be true. California has lost 500k people to outward migration in two years. Surely you would expect house prices to fall given those statistics particularly if the trend continues - 2.5M in a decade would be a major decline.
Given that new reality Scott is probably wrong about Oakland and SF. Oakland seems to be an overflow city, the place to be if you can’t afford SF. Building new housing there now into a population decline would see prices fall. SF on the other hand may take up some slack.
Well I did say that SF might take up some slack. SF like Manhattan probably has high demand regardless. However a drop of 2.5M will be felt everywhere. Who knows if that continues, though.
It's not necessarily true that a drop of 2.5 million will be felt everywhere. Japan's population has declined by about 5 million from its peak, but Tokyo continues to grow.
My understanding is that in California people are largely fleeing the cities.
However, I don’t think that the population of SF will decline. Not least because a lot of people living in Oakland and the south bay would prefer to live there if they could. Particularly new arrivals.
What percentage of the earth's surface within, say 50 miles of the Dallas city hall could be developed for housing? I'm guessing somewhere around 95%, leaving out some lakes and the like. In contrast, what percentage within 50 miles of the San Francisco city hall could be developed? I don't know, maybe 50%? Maybe less. A huge fraction is saltwater and quite a bit more is rugged mountains.
Not surprisingly, land costs more near San Francisco than near Dallas.
Oh for goodness sake it's obviously a loose rhetorical proxy for the weighted centroid of the economic catchment zone or whatever the technically proper way to do it would be. I hate to side with Steve Sailer in anything but there is nothing more telling in these discussions like this than people who complain about using back-of-the-envelope and order-of-magnitude methods that rely on a fair bit of contextual knowledge. It's absolutely just the midwit meme.
1. density is desirable. This means that people mostly want to live and get higher amenities from a higher density city. I think this makes a lot of assumption on development that comes together with density - for example on public transportation, etc. But let's assume we get them with density.
2. There is a fixed amount of people willing to move to a metro in the US.
If you build more houses -> desirability increases -> each person in the city gets more from the city -> it attracts more people -> prices increase in the city, but reduce in the rest of the US metros.
Even if this is true, each person in the city gets more, so this is reasonable. Also, if this is done in all the cities (NY + Austin + SF + Boston + Auckland + Atlanta, etc) this will reduce the prices in all the US.
I spill 3 facts I know about urban economics and interesting top notch academic papers. I hope it helps.
(1) All else being the same, housing prices decrease when you build more (assuming same number of people, same wages, ...)
(2) Urban development increases productivity, wages and GDP/capita increases. (economies of agglomeration) As a consequence, wages increase and there are more jobs. More people move into cities. Commute times determine the limits of growths.
(3) Housing market equilibrium, and city growth is determined by multiple factors. Eventually negative externalizes will limit the growth. In the US housing markets, low density and bad public transport create negative externalities earlier than elsewhere. US economy would be much bigger if Urban planning and zoning would be better.
Two top notch relatively recent academic papers on the subject:
Hsieh, Chang-Tai, and Enrico Moretti. 2019. "Housing Constraints and Spatial Misallocation." American Economic Journal: Macroeconomics, 11 (2): 1-39. DOI: 10.1257/mac.20170388
Richard Hornbeck, Enrico Moretti; Estimating Who Benefits from Productivity Growth: Local and Distant Effects of City Productivity Growth on Wages, Rents, and Inequality. The Review of Economics and Statistics 2022; doi: https://doi.org/10.1162/rest_a_01208
I don't think the primary driver of demand is "wanting to live in a big city". I think the primary driver of demand is new york city wages. So if NYC built more housing the prices would drop as demand is met for all those who can achieve wages commensurate to the housing prices. Similarly if Oakland built 5 million houses they wouldn't see NYC style demand since there isn't NYC style wages
Maybe the relation between new housing construction and rent price go like this:
1) new housing -> rent price goes down (classic offer and demand)
2) more house -> new opportunity for services and shops, i.e. increase the productivity per m² of the place
3) increased productivity per m² -> more demand for housing ->rent price goes up (classic rent price depending on the place average salary)
So the apparent paradox is simply a 2 different effects with a time delay. New construction drive rents down in the short term, then up after some delay (if the city is succesfull, if not, it's a housing bubble crash)
Scott, I think you are missing the elephant in the room, which is jobs. If density is highly correlated (like the R^2 of 0.77 in your graph), Palo Alto should be cheaper than most US cities. The reason why it is not is because it is in close proximity to high quality, high paying jobs. On the other side, the reason why Detroit is doing bad for such a large city is due to the lack of jobs.
The causality is clearly: Jobs -> housing demand -> building. Yes, there are jobs that are created due to agglomeration effects, but for the most part, this agglomeration takes a long time. (Even Silicon Valley is built on top of 70 years of investments in tech). On the other hand, when oil is found in North Dakota, prices for small town housing rocket up.
Your thought experiment of Oakland was really weird, as you picked just a single city in a 10 million people metro area. There are enough jobs in the Bay Area that are already established for the area to absorb 4.5 million new residents. Applying your thought process to other cities shows the brokenness of the logic. If you magically turned Portland or Detroit into a 6.5 million person city overnight, there is no doubt that the price of housing would crater in Portland's case, and Detroit will definitely not become a new Manhattan.
If you accept that jobs create housing demand, then the solution is to keep increases in housing supply above increases in jobs. There are many ways of achieving this, some good, some bad. One would be to disallow cities from creating new office and industrial space without a corresponding increase in built housing.
If this is correct, then the intuition that Silicon Valley folks are increasing rent for everyone in SF is clear and logical, as they represent new jobs without the corresponding increase in housing.
> But it can’t do this forever - at some point, it will exhaust the pool of Americans who want to move to big cities (you’ll know this has happened when housing prices are no higher in big cities than anywhere else).
This is obviously wrong; most things are more expensive in cities than they are outside of cities for the very simple reason that people in cities have more money than other people do. It doesn't mean the urbanites want those things more; in many cases they want them less.
But even worse, you're treating a complex function of several variables, the price of housing... somewhere... as an indicator for a single variable, the size of "the pool of Americans who want to move to big cities". In the first place, that quantity is not a coherent concept: the number of people who want to move to cities is going to be affected by local conditions in the cities. If housing there gets cheap enough, more people will want to move than previously did. And in the second place, the general conceptual approach of judging the value of one variable by watching what happens to a complex composite figure that includes that variable is complete nonsense.
You are confusing density of houses with density of people.
If Oakland built 50,000 houses, that wouldn't make it attractive since people don't want to live in a town with 50,000 empty houses.
If Oakland built 50,000 houses and managed to fill 49,000 of them than that would make the remaining 1,000 more attractive since now Oakland is a bigger town with more amenities and culture. Although it takes time for amenities and culture to happen but yes, I would guess that if they built 50,000 new houses, managed to fill up 49,000 of them and promoted culture or waited for culture to happen naturally then the remaining 1,000 would be more attractive.
In terms of an "economic perpetual motion machine" this is not a big deal. I mean, any company that generates revenue and uses that to reinvest in the business is kind of like an "economic perpetual motion machine"
You could also do something like build 50,000 apartment units with great amenities, rent them out super cheaply for 5 years to make sure they get filled up and then once people moved in and culture and society is created jack up the prices. Don't know that anyone has ever tried this though since it sounds really risky. Building 50,000 apartment units is really expensive and you don't know if it will work. But the fact that "maybe there exist risky investment opportunities that if executed properly might yield massive returns over the course of a long period of time" doesn't seem to violate any kind of economic law does it?
Actually, when you think about it, the assumption that "building 100 more houses" leads to "100 more families moving in" (which in turn leads to more amenities, culture and therefore higher housing prices) is based on implicitly on the assumption that in the short term, increased supply, reduces prices.
Otherwise, why would building 100 houses, lead to more people? It's not the case that there are no houses for sale in all of Oakland. But 100 extra houses would increase supply, thus lowering prices thus leading to more people, thus more amenities and culture and thus higher prices long term. Except that if the 100 extra houses don't result in lower house prices (because maybe there is already plenty of supply) you've actually now made the city less desirable because no one wants to live in a place with lots of empty houses. And even if these houses get full, if people move into them from other parts of the city they will lead to more empty houses in the city as a whole.
I don't know the relevant geography, but can Oakland survive (and thrive) as a small town on its own, or is it stuck as a suburb/commuter town of San Francisco?
I think there's a big difference between "moving here because there's a decent job and the smaller city is better quality of life" and "moving here because it's a place to sleep and eat while I travel X miles to my work and social life in the big city".
Didn't Dutch originally settle in the area exactly because of the harbor? Wikipedia says
> The mouth of the Hudson River was selected as the ideal place for initial settlement as it had easy access to the ocean while also securing an ice-free lifeline to the beaver trading post near present-day Albany. Here, Indigenous hunters supplied them with pelts in exchange for European-made trade goods and wampum, which was soon being made by the Dutch on Long Island. In 1621, the Dutch West India Company was founded.
Surely geography helped New York later become a national capital and in any case a center of finance even after the establishment of DC.
Absolutely, but the typical New Yorker now doesn't move there for the Harbour.
My hometown was founded where it is because it was at a fork in a river, thus making it a good place to access much of the surrounding countryside before roads were a major method of transportation on the continent, when most stuff had to be transported by boat.
No one travels that river by boat now except recreational, so no one moves there for the river location anymore.
While New York's Harbour is probably still valuable, few think of NYC as a port town now, and I suspect that most dockworkers there have difficulty affording a good quality of life nowadays.
I think you're overly focused on the direct jobs involved in working on the docks, and not on the actual value created by the sea trade that the port enables.
The point of a port is not to employ dockworkers. That's part of the cost. The benefit is that you can cheaply trade with other places a long way away.
How much actual trade gets shipped through New York these days? I would assume relatively little, because there are other East coast harbours with lower land prices and cost of living where it's cheaper to offload goods, no?
Dockworkers in NYC would have to be paid a premium these days compared to say, dockworkers in Norfolk, or your NYC dockworkers would move to Norfolk for a better pay to cost of living ratio.
I'm surprised by your surprise. International trade is a really really big deal and it mostly happens by sea. Why do you think all the world's biggest cities are coastal?
You would obviously be wrong for any city in which demand is limited. If you found a city where nobody wanted to live, and put a lot of housing there, you would crash the price of houses in that city. You could use this idea to regulate housing prices in those kinds of cities - just build enough housing to lower prices to the level you desire, rather than crashing it. China has tried building cities from nothing, and many large buildings were later torn down having never been occupied. Even with as many people as China has, there are lots of places with existing housing available and nobody trying to live there.
The problem you seem to be identifying is that there are some cities where demand far outstrips supply, due to their nationwide pull. Lots of people want to live in NYC or SF who are unable to do so. This is coupled with the reality that developers are going to want to take advantage of that by building denser and more expensive housing, not cheaper and less dense housing. Because land is geographically isolated (you can't move the underlying land or the land next to it), there's only so much land available within a certain distance of whatever people want to be near. For SF it's likely tech jobs. Living a three hour drive away isn't useful if you want to work in tech on site. It's also not useful if you want to be a teacher or service employee in SF. Those could be great jobs, but you have to live close enough not to turn all your free time into a miserable commute.
That was a problem when I was working in social housing; there were houses available but nobody wanted them, because they were miles out in the country and unless you had a car, you were isolated because there's no bus service. People also want to live beside their families or neighbours they know, or they want to live in a 'desirable' area.
So you end up with waiting lists for houses in Area A, while there are vacant houses not being taken up in Area B. And you can't really blame people for "I have no way of getting to a doctor, the shops, etc. because I don't have access to a car and I'm not walking five miles to town and back pushing a buggy".
Right. And it may be that opening up new housing in city centers mostly just takes people from the greater metro region and puts them in the city, because they can now eliminate their commute. This clearly wouldn't reduce housing costs at all, and may increase it. They likely can sell their previous housing as well, to someone else who can commute or someone who actually wants to live in the greater metro area instead of somewhere else. This may reduce the housing costs in the greater metro area, even if the effect where the housing is built is to raise prices.
This would be like SF building 50,000 units and seeing no change in prices locally, but surrounding towns and cities with 1-2 hour commutes dropping in price. SF policymakers and renters would not identify that as an improvement, even though it likely is for the region.
I'm not sure if it's a counterexample or evidence for your theory, but Tokyo is notorious for being rather cheap for such a big, densely populated city. Their prices for houses in the 23 wards are about half of what you'd pay in the suburbs of Toronto (and Toronto in turn barely compares to Vancouver or SF).
On the one hand this could be explained away by the overall demand in Japan being capped. Tokyo is still the most expensive city in that country, and there's relatively few global migrants choosing between US cities and Japan ones.
On the other hand, Tokyo still has about 3x the population density of New York, so if they'd stuck to New York-style zoning, prices could have risen to absolutely insane levels (in the city itself and in whichever places people priced out chose instead). Conversely, New York moving to the density of Tokyo's metropolitan area (which is about the same size as New York itself), would support about 10,000,000 extra people. How big do you think the "any big city" pool of migrants is?
On the gripping hand, since the zoning rules are set nationally, it's not an example of "one city upzones drastically, but its neighbors don't". Maybe there would be significant extra demand if little-to-no housing supply could be built in Yokohama/Osaka/etc.
Find one of those little islands in Maine, then rebuild all of New York City on that isalnd in Maine. Are the new apartments in the new city worth as much as an apartment in NYC? Probably not because none of the people, businesses, institutions, etc in the original NYC that make it such a desirable place to live in are in Maine. There is a difference between population density and housing density. Population density makes housing prices go up. Additional housing make prices go down. Housing cost is the ratio of population density to housing density, ie the ratio of supply to demand like in any other market. So building additional housing shoud make prices go down in the short term, while long term you may have to deal with Jeavon's paradox whereby the increasing livability of the city makes it even more desirable to live in, causing an increase in prices, but that's not a given.
"No; I think the missing insight is that there’s some pool of geographically mobile Americans1 who are looking for new housing (or who might start looking if the right situation presented itself). These people have various combinations of preferences and requirements. One common pattern is to prefer any big city - they would be happy to live in Seattle, or NYC, or the Bay, if the opportunity came up."
Another common pattern is to want to live where you're from. In 1990 NYC had 7.3M people, compared to 8.8M now. How many of those 8.8M have lived here that entire time, or were born here during the interim? I was born and raised here, I like it here, and most of my friends and family are here. I'm definitely a big-city-simp, but Oakland would have a hard time getting me to move there by building 10X the housing for many of the same reasons that I don't currently move to Tokyo.
In the absence of zoning laws, housing costs will equal the cost of construction. If you get extremely dense like NYC and run out of land you'll need to build way up, which is very costly.
But most places in America can get 10x denser without having to build more than 3 stories high. If the area has housing prices higher than the cost of construction, eliminating zoning laws will lower housing prices even while inducing demand; you can just keep building to accommodate new arrivals!
As an analogy, we induced demand for cars by building lots of cars and roads. But cars didn't get more expensive, since we can scale up production to meet demand. Car prices will only increase if the cost of construction increases (albeit with short term fluctuations from sudden spike in demand).
Cities in the past were not this expensive for that reason. Chicago grew from 4,000 to 3.4M in less than a century, but managed to accommodate everyone.
"If the area has housing prices higher than the cost of construction, eliminating zoning laws will lower housing prices even while inducing demand; you can just keep building to accommodate new arrivals!"
Sure, but you also need amenities along with the houses. If you just build houseshouseshouses (or apartment blocks) and nothing else, you run into the same kind of problems as Ballymun, for instance:
That's why property taxes exist! And of course there will be more commercial businesses, since density definitely induces more stores, restaurants, offices, etc.
I think more housing increases prices because it's limited. Looking at San Francisco, the city proper isn't even a million in population (the metro area is 7.7 million).
I have no idea how many people want to move to San Francisco, but let's say that it's 100,000 out of the entire world (because you'll get the best jobs in Silicon Valley and get rich).
If SF builds 90,000 new housing units, that means 90,000 more people can move there. So it's not going to bring down prices for those already living there, who might like to move out of a houseshare and get their own place, since the demand is continuing at the same level. And the price won't come down, because the housing supply isn't at the same level as housing demand - there are still more people who want to live in SF than there is housing available.
So increasing density won't bring down prices in that case. Unless you can say "In 2028 the projected population will be 2 million and by then, with old and new housing stock, we will have 3 million units available", then the price will come down. But so long as more people want to/need to move there, so that new housing is being snapped up as soon as it becomes available, then prices will remain high.
Same for the metro area - so you can't afford to pay rent to live in SF proper, then you move to the nearest city/town where you can pay rent. Soon everyone is taking that as their second choice, and demand is pushing up prices. Then people switch to their third choice, and so on, until you get to the places where the distance in travel time is so far, and there aren't commuter trains, that it's not in demand and so prices are lower.
I’m not entirely sure I disagree, but this also seems like an unnecessary addition that doesn’t explain much--particularly as it is contradicting by empirical studies.
Here’s what I see happening:
1) Land prices increase when an area is unusually productive or desirable.
2) This then incentivizes more housing units to be built to take advantage of that additional productivity/desirability.
3) Reactionaries (not necessarily a bad term here) oppose further construction, leading to continued increases in price.
There are two additional effects, one of which you posited
A) As density increases, the desirability of the city for urbanophiles increases.
B) As density increases, productivity increases because there are more talented people in a smaller radius and because you can tailor your local business to a smaller niche of people while having the same number of customers.
Your argument that ‘A’ is a main factor in driving prices up is fairly unconvincing to me. Plenty of people, if not most people, seem to prefer the suburbs to cities, at least aesthetically. On the other hand, ‘B’ seems fairly likely.
But what I want to specifically point out is that your argument rests on the claim that the cost increases from section 1 and 3 are smaller than the cost increases from section A (and B, if you include that).
Urban desirability and increased productivity (A and B) are positive feedback loops whereby increased housing leads to increased demand and therefore increased prices. However, ordinary supply and demand is a negative feedback loop whereby increased housing leads to increased supply and therefore decreased prices.
One important difference between these two models is that, if B is driving the increase, local wages should be expected to actually grow faster than local housing prices even if said housing prices increase, because the attracting of productive talent and productive companies (combined with Baumol’s cost-disease) will cause wage gains across the spectrum.
The only losers in this scenario are individuals wealthy enough that they would have preferred constant wages/salaries in exchange for continued suburbia.
a) relaxed housing restrictions increases supply which decreases prices and rents
b) increased density creates more valuable urban agglomeration effects
c) urban agglomeration value is capitalised into valuation of dwellings, increasing demand and increasing prices
d) c) is bigger than a), so the net impact is that prices and rents rise.
The problem is that part d) cannot be inferred from the data (that would be) behind the imaginary chart because each of the cities on it have restrictions on dwellings that we aren't controlling for (and would have a hard time trying to work out exactly how to control for in any real-world study).
It's also not quite the right framing to think of a reduction in zoning restrictions as in increase in the supply of housing. It is really an increase in the elasticity of the supply of housing - by reducing absolute legal restrictions as well as the implicit (though sometimes more restrictive) barriers from the approvals process, the supply of housing becomes more responsive to changes in prices/rents.
The simple conclusion in theory (for instance In the Rosen-Roback model of spatial equilibrium) is that, whether urban agglomeration (which is effectively a kind of productivity) winds up in prices and rents depends on the elasticity of housing supply. Where the housing supply is perfectly inelastic (i.e. no price increase can induce the supply additional housing) all productivity increases go to house prices. Where the housing supply is perfectly elastic (i.e. an infinite amount of housing can be supplied at the going price) all productivity increases go to wages and population growth.
The imaginary graph (from the article) could be explained by the following stylised set of facts: historically freer planning, but urban development commencing at different times (and at different rates for random "natural" reasons) followed by much uniformly strict restrictions on redevelopment everywhere. The initial level of density (and thus urban agglomeration) is different in different places, but with similar levels of restrictions on new development (and additional densification) housing supply is similarly inelastic everywhere and so prices today are largely determined by density levels. This stylised history is consistent with frequent observations that, much of the development in big cities would be illegal today (e.g. https://www.nytimes.com/interactive/2016/05/19/upshot/forty-percent-of-manhattans-buildings-could-not-be-built-today.html)
The reality is likely a messy version of this (because restrictions are different in different cities and have been implemented at different times). But the important lens is that the relationship between prices and productivity (and thus density) depends on a relatively inelastic supply of houses - exactly what is being alleviated by zoning reform and relaxation.
The other insight that I think is missing from Yglesias' (and your) analysis here is that growth is multifaceted. Density doesn't increase for no reason; it increases as a knock-on result of growth in jobs, and amenities, and clubs, and service organizations, and sports teams, and etc. These things are really, really heavily coupled.
When cities go through periods of "growth" meaning the broad definition above, housing demand tends to grow faster than housing supply, which leads to things like above-market bidding wars and spiraling rents. *That* leads to density. Building stuff takes time; the density follows many months to multiple years *after* the increase in demand.
So, I disagree with "density increases local prices" per se; *growth* increases local prices, which prompts denser development. Where my YIMBYism comes in here is not that you can make a desirable city cheap with lots of new housing - sorry, not gonna happen - but rather that policies which restrict density should be avoided precisely because they guarantee that the price shocks that come with growth will be sharper and take longer to resolve.
Part of why this is all so important is that when price shocks do settle, they don't resolve into big price drops - price increases in housing are very, very sticky. Homeowners *hate* selling at a loss, and will avoid it like the plague. Landlords won't cut rents until vacancy rates become extreme. Policy has to be designed to keep the price jumps under control, because once they occur there's no path down that isn't super painful.
It sounds like this is just a matter of accounting for covariates. Housing density isn't the only thing that makes an urban environment valuable to live in. There need to be jobs, transportation options, food availability, basic services like plumbing and trash collection, a lack of crime, weatherproofing, public spaces, amenities, and so on, all of which we might lump into the attractiveness of a location.
If you look along the vector between the random plain in North Dakota and NYC, both the attractiveness and the housing supply increase, and the difference in price indicates that the attractiveness increases more than the housing supply does. But when it comes to discussing changes to housing policy in isolation, you're operating on a different vector that keeps the attractiveness more or less constant.
A simple graph might help, which I can describe in words: Put attractiveness on the vertical axis, and housing supply on the horizontal. Price is highest in the upper left, lowest in the lower right. NYC is above and to the right of ND, but it's more above than it is to the right, so along that diagonal, price increases as you go up and to the right. Housing policy debate is about approximately horizontal changes, and on that axis, price decreases as you go from left to right, i.e. increase the housing supply.
Scott, I'm tempted to say that you're not even wrong, but in an interesting way.
Your theory is that increasing housing density in places where people want to live increases prices, but that it does so in increasing the value of living in the city as a whole. If you're right, and I think maybe you are, then it doesn't make sense to say "We shouldn't build housing because although it will increase supply, allowing more people to live here and lowering prices, it will also make almost everyone in the city better off, therefore increasing demand to live in the city and increasing prices!" If you're right, we should build more housing both because it allows more people to live in the city and because it improves the lives of nearly everyone in the city - there's more housing AND each unit of housing is more valuable to the people living in it than it was before.
Quibble one: I don't see anything in your essay that suggests that the increased value effect would raise overall housing prices more than the increased supply effect would lower them. Do you think this is inevitable or even likely, and if so why?
Quibble two: Of course, you might still oppose YIMBYism because you were concerned that increased density would change the character of a city in undesirable ways, or you might be concerned that particular groups would lose out on the increase in value provided by more housing.
Adding housing only increases density if the land area is fixed. If new land is annexed for the new housing, available housing can increase with no change to density.
And the units in the first graph, density per unit area, make no sense to me.
There is a difference between house prices (which include the land under them and so dramatically increase as density increases) and housing rental prices (apartments/condos can be stacked to make use of the pricey land). That being said building up is harder than building on a flat plane, so I would expect the rental prices to increase relative to a flat plane (if somehow building a 20 story building was cheaper we’d see them built in the middle of nowhere more). So density does inherently raise rental prices somewhat because it requires building up, but artificial restrictions on building density will increase prices even more than they would be without them. I think it’s also right that density can increase demand for a particular city as some people want to live in with the extra amenities of density (and tolerate/enjoy the density itself) vs people who want to live in open country or more suburban areas. Japan allows more density and construction everywhere (plus falling population) so their housing is just a whole lot cheaper overall, but still should be more in Tokyo than in the country due to the height. As with many things in Japan, I suspect they are probably more at an overall equilibrium with regard to people distributing throughout the country and having the interior/exterior space, and density/amenities for their income vs the US which is much more dynamic, has a great many more building restrictions and inefficiencies, and has eye popping income increases from the tech and oil industries.
We also do things like requiring double stairs and have worse fire rescue capabilities, which increase the cost of building up vs building flat in the US relative to many other places. Property taxes/Georgism can significantly affect this as well, not sure how that differs between the US and Japan. There are also significant cultural differences in how income is used and wealth is saved, with the US using housing as the way to build a typical household’s wealth.
Also I just realized that most of the Japanese “countryside” is a within a 4-5 hour ground transit ride to Tokyo (even less by air), while most of the US is certainly not a 4-5 hour train ride from New York. So in some sense maybe almost all of Japan is a lot more urban/connected to agglomerated amenities than the US is, which would further cut down on the price differential between city and “countryside”
Didn't Robert Lucas point this out in simple terms like a hundred years ago when he noted that cities are valuable because of the social connections and the more people/housing units, adjusted for proximity, the more social connections, and therefore the more valuable the housing unit or the restaurant table.
I don't think your graph of price vs. density is as ridiculous as it looks at first glance.
You can very well make a model where each single added house decreases local prices by a small amount while having an overall positive correlation between houses and price in aggregate.
You just need some event that is more likely to happen with many houses that increases the price by a disproportionate amount, like a school, supermarket or public transport being built or a high profile business moving to the area. Or, simplyfying the model, an event that happens once a certain threshold of houses have been met. The resulting graph would go down with each single house but would also jump up at certain points, thus increasing the price in the long run.
Of course, this is a very YIMBY-favoring interpretation. Ignoring other factors, it would favor YIMBYism even on a geographically local scale from a community perspective: Prices (mostly) go down because there is more supply of equal quality and prices (mostly) go up because there's more quality of equal supply.
For inhabitants of big cities, who can actually afford it now, it is undesirable to decrease housing costs in big cities, because that leads to an increase of poorer people in their vicinity.
Considering cities, I think its not a function of big cities attract people. No, its jobs and amenities.
100K city no airport. no art museum. few high paying jobs
500k city - has airport, has art museum, has ethnic food, has a high tech business
NYC level - has stock exchange and banking industry able to support top class amenity, also other jobs, that attract other amenities. OOOH, HAKKA FOOD. OOH, AN OPERA AND A SPORTS TEAM.
You're not adding houses to a generic city with no special amenities. As the city gets bigger based on industry it also gets more amenities and becomes more attractive. OOH BALLET, OOOOH, ARTISAN PICKLES.
I haven't even considered cachet or prestige!!!!
But basically this will vault certain cities very high up for high high demand.
Adding a few more houses might not be able to satiate the pent up demand that is so high, these urban locations have people commuting for an hour on a train to work there.
> NYC level - has stock exchange and banking industry able to support top class amenity, also other jobs, that attract other amenities. OOOH, HAKKA FOOD. OOH, AN OPERA AND A SPORTS TEAM.
The Hakka food is surely a result of Hakka refugees ending up in New York and not a result of existing demand in New York eventually attracting Hakka chefs to fulfill the demand.
Probably some interplay. Because you open restaurants based on demand. And Momofuku is Chinese food, but its demand is rich people.
And the larger the city, the better shot you have at "authentic" food, or like Vegas you have it because of clients.
I'm gonna eat some amazing Chinese food (better than anything in Taiwan, for example) in Davis, CA, because tons of chinese people live in the area who are scientists and have the money to pay for top shelf Chinese food.
I can also ask you why there is a Ruth Chris steakhouse in Taichung Taiwan?
Is that because of American refugees?
TGIF is there too - it serves the locals not expats.
> I can also ask you why there is a Ruth Chris steakhouse in Taichung Taiwan?
Ruth's Chris is a brand that has expanded. Name a Hakka restaurant chain with a store in New York.
Note that Ruth's Chris deciding to see if it can sell the food it already makes in a new market is virtually the same process as a refugee thinking "Well, nobody here knows who the Hakka are or has any desire to eat their food. But that's what I know how to make, so let's see if people will eat it."
> I'm gonna eat some amazing Chinese food (better than anything in Taiwan, for example) in Davis, CA
This is not plausible.
> because tons of chinese people live in the area who are scientists and have the money to pay for top shelf Chinese food.
For example, you've failed to distinguish Davis (population: 67,000) from Taipei (population: 9,000,000).
If we assume that every faculty member at UC Davis is a Chinese scientist, Davis would contain "2500+" Chinese scientists. (see https://www.ucdavis.edu/academics/our-faculty ) If we make the much more reasonable assumption that each university in Taipei has, on average, at least 100 scientists on staff, Taipei would already be well ahead of Davis in local Chinese scientists.
I think you're onto something. But you should check out this paper by Ed Glaeser and Joseph Gyourko: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.1.3. From Figure 3, housing prices in most cities are pretty close to the costs of construction in those cities. Deviations from this rule are cities where people want to move but there are natural or artificial barriers to housing construction.
Your story is based on the idea that density carries attractive amenities. Anecdotally, I think the amenity value of city density has been enhanced by recent technology. For example, technology has greatly eliminated the need to wait in stupid lines (at the bank, at the post office, etc.). And when you do have to wait in lines, it's not nearly so bad because your phone allows you to still be productive and/or entertained. Technology has also made it easier to navigate a dense city and to find all those niche little shops or clubs or farmers markets or whatever that make a dense city so cool.
Strictly speaking - density is irrelevant. What matters is demand vs. supply.
The housing building advocates use this incorrectly: they presume perfectly matching demand vs. supply - thus increasing supply reduces demand effects. Wrong.
First of all, no city is standalone. San Francisco has the entire Bay Area as a suburb; New York has its other, non-Manhattan boroughs as well as New Jersey, Washington DC has Maryland and Virginia, etc etc. These suburbs/adjacent areas constitute both latent and unmet demand - while not everyone in those suburbs wants to live in the city, the reverse is not true at all: few people in the city want to live in the suburbs. The net demand effect of these suburbs is clearly skewed towards the city. In this respect: Yglesias is completely correct in that building 1 or a dozen apartment complexes will do nothing to materially affect the supply/demand curve.
The second problem is that there are material effects from social mores and government policy. Both San Francisco and New York City have property tax caps, for example. These caps serve to reduce turnover because anyone who has owned a property in those areas has a material tax benefit that increases over time - they only sell if they have to and/or are moving out forever. There are numerous properties in Pacific Heights in SF which are $4M to $7M in value but are paying under $3000 a year in property tax (use Redfin to look around); the identical properties, if purchased today, would be paying at least $40K to $80K a year in property taxes. New York city has only had the tax cap since 2011 but the effects are similar, if smaller. Social mores - Tokyo is a prime example. People simply live in smaller places. San Francisco and New York city also have rent control - another market distorting mechanism on top of (and directly related to) the property tax increase limits.
Lastly, cities are where rich people live. Yes, some live on huge ranches in Montana or in a "regular" house in Omaha, but the majority of rich people live in cities and/or have one or more properties in a city. Rich people = more expensive property.
I find Scott's argument compelling, but to me many of the comments seem to be arguing about tangential points. So I wanted to try to reiterate what I thought was the core of the argument, for what it's worth. Less eloquently than Scott, alas. And then I'll try to offer a slight extension.
In this simplified thought experiment, imagine all housing units are identical, so we abstract away from the effect of changing housing quality. And imagine employers' location choice and employees' location choice are governed by the same factors, so we can think of a representative person's preference.
The core assertion: suppose you build 1,000 new housing units in San Francisco. This will probably cause _more than_ 1,000 people to move to San Francisco (specifically, people who would not have moved to SF in the absence of this new construction), and so housing prices will probably go up.
I know it seems weird, but I actually find the assertion pretty compelling, because the value of the network is proportional to the number of nodes in the network. If you build 1,000 new housing units, and fill them with 1,000 new entrants, doing whatever cool things those new entrants are doing, does that make the city more or less attractive to the marginal new 1,001st person deciding between SF or LA? "More" does seem like it has to be the right answer, most of the time. So if someone was indifferent between SF and LA given (old population, old prices), then they must prefer SF with (new population, old prices), since it now has a superior network. And hence equilibrium demands that prices go up until indifference is again achieved.
If I had to think about what might be missing from this picture, the only thing that comes to mind is that the intertemporal behavior of the system might be important. Rather than building 1000 new units, consider what happens when you build the _first_ unit. The 1st new entrant, in the old steady state, did not come to SF. At (old pop., old price), they chose LA. And while you now have a new unit, you still have the old population. So to change the first person's mind, you have to offer a lower price.
So this suggests we should expect, if a lump of new housing appears, it should have a short term negative effect on prices, and a medium-to-long term positive effect on prices. Which also makes sense because new entrants to a city don't immediately start contributing to its network effects; they have to be integrated into the network first (i.e., the famous celebrity chef entrant has to open their restaurant, the wealthy angel investor has to become known to the entrepreneurial ecosystem, the artist has to open their gallery, and so on.)
One last generalization. If the short-term and medium-term effects of a new housing unit on house prices have opposite signs, then in a continuous system, the relationship between prices and building rates will probably be non-monotonic. Think of a differential equation where changes in prices are a function of (new entrants - new units), and where new entrants' rate of entry is a function of current prices and _lagged_ population (where the lag is proportional to the amount of time it takes for the average person debating between SF and LA to update their decision model to include the network value of recent new entrants.)
So you can have one steady state with no new units, no new entrants, and no price changes. Or another steady state with very slow building of new units and increasing prices (because the rate at which new entrants are integrated into the network exceeds the rate at which new units are built). Or a third steady state with fast building, where units are built faster than new entrants are integrated, and we observe decreasing prices.
This could conceivably make sense of both SF and Tokyo.
Plot price change since 2000, say, against population growth over that same period. It will be immediately clear that there are no shortage of slow-growing cities. Control for average wages and it will be immediate.
I live in Whitehorse, Yukon. The average home here costs 50% more than the average home in Houston Texas. Yukon is about as sparse as you can be. It's got more land than Germany and the whole population wouldn't sell out the stadium where the little league world series is played. Density we ain't got. NIMBYs and city planners we got in spades.
I think if we repealed the Jones Act and the Foreign Dredge Act, one of the Mississippi cities would organically develop that way.
Not at all. Shipping over water is absurdly cheap, and the Mississippi is the best inland river for transporting goods of maybe any country in the world. It's held back by the regulatory costs of shipping between domestic ports and dredging the Mississippi Delta. Looking back at my post, I might also have given the impression I meant the state rather than the river. More likely it would be St Louis.
He's probably looking at this: http://www.usa.com/rank/us--population-density--metro-area-rank.htm
Part of the problem is that if you aggregate on the level of the entire metro, you're talking about thousands of square miles (3800mi² for the Detroit metro, 4800mi² for Los Angeles), of which relatively little (10% in LA, 4% in Detroit) is the actual municipality.
Feel free to look here instead:
https://en.wikipedia.org/wiki/List_of_United_States_cities_by_population
New Jersey has three cities in the top 10 by density (Jersey City, Patterson, and Newark).
CA has "two" (SF and Daly City)
MA has "two" (Cambridge and Boston)
New York, Miami, and Chicago are the rest of the top 10.
Boston is surprising to me, but only because I don't know much about it. Other this tracks my intuitions.
City limits are very arbitrary. Most cities consist of a core and a large suburban sprawl. Boston city limits are very small, it's essentially just the core of Boston with no suburbs.
Boston and its associated smaller cities are pretty interesting - arguably that's where the historical process of cities annexing surrounding smaller municipalities died in the US, so we're left with a whole bunch of intermingled borders that today come across as completely arbitrary. Looking at population, population density, and median home price for 2020 gives us this:
Boston: 675,647; 13,989/sq mi; $700k
Cambridge: 118,403; 18,500/sq mi; $938k
Somerville: 80,842; 19,656/sq mi; $870k
Brookline: 59,223; 9,347/sq mi; $1065k
Cambridge is a world-famous center of academia that's leveraged the startup pipeline for decades, Somerville is aggressively recovering from a post-industrial slump in the 80s, and Brookline is an experiment in how many country clubs can fit in an urban area. There's an easy story to tell here as to why the values are where they are, but you can't get it by density alone.
Daly City is an interesting thing to mention. It's really the same city as SF, but it's in a different county with it's own government. Walking from one to the other, you never get out of the city. It's not even suburbs, though once it was. So I'd say that CA has ONE.
There's a reason why I put "two" in parens for CA and MA :-)
Any list that has both SF and Daly City on it should raise eyebrows, and make us suspect that very unlike things are being compared in ways that obscure their differences.
Could be why they put "two" in quotations.
Thank you for noticing
"Density of a city" is a pretty meaningless number. A (physical) city is a big agglomeration of buildings which slowly peters out as you get towards the edges. The overall density of that "city" is dependent on exactly where you (somewhat arbitrarily) decide to draw a line that separates the city from the countryside.
In the US there's a concept of "city" which means "local government area" rather than corresponding to a physical city. Guttenberg NJ is supposedly the densest "city" in the United States but it's not a city in any physical sense, it's just a handful of blocks of the gigantic city which we could reasonably label New York.
That's not to say there's not a very real sense in which New York is more dense than Los Angeles, just that if you want to measure density you need more than one number. Plot an average density vs distance from city centre curve, and you might have something you can reasonable compare.
For Detroit I expect you'd see this curve flatten considerably over time as the city turns from a densely concentrated one to one in which the suburbs hold the majority of the population.
It turns out that, unless you consider scales << 1 km or >> 10 km, such curves for different cities tend to be roughly proportional to each other. (I'll post a link to a tweet I saw about this if I find it again.)
Right. The problem is that we want to include built-up areas that are contiguous with the rest of the city even if they're not all in the same municipality, and we want to exclude, e.g. random cornfields in the suburbs.
I think the core municipality is plausibly a better level to aggregate at than the metro area because policy generally gets set at the local level and it's most likely to be a binding constraint on new construction there than in other parts of the metro area, which are also not necessarily contiguous with the city.
But even the densest square kilometer in Detroit (well, officially, Hamtramck) is an order of magnitude less dense than the densest (or even tenth-densest) square kilometer in Manhattan (or Barcelona or Paris). See https://garrettdashnelson.github.io/square-density/ (and https://twitter.com/undertheraedar for the EU analogs).
The writer wasn't using metro areas, he was using urban areas, which are the urbanized portions of metro areas. There is a strong correlation between high housing prices and density at the urban area level.
Scale matters a lot here, so I'm confused why you want to disqualify the Tokyo example (or Seoul for that matter). Tokyo and Seoul make up a huge fraction of the populations of their respective countries (20-25%). It's true that _locally_ there are agglomeration effects so prices may move up, but if some place is YIMBY enough prices will move down. As far as I'm aware, _every_ locality that builds at the scale that the full-on YIMBYs want them to build as reduces prices.
You may disagree with turning the bay area into Tokyo. But I don't see how if the bay area built enough housing for 66 million people (20% of America) that prices wouldn't go down.
I agree if the Bay Area built 66 million new houses, prices would go down. I am only seeing debates about building 10,000 vs. 100,000 new houses; at that scale, I wouldn't expect prices to go down.
Got it. Given the Overton window, YIMBYs can't successfully argue for 1M+ new houses in Oakland. There's some political finagling going on here.
That being said, the serious YIMBYs want 1-3.5M extra housing units in CA by 2025: https://cayimby.org/how-many-new-homes-should-california-build/ . I suspect given agglomeration the real number is higher.
But why? We have good research showing that adding even a hundred new units lowers the trajectory of rents in existing stock in the immediate vicinity of where it's built, compared to the trajectory of rents on similar blocks that don't get a new building; and that adding those hundred units leads to move-chains that open up units even in lower-income neighborhoods. (See Evan Mast's research on this.) The fact that people filter up from poorer neighborhoods to richer ones fairly strongly suggests that the new building in the "gentrifying" neighborhood will also lower the trajectory of rents in farther-away neighborhoods, since fewer people "too wealthy" for that neighborhood will bid up the prices of units there. (But this effect would be smaller / more diffuse, compared to the local impact.)
I believe CA YIMBY maintains some resource lists about this stuff if you want references to more of the papers.
All you've observed is that there is no dense/in-demand US city where the market has been allowed to supply what is being demanded. Density is a signal that the location is desirable. Given Anglosphere style bad land use practices, desirability _partly_ translates into density, and partly translates into housing inflation. So of course you see correlation between those two things.
Edit: Aha, I think maybe I see the distinction you're making. You mean "go down in absolute terms", not "go down relative to what would otherwise happen". And yes, if you wanted prices to actually go down -- back down to the level of a healthy market where the median person's housing costs less than a third of the median income -- then the Bay Area would need to build on the order of 400-500k more units, in the next eight years, than what the RHNA process currently calls for.
https://medium.com/yimby/planning-to-fail-4e832012a020
Also: If you're graphing statistics about the housing market, this one is pretty good to consider.
https://twitter.com/JeremiahDJohns/status/1615352365040766976
I think the best case we can hope for is to accelerate building to the point that rents flatten out for long enough that incomes can catch up, so that rents will go down in _relative_ terms, but never absolute terms. Rents, like many types of price, are pretty sticky downwards. Less-so for corporate operated housing where people are more inclined to just set the market-clearing price. "Mom and pop landlords" operating a handful of units are much more willing to let a unit sit empty for six months rather than lowering the rent 10%.
Last part is false. People who one 1-4 extra houses and rent them out _need_ 100% occupancy to pay the extra mortgages.
Agreed. They will happily take the market rate. This is not commercial property.
I have absolutely seen cases where people own the unit outright (e.g. inherited) and behave in wildly irrational ways. I've also seen a ton of self-destructive behavior where people will be penny-wise, pound-foolish, with trying to avoid dealing with critical maintenance like roof repairs, where if the problem is not dealt with it will result in much more expensive long-term habitability issues.
Behavior in the small-landlord market is _extremely_ variable.
I've read about this effect also, particularly in San Francisco. This behavior seems to be driven by San Francisco's particular legal environment. Some of the relevant considerations:
* it's extremely difficult to raise rents if the housing market recovers, so you might be better off waiting for the rental market to move in your direction
* it's extremely difficult to evict a "bad" tenant (who doesn't pay the rent, damages the property, or repels "good" tenants), so owners may want to hold a vacant property in the hope of eventually selling it, occupying it, or re-developing it.
Outsiders' assessment of what sort of behavior is "rational" often depends heavily on unstated assumptions.
Sure, for towns that have rent control, waiting out a down cycle could be rational.
But seriously, I have seen multiple landlords just do stupid things, where it was clear they just were lazy and short-sighted, and would've been much better off getting a property management firm to take over. (In both the cases where I have direct experience -- the landlord my spouse had early on in our relationship, and one I had -- the landlord in question inherited the property. The Bay Area has a certain amount second- and third-generation landed gentry, who are exactly as smart about managing their properties as landed gentry are portrayed to be in a Jeeves and Wooster novel.)
Speaking hypothetically, but if I previously rented an apartment for $1000, I would probably refuse to rent it later for $900, for the reason that a person who has a problem paying $1000 a month is more likely to have a problem paying $900 a month.
Just like banks prefer to lend money to rich people, for landlords it is also safer to rent to rich people. Your greatest risk in this business is a person who suddenly starts paying *nothing*, is impossible to evict, and even destroys your property. Poor people are statistically more likely to do this... therefore, sadly, making your price more affordable is playing with fire.
> And yes, if you wanted prices to actually go down -- back down to the level of a healthy market where the median person's housing costs less than a third of the median income
Not sure 1/3 is always a good bar. Depending on your situation it can make sense to spend substantially more than that. Especially if it saves you from needing to commute, or you work remotely and spend a lot of time at home.
Once you have kids you probably need to get in that area, but kids are less and less common these days.
Why would it be better to spend more money on housing than less if we're talking about the same quality of housing?
My Mother's house was worth $300,000 new in 2004, it's worth a million now. How is that good in any way? It's the same house, just older.
A) It almost certainly isn't the same house. People replace mechanicals, do minor projects etc. Most property seems some level of investment when occupied.
B) Sure it would be better if it was cheaper? it would be better still if it was free. But that money comes from somewhere, it doesn't fall out of the sky.
My father custom built this house to her specifications, she hasn't made any improvements besides those. It has had maintenance, certaintly, fresh coats of paint, she swapped out the interior door handles recently, but that's it. Nothing that would even remotely justify a tripling of price in two decades.
Surely you understand how "most people cannot afford to reproduce" could be a problem over the longer term?
If you want to reproduce get a decent job. About 40% of societies problems are down to people having children they cannot support or raise effectively.
If there are only ten "decent jobs" being offered, what is your advice to the eleventh prospective worker? https://acoup.blog/2023/04/28/collections-academic-ranks-explained-or-what-on-earth-is-an-adjunct/
What if a move-chain is disrupted by someone moving to that city from elsewhere? That is, for big "destination" cities, if there exists a supply of people who would move there were it not for the difficulty of finding housing, then wouldn't adding more housing simply attract those people without affecting rents for anyone downstream on the move chain?
That's exactly the question Evan Mast's research was trying to address -- what portion of brand new units get occupied by locals, and once you open up new seats in the musical chairs game, as people shuffle around, how far down the income scale does the effect reach before affluent people from outside the metro area flow in?
You can read his results here: https://research.upjohn.org/cgi/viewcontent.cgi?article=1012&context=up_policybriefs
He used postal service change of address data, and then made sure his modeled results were realistic by chasing down real-world move chains for various buildings in several metros.
The TL;DR is that his model says adding 100 units of market rate housing renting to affluent people will lead to around 70 middle-income units opening up, and around 40 units that rent to the lowest-income portion of the metro.
Thanks, I'll take a look a that later tonight.
But real quick, it seems like his data comes from Chicago. Although I run the risk of attracting ire from its natives... I would not put Chicago in the same class as NY and SF. I think it entirely possible that there are a lot of people who would love to live in downtown NY or downtown SF who would not want to live in downtown Chicago.
I believe some of the details in that specific short summary focus on Chicago, but his work is much broader than that:
"I next sharpen focus to the migratory connections between new construction and low-income areas and track moves at the building level. I identify 686 large, new, market-rate multifamily buildings in 12 large central cities and track 52,000 of their current residents to their previous buildings of residence. I then find the tenants currently living in those buildings and track them to their previous residence, iterating for six rounds and, in order to focus on local connectivity, keeping only within-metro-area moves in each round."
And there was a team in I want to say Finland (it was definitely one of the Scandinavian countries) that replicated his work for at least one of their local metros.
Yeah, here we go: https://research.aalto.fi/en/publications/1ed11876-eb87-4a2c-a9a6-4a02a58825bd
They basically found very similar effects tracking migration chains in the Helsinki metro.
No doubt, but what continues to evolve in central Chicago is if anything an underreported story. The change just during my lifetime is quite remarkable and is exceeding the most wild-eyed predictions of local urban-planning dreamers of my parents' generation. (My father worked during the 1960s for NE Illinois' regional planning agency and my elder siblings met some of those dreamers at our family's dinner table.)
Central Chicago (defined as the Loop+River North+South Loop+West Loop) has continued to steadily grow as a residential district for about three decades now. Demand growth, reflected in both prices and new construction, has had small pauses but has not meaningfully slowed through even major disruptions such as COVID and before it the 2007-2008 real estate crash. And demand is absolutely roaring right now: just in the South Loop another 1,000-foot all-residential building is under construction just steps from that area's first one which is right next to that area's first 700-footer (both full); as are at least a half-dozen others from 30 to 50 stories each. The West Loop has a fresh wave of new projects now underway as well and the new-construction boundary of that district appears to have extended at least another half-mile westward based on my drive through there the other day. Etc.
Just the small Loop business district, about 1.5 square miles which in the 1980s had fewer than 5,000 fulltime residents, is closing in now on 50,000. And there is fresh political focus locally in pushing that trend farther by encouraging/enabling residential conversion of Loop office buildings at a new scale.
Chicago's total population remains flat because of population losses elsewhere in the city. (E.g. Englewood had nearly 90K in 1970 and is now down near 40K and still falling.) The central area though -- roughly 12 square miles which as of 1980 housed fewer than 20,000 people -- is now approaching 200,000. And seems on track to by maybe 2040 be the densely-packed home to twice that many.
Also I think it's a mistake to think of this in terms of "a supply of people who would move there were it not for the difficulty of finding housing". Like, very few people move to a new metro _just because_. They move to the area for a job or school or family. What happens if somebody gets a six-figure job offer in Palo Alto and then finds that even on six figures, they can't afford to live in Palo Alto, is mostly not that they decide not to take the job. They just live in Fremont instead, and commute across the bridge. (And then somebody who works a service job in Fremont can't rent the unit that person takes -- and they commute in from Pleasanton. And somebody working a service job in Pleasanton ends up commuting from Tracy.)
The number of people who want to rent _somewhere_ in the Bay Area is short-term almost entirely price-insensitive. Long-term it is budging, very slowly, with out-migration, but the issue of jobs-housing balance is much more about city planning decisions. Each city individually finds that the way the property tax formulas break down, compared to who pays for stuff like schools versus who pays for transit systems and roads, it makes sense to try to attract offices -- you get more of the property tax revenue, while paying for less of the incremental services involved in supporting activity for that building. But of course if _every_ city tries to encourage investment in office parks, while expecting _somebody else_ to build the housing for those office workers, you have a problem. The RHNA process tries to solve that, but for 40 years the whole thing was a joke, with no enforcement.
(Well, I turned down a job in the Bay Area partly because I didn't want to deal with the Molochian housing market there. I had other offers of comparable quality elsewhere, and took one of them. But I'm probably weird like that.)
I wouldn't consider it weird to include cost of living into the evaluation of a job offer.
We have a similar situation in Germany. In southern Germany salaries offered are substantially higher than in northern and eastern Germany. However, cost of living there essentially negates this for all but the highest paying jobs.
So very often the additional burden of having to move isn't offset by those wage offers.
Unless you need to accept a specific job offer to advance your carrier, financially it's very often a good idea to evaluate the entire package instead of just comparing wages, even if we ignore all other considerations (like friends and family left behind).
Lots of people consider location and housing as a primary factor, especially when they are married and have kids at home. Young people right out of college tend to look at straight cash income more, often to their detriment.
My sister wanted to live in SF. It was too expensive so she lived in Oakland. Then she had to move for a job, and chose Portland over higher pay elsewhere. I think some people DO choose a location that fits their lifestyle.
My sister would not take a job in some small town in TX or maybe even a big city. Maybe Austin. Because she needs to be in a "cool" left wing environment.
Let me refine the point: Sure, there will at the margin be some people who decide not to move to the area, or to leave the area, because of this factor, but if some company does decide to add high-end engineering jobs, they _will_ be able to fill those jobs, in reasonably short order.
Silicon Valley companies have started griping about cost of living here making it harder to recruit, but for the most part they haven't taken the housing issue seriously enough to take public positions on it.
Elon moved Tesla HQ to Texas, but then quietly moved "engineering headquarters" back to Palo Alto because it turns out that very few of the employees in CA wanted to move to TX, and the pool of engineering talent here is much deeper, and he cared more about having more in-person work -- which honestly for the hands-on mechanical engineering stuff is probably fair! -- than he cared about trying to keep office rental costs low.
It's also an open secret that a fair number of the Fremont Factory employees commute in each week from as far away as Nevada, and sleep in the parking lot during the week. Better housing conditions there would make it easier to recruit, and would mean higher real standard of living for employees, even at a lower cash pay level. Yet the Tesla Government Affairs office has taken no interest in lobbying cities around the factory (Fremont, Milpitas, Union City) to make it easier to build workforce housing.
Patrick Collison has put some money into backing YIMBYs in the region, but far less than he easily could. Marc Andreesen talks a good game about the importance of letting people build, but then turns out to be personally quite NIMBY when it come to his own town of Atherton.
And all of this makes sense because, despite the gripes, when push comes to shove, all of these folks _can_ still hire. Maybe they pay marginally more, but it's peanuts compared to the actual value a good employee produces for the company, and there are tons of highly-talented people who want the good weather and great cultural amenities on offer.
To a first approximation, the number of highly-paid jobs directly determines the number of high-income people competing for housing in the region, with no elasticity at all -- if Apple or Google or Facebook or Tesla decides they're going to open another thousand reqs, those reqs will get filled. If the number of "nice" / "luxury" units falls short of the number of high-paid workers, then they enter the market for older units, and bid up the prices, pushing middle-income people into long commutes or sub-standard housing, and pushing low-income people into homelessness.
So, would you agree with a rough simple model like this:
Take a bell curve, and chop off the left quarter. NY and SF are somewhere in the new left third, on the left side of the peak. There's a pool of people who would like to move in, and we can order them from high-income to low-income. Right now, adding more housing means that more high-income people will move in, so at best there's no effect on housing costs, and at worst they go up because having more high-income people living in the area will raise property values. But eventually, if we build enough housing, we'll have skimmed off all the higher-income people, and start getting to the middle-income people who want to move there, at which point housing costs will decrease (or there will be vacant housing).
The move-chain formulation may appear not to apply in particular jurisdictions, but that's a result of the jurisdictions not being aligned with the metropolitan area. (For example, people living in northwest Indiana may count as part of the Chicago metropolitan area.) Thus, building more housing in Manhattan may not affect housing costs in Manhattan (yet), but will affect housing costs in the greater NY metro area, and will eventually, if enough housing is built in Manhattan, start to affect housing costs in Manhattan.
(This all assumes a free market in housing, with no rent control or tenants' rights laws that incentivize keeping housing vacant rather than renting it to the current best available tenants.)
My model says that if you add a relatively small number of new units, the people who move into those new units will be high-income people in brand new units. So _their units_ obviously are moving the average upwards. But the average for the region as a whole will rise slower than it otherwise would've, and if you do this in enough places, the average of the region as a whole will even turn around and start going down, _even if_ the average for each little two-block radius around one of those new "luxury" buildings goes up.
The average for the units in the immediate neighborhood _excluding the new ones_ actually should be deflected downwards more than the downward push on the region as a whole, since "other stuff within a few blocks" obviously has some level of substitutability with the new stuff; but some of the benefit of the new units, in terms of lowering the trajectory of the regional average, is "leaking out" to other neighborhoods, including, as you say, out to really far-flung extensions of the metro. Like, to refer back to the example I gave earlier, if the guy taking a job in Palo Alto _could_ find a decent place in a new twenty-story building on top of the Palo Alto Caltrain, then he doesn't instead rent a place in Fremont; and that means somebody who wanted to be in Fremont doesn't go to Pleasanton, and somebody that wanted to be in Pleasanton doesn't go to Tracy. So some of the benefit from the new units in Palo Alto has been transmitted sixty miles out to the exurban fringe of the East Bay.
But the place I disagree with your description is that it's not like you have to fully saturate the higher end of the market before you start seeing _some_ benefits move down to lower-income people. Again this is what the migration chain research is getting at. When you add new market rate units -- what Noah Smith has jokingly called Yuppie Fishbowls -- the fact that new people move into those _instead of_ trying to move into and renovate older units, does provide an immediate reduction in price pressure on people who live in older / more run-down units nearby.
So building a relatively small number of new units in Manhattan (say, increasing stock by 1%) would put the price of _existing_ units in Manhattan on a lower trajectory (so maybe they rise by 3% instead of 5%). But it may not in the short term lower the _average_ price of units at all relative to what they would've been, and will probably _raise_ the average of the immediate neighborhood, because the new units will be premium stuff that costs 2-3x the average. To actually put prices of existing units onto a track of absolute reductions, you'd have to build a _lot_ of new units. Plus you'd then run smack into the way that real estate undergirds our financial system. It's probably safer to just aim to make it so prices are stable, or at least rising slower than wages, so that people can see some real income growth instead of having people below like the 80th percentile in high-wage markets feeling like any progress they make on wages is immediately clawed away by the housing market.
So I think your article may be conflating density of two things:
1) Density of jobs
2) Density of housing
These are often highly correlated! But, increasing jobs (while holding housing constant) will raise housing prices, while increasing housing (while holding jobs constant) will decrease housing prices.
Network effects encourage both growing together, but things like Prop 13 encourage zoning for jobs over housing, because jobs bring in more tax revenue while houses bring in more expenses for the city, notably providing public schools.
Side note, orthogonal to your main point:
If you build a cornucopia of housing without also building jobs to go along with it, you will end up with widespread poverty, food deserts, and other symptoms of urban decay.
I think you have that history backwards, nowhere (in US at least) have large tracts of housing been built without the rise, or anticipated rise, in the job market. That dysfunction you point to is from housing being built in concert with booming job markets, the job market then collapses and you see a cascading exodus leaving so much vacant housing that the value of the unit falls below the price of maintenance, resulting is cascading ruination and disinvestment in other infrastructure as municipal budget obligations fall behind revenue.
Think St. Louis or Detroit or most other rust belt cities that were hollowed by deindustrialization and suburbinization.
The jobs were subtracted from whole cities, housing was not added to empty cities.
You can see planned cities in China where housing was added where no jobs were located. They didn't work, and mostly sat empty.
Additionally, a large part of this construction was driven not even by the expectation of future jobs - it was the result of actions taken by local governments to meet aggressive growth targets set by the central government, combined with cheap credit for developers. It didn't matter whether the units would be occupied because the construction was the point. The wild thing is that a large proportion of these empty units did actually sell: combined with the lack of a property tax, this made real estate an attractive, ever-appreciating investment for those who could afford it, so many of those properties were sold at high prices before they were even constructed. And then when the central government started to get nervous about all this debt and tighten things up, that triggered a liquidity crisis in which Evergrande and other mega-developers defaulted on some of their debt.
I don't understand your argument here. Suppose more housing doesn't cause even a short term decrease in price for housing of a given quality (size/amenities). Absent that decrease in price what induces the demand? If prices stay the same how do these mobile people know to move there?
I doubt they are looking at the total number of available units and using that to estimate how desierable the city is to live in. So maybe there is eventually an induced demand effect but that's going to happen at a longer time scale.
Or maybe that's your claim. It is plausible that in the long term (though dunno if true) that more housing increases overall prices in the city but in short term it's got to reduce it.
(tho reason it's increasing prices in long term is by making it better to live there so ...)
> Absent that decrease in price what induces the demand?
Agglomeration effects could induce that demand.
> Or maybe that's your claim. It is plausible that in the long term (though dunno if true) that more housing increases overall prices in the city but in short term it's got to reduce it.
Yes, but that short term might be very short indeed.
> (tho reason it's increasing prices in long term is by making it better to live there so ...)
Yes, exactly. Especially 'better' in the sense of economic productivity. New York is not more or less pleasant in an absolute sense than podunk, but it's a lot easier to find a high paying job in the big city.
Agglomeration effects don't materialize until agglomeration has occured, I.e., you've increased total residents relative to the counterfactual. I agree that in the 'long' term that might happen but the causation has to go from: more houses -> cheaper to move their (than in counterfactual w/o) -> higher population -> agglomeration effects. So at least briefly you need to get lower prices.
Regarding how long long term is, I highly doubt that it can be less than a year. I think a good lower bound comes from looking at the length of time between, say, high income people starting to move into an area and substantial changes in the nearby stores. Usually that takes a few years (I admit it might be less in areas where one developer can create a massive mixed use complex in one go but I presume here we just discussing pure housing construction).
I guess that's short term as far as the debate is concerned.
> Agglomeration effects don't materialize until agglomeration has occured, I.e., you've increased total residents relative to the counterfactual. I agree that in the 'long' term that might happen but the causation has to go from: more houses -> cheaper to move their (than in counterfactual w/o) -> higher population -> agglomeration effects. So at least briefly you need to get lower prices.
Not necessarily, because economic actors can anticipate predictable future price movements.
So even if the real agglomeration effects only materialize in X years, prices might already go up today.
> Regarding how long long term is, I highly doubt that it can be less than a year. I think a good lower bound comes from looking at the length of time between, say, high income people starting to move into an area and substantial changes in the nearby stores. Usually that takes a few years (I admit it might be less in areas where one developer can create a massive mixed use complex in one go but I presume here we just discussing pure housing construction).
Any real discussion would need more details, and we would need to nail down scales.
An example where I would expect almost immediate effects:
Mountain View in California, where Google is headquartered, has about 80k inhabitants. Many well paid people live out of town and commute long hours.
If they housing for another 10k residents tomorrow, people would move in almost immediately. Local shops would probably expand almost immediately as well. Eg restaurants can perhaps hire and cram in a few more cooks in the same space they already have.
In this example, the high income people convert from commuters to residents. They already have jobs in the area. But after the conversion they presumably spend more money and time in Mountain View than before. Those effects are predictable to other local businesses, and thus they can expand even before they actually observe the effects, almost as soon as they reliably learn of the coming expansion.
I agree that for many other places the process would likely to slower, as they don't have that pent-up Google-employee demand.
Sure, economic actors can anticipate future changes but people looking to buy a home aren't looking at the number of new apartments built and deciding where to live on those grounds.
Anyone can move to the city provided they willing to pay market rate. Essentially (holding other factors fixed) the net migration is a function of the housing cost. Yes, if they build another 10k houses more people move in almost immediately *because* those new houses are a better deal for the ppl moving in than they could have gotten before they came on the market.
Might be they are 1% cheaper. Or maybe they are priced the same as existing units but offer nicer amenities or are just closer to where the buyers work that units prev available for that price but that still means someone who had wanted to be x miles from work and live in this nice a place (it's rarely) going to be 0 units like that b4) is now paying less for those conviencies.
This may in some sense be a verbal dispute since I'm not necessarily claiming the average price on Zillow goes down, merely the average price on Zillow for something that offers that buyer features they rate as subjectively similar.
--
Yes, I grant that sometimes a big buisness may move in as part of a large property development believing they can now house their employees but absent those kind of large development deals (which I agree may be different) new restaurants are rarely opening up before anyone moves in bc they anticipate the new people in a small number of units. They are going to react to that movement.
I suspect that what tends to happen is that in practice the "price decrease" really comes in the form of better fit between buyer and unit (ohh look I can now move to SF and I can afford the kind of place I like near my employer) or simply the fact the unit is new (that's more desierable) so there isn't any decrease in anything like cost per square foot as a result of these small increases in the number of units but the cost per unit of subjective value to buyer has decreased. And that the agglomeration effects and the anticipation of them you mention can kick in before it results in any decrease in actual cost per square foot.
But you need something that makes the city more appealing to people who are thinking of moving in/out to have a net pop increase and I don't believe they are looking at number of units built and predicting that there will be future benefits to agglomeration as a result of the new units.
If ppl really did that on net this discussion wouldn't be so full of disagreement.
I think you're neglecting search costs. Twenty prospective occupants competing for two vacancies produce a lot more noise in relevant channels than twenty competing for ten, and bad signal-to-noise ratio makes life difficult for everyone involved without changing the nominal rent price at all.
I don't think search costs are going to vary independently of actual costs. People often need (or at least really want) to sell their house within some period of time (eg to move for a job or to accommodate a new kid). If more houses enter the market so your house doesn't sell in the originally expected period of time you reduce the price. If all the houses you see during 2 months of looking that are acceptable are a certain cost per unit of desierability you accept that you'll need to pay more for that.
But see the thread above. I agree that this argument doesn't imply you see a change in the median price relative to the counterfactual. For instance, it might be that many people would like to move to the city but only if they can get a place that's above average in size or centrality. So the price to get those amenities may decrease in a way that actually causes the average sale price to go up.
But I'd still call that a decrease in price in the same way that you can say the price for computing power has decreased hugely even though most families probably spend more on computers than they did 20 years ago.
Can’t speak for others, but as a YIMBY I would, if it was within the window of political feasibility, be arguing for converting most downtowns into loosely woven arcologies. But you have to tackle this problem in bites because people are reluctant to let you even build a duplex, let alone bulldoze all the single family and row houses in SF to build a series of terraced megatowers.
What's a loosely woven arcology?
I would suggest something much simpler and hands-off: abolish Euclidean zoning (and perhaps move to something like Japanese zoning, if you want zoning at all), and abolish rules like mandatory minimum parking requirements.
Then let the market sort it out. If they want 'loosely woven arcologies', I'm sure someone will build them.
Ah, the term "Euclidean" comes from a city in Ohio.
I was thinking, "technically, since the Earth's surface is approximately a sphere..."
Yes, Euclidean zoning is very confusingly named. Yet another reason to ban it.
Btw, Euclidean zoning is a big philosophical dilemma for me:
On the one hand, Euclidean zoning is obviously bonkers.
On the other hand, I believe in subsidiarity. The notion that (political) decisions should be made at the most local level they can be made. See https://en.wikipedia.org/wiki/Subsidiarity
Of course the most local level possible is to let the land owner decide what to do with her land. But I find it hard to justify on principled grounds giving the federal or state level control here, even if it is just to ban Euclidean zoning.
I guess in a democracy communities get exactly the kind of bad governance they vote for?
Not all democracies have bad zoning, not even all federal democracies. Eg Japan and Germany are doing just fine in this respect as far as I can tell.
I wonder whether the apparent American love for restrictive zoning is just a 'second best' way to express a different preference? See https://en.wikipedia.org/wiki/Theory_of_the_second_best
Perhaps if you allowed American communities to straight up ban poor people (eg via an income or wealth threshold), they would do that, instead of having to hide that desire behind restrictive zoning?
The best level, under “subsidiarity,” is not the federal, the state, or the neighborhood, but the commuting urban region, which could be the county or a super-county.
I mean, it's probably a variant on the Liquidity Trap, right? Once you get to high enough home prices, building more houses doesn't lower their prices *unless* you very publicly and very believably commit to building houses until the prices go down. If the state of California said, "We are going to build homes as quickly as possible until their price falls by 20%" and in some way demonstrated that this was unequivocally going to happen, the price of homes would fall over night before a single house was built.
Because homes are in the terrible position of being both a necessary good and a personal investment, they get affected by both basic supply and demand as well as the weird economic traps that result from speculation. If you want homes to be cheap, you have to both meet demand and convince people that there are better investment opportunities.
I think the first mistake in the housing discussion is talking in hard numbers. You can't say, "We're going to build 100,000 new houses", you have to say, "We're going to build houses until the median price is X."
I'm not even sure that "if the Bay Area built 66 million new houses, prices would go down." The demand for housing seems to be fairly inexhaustible. Everyone always wants more of it. If the YIMBYs win, and in the future there are enough apartments that everyone has at least one each, then the second apartment will start to go up in value. Slightly bigger apartments will seem even more attractive.
Housing seems more like TV than like beer. If you produce too much beer, you'll have to flog it at a discount. But there doesn't seem to be the same limitation on the amount of video entertainment that people can produce.
If true, that seems like it would be good problem to have.
Plenty of blue collar jobs in construction to be had. All the extra GDP will lead to extra tax revenue to finance your favourite boondoggle or pay off government debt, etc.
Right? I mean, that's pretty much what the 20th century looked like in the USA, isn't it? And the last 40 years in China, where I live. A lot of housing got built, house prices went up, and everyone got a lot richer. And despite the big crash in 2008, house prices have continued to rise.
It's fine to say "there must be a limit" - and I suppose there must be, somewhere. But I don't see any reason to think that current levels of housing supply/density are anywhere near the limit where house prices will suddenly start to go down.
Yes. Though the extra construction is largely an effect of prosperity, and only partially a cause.
Yes, absolutely. I certainly don't think that if you just build a bunch of houses, everyone would get magically rich! It would have to be part of a general development, including new work, new places to work, new entertainment, and everything. But I don't see any reason to think that new jobs and new technology and all the other things wouldn't appear.
I just worked on a comment on this article for an hour and then accidentally CTRL-W'd myself. I want to die.
tl;dr: Additions to housing stock decrease rents at the margin, holding all else fixed. Second-order effects include increased wealth/capita (unless you assume new residents have negative wealth), leading to increased demand for goods and services in the same fixed area, thereby leading to increased supply of amenities which directly increases the attractiveness of the city's housing stock. The whole feedback loop is also affected by the mobile-yuppie hypothesis you mention, especially because higher-income high-skilled Americans are disproportionately mobile. However, very dense cities with less concentrated wealth, e.g. Union City (or Manila, or Bnei Brak in Israel) have nowhere near the same effect. That mobile-yuppie hypothesis ties into the role of cities as a productivity multiplier for high-skilled jobs, scaling with density: see The New Geography of Jobs by Enrico Moretti.
I wrote two comments (combined 70+ minutes of writing) on this and accidentally CTRL-W'ed myself twice. I hate myself and would very much like to die.
tl;dr; Yes, second-order and third-order effects from housing stock increases can increase rents, even though the first-order effects (ceteris paribus, etc) is to lower rents. Primary driver is increased wealth/capita, which is especially a factor for cities which are already large, dense, and attractive to high-skilled workers (partially validating your mobile-yuppie hypothesis). Causal pathway: More housing -> more residents/capita -> more demand for amenities per capita -> increased attractiveness of city -> higher housing costs. Please just reply to this if you have any questions.
In the interest of staying alive, maybe check out https://superuser.com/questions/882053/recover-text-on-reopen-closed-tab-in-chrome
I think you have to consider rents not so much as a function of density but as a function of density plus time. If Oakland doubled its housing stock tomorrow rents in Oakland would go way down. Rents going down would cause some people to move to Oakland, and the low rent would make it a very attractive place for workers to live, which would cause many more companies to move there and open offices there, and those companies would hire workers who would move there. All the people moving to Oakland would increase demand for all sorts of goods and services in Oakland, which would cause more businesses to move to Oakland or be started there, which in turn increases wages causing more people to move to Oakland, and eventually all the extra housing is filled and Oakland is a much larger and denser and economically important city, maybe similar to Seattle, with higher rents to match.
But crucially, this process would take a lot of time. Just because Oakland suddenly became much denser does not mean that people will immediately start treating it like New York or San Francisco. The network effects that make large dense cities highly in demand and therefore expensive to live in take quite some time to develop, so the effect in the short and even medium term would be to reduce rents in Oakland.
Now obviously you can’t just double the Oakland housing stock overnight. In reality, the housing stock increases slowly, both because of burdensome regulations that are the bane of YIMBYs (which slow down housing construction that would happen in a sensibly regulated market) but also precisely because the network effects that increase the demand for housing take so long. But the same effect still happens on a much smaller scale, which is why you get all those studies saying that building some more housing causes rents nearby to drop a little bit. Building more housing generally causes rents to go down in the short term, but in the long term network effects dominate and large dense cities become more expensive. The only way to reduce rents in the long term is to build more housing everywhere, like you said.
I think a lot of the confusion might stem from ambiguity in the word "prices".
Consider a city with a set {X} of existing homes and a proposal to build a set {Y} of new homes, where ||Y||<<||X||. Most/all of {Y} will be luxury units, so the average price of {Y} will be higher than the average price of {X} was prior to the new construction. But, at least in the very short run, the average price of {X} alone should drop for basic supply & demand reasons.
The relationship between the average prices of {X U Y} after new construction and the average price of {X} before construction is indeterminate from just this stylized scenario; I suspect a lot of clashing intuitions are due to this.
In other cases, Yglesias unabashedly does take that extreme position: see his book "One Billion Americans."
Agree that Tokyo can and maybe should be discussion point in terms of numbers
You excluded Tokyo from your dataset. Tokyo has much higher density than SF and much lower price per sqft.
Isn't that a different customer base? Is Tokyo a discontinuity from pricing/density in Japan?
I think the error here was actually mentioning London instead of just sticking to the US.
Japan overall has fairly YIMBY policies, so no, it's not a discontinuity. But the fact that Western countries are suffering from high prices while the densest island with the densest city has cheap abundant housing, suggests that policy is the relevant factor.
Immigration policy, in this case, is probably the most relevant factor. Japan has cheap housing now because the population is declining due to low birth rates and an extremely restrictive immigration policy. In a game of musical chairs with more chairs than people, there's not much pushing and shoving. Why would you need to increase density when you have fewer people each year?
Back in the 80s-90s when the Japanese population was still growing and urbanising, Tokyo real estate was insanely expensive, and there was an often-repeated factoid that the gardens of the Imperial Palace were worth more than all the real estate in California.
You might be surprised to know then that despite Japan's low birthrate and low immigration and rapidly declining population, they build far more new homes per capita every year than the US does. As a result, the average Japanese home is very new and the average house is torn down and replaced after a relatively short 30 years. They're living in nice new homes for cheaper. All because they mastered the dark art of building drywall boxes
In a country with a declining population, you would expect that fewer homes are being built per capita because there's little to no competition for existing homes. But it's exactly the opposite! Japan builds far more homes per capita than the US does, despite their declining population. That should really make you stop and think what's going on here.
I don't really get your point about "building new homes" vs "replacing existing homes". Like, if I build a new townhouse in Osaka and then someone in the country side demolishes an older home, then mine doesn't count as new? I think you're just saying that anywhere with a declining population can't "build new homes".
Any tiny Tokyo apartment is much nicer than the spot under the freeway outside my Oakland window where a bunch of people sleep every night.
I think you are reversing cause and effect.
????
You're saying that you think a declining population causes them to build more houses?
So are they building, or rebuilding?
The new homes are sometimes built on land that previously had a different structure there. I guess if you want to call that "rebuilding", then you can try to rationalize it away. But you would expect that a country with a declining population would do less rebuilding because there's no need to. But in fact, the opposite is the case. Japan builds almost twice as many homes per capita as the US and the average home is demolished after only 30 years. People there treat used homes like used cars and don't think of them as an "investment".
Yes, the overall population of Japan is decreasing but the population of Tokyo is increasing. Tokyo has just matched supply to the demand.
I can see from this and your other responses here that you're really not doing this in good faith and you're just looking for any reason to be opposed to free market housing, but your arguments are pretty bad and you should at least try harder.
The argument is about housing prices not whether you personally can make friends. I recommend attending a local meetup for people with similar interests.
Exactly! Tokyo just like SF or NYC or London is experiencing net population growth. It’s irrelevant whether that’s from international immigration or migration from your own (otherwise declining) domestic population. The difference is that Tokyo has an urban housing and planning model that privelages housing affordability over restricting new construction.
Just want to note that despite Japan's low birthrate, they actually build almost twice as many homes per capita as the US and the average Japanese home is torn down and replaced after only 30 years. It's not really a matter of population growth vs shrinkage. They just build new houses for the same reason we build new cars or new refrigerators: new stuff is nice.
First, I didn't exclude Tokyo, I used a graph which only had US cities. Second, I discussed why I didn't think this example held in Footnote 1.
My assumption is that in 1989 Japan broke through the barrier of being supply constrained to being demand constrained
Your assumption is unfortunately wrong. Japan, despite having a shrinking population, builds almost twice as many homes per capita as the US. This is exactly the opposite of what you would expect! As a result, the average Japanese home is torn down and replaced after just 30 years. I'm not going to tell you this is super great for the environment or something, but it is really great for people's living standards. Even a relatively poor person can afford to live in a nice new apartment in a desirable neighborhood.
I think there's a significant chance that this is a weird effect of modern zoning (or maybe service economies?) cities used to be where poor people lived! *Downtown* used to be full of poor people! There are major cases of high-density dirt cheap living (like tenements). It seems at the very least plausible that
It looks like you haven't finished your comment, but what you're describing is essentially the same thing as the local vs global prices, if you don't just look at the housing price average for a city. If you build 10,000 more houses, all built to code with modern materials and insulation, those houses might be so expensive that they drive up the average for the city, but they might cause wealthy people already living in the city to move there, causing the prices for all the other houses in the city to decrease. If all new housing is objectively better value for money than old housing (which is likely untrue given the weird zoning you mentioned) and all people move to better housing given the opportunity, it's the lowest quality housing that ends up becoming cheaper, and thus your city attracts more poor people.
So building more housing attracts more (rich and poor) people? Existing demand consumes new supply.
But even if current demand would includes millions of more residents moving to that city who can’t currently afford it, that demand is not infinite (if only because the human population is finite). You would eventually hit a point of increasing vacancy where prices would be forced down to compete for consumers who can more easily shop around. This would be especially true if you increased the supply of housing across multiple high demand cities at the same time by say, for example, deregulating zoning restrictions at the state or federal level.
I think it's more likely to be due to deindustrialization and transitioning to a service economy. During the industrial revolution there was a huge migration to cities because they were the centers of industry and provided lots of jobs for poor people. Now cities provide jobs + status for college educated people, and have to become more desirable in order to actually attract those people. This results in lower income workers getting squeezed because they are competing for housing with people on professional salaries.
NYC/SF are expensive because there are MANY good jobs there and people WANT to live there. Not because of the density of housing. You could build 500,000 homes in the middle of your empty field in North Dakota, and it wouldn't do much for the demand there. You aren't going to create Manhattan by magicking 3.5 million housing units of similar quality into the Red Lake Indian reservation in Northern Minnesota.
But overall you are right, that in the real world local density increases can/often lead to local gentrification/rising prices, and the benefits tend to be for the wider area. But the actual impacts depend a lot on the particulars and the services/jobs available.
There are good jobs there because the cities are dense; jobs go where employees are, and vice versa, in a cycle. There aren't hundreds of thousands of good jobs in a Manhattan-sized area of a random plain in North Dakota (unless that plain has oil!) , because that plain isn't dense enough to support the businesses that create jobs.
Yes but a housing unit isn't an employee. We are talking about the impacts of building more units, not more employees. Our rapid cloning tech isn't that far along yet. :)
It takes years (and even generations) for institutions to build up and for something like Manhattan to grow. Absolutely there are many places in the country (especially during the last housing crisis), where it was built, and no one came. This isn't the field of dreams. It is very possible to over build demand (at least in most places, I do shudder to think of what that would look like in Manhattan).
Maybe I’m wrong, but weren’t most of those development flops green field suburbs in Vegas or vacation condos in Miami, i.e. dependent on rising income and continued growth in speculative real estate markets? Commercial real estate woes might be more associated with the Covid shock to work patterns.
I think all these have in common that they’re something of an economic monoculture and are much less resilient to economic shocks. Mixed use neighborhoods are much less likely to go bust because there’s no single employer or investor that can pull the rug out, residents are more likely to have roots and networks that mitigate flightiness and there’s sufficient density of infrastructure and other jobs that they can adapt without moving away. Density means there’s always going to be a minimum customer base to keep more street level businesses viable through a downturn.
Yeah that is the point. A bunch of houses out in the middle of nowhere can attract no one. We are literally debating whether "housing alone" is enough. I am saying no.
Housing alone in the middle of nowhere wouldn't be enough.
But adding lots of housing to NYC which already has an established job market, would be enough to grow that job market there, too.
So what's the argument for big cities that fall apart, like Detroit? It does seem like there's some employment-related piece in here - Oakland is going to have some limits on who it attracts because it's not going to pull a ton of finance people from NY, etc.
Absolutely. Job losses are often a huge part of the 'why' regarding "big cities that fall apart, like Detroit."
From Reuters in 2009 ...
https://www.reuters.com/article/us-usa-autos-migration/as-u-s-autos-decline-michigan-faces-worker-exodus-idUSTRE5595T920090610
Mostly deindustrialization, containerization of shipping, and massive federal subsidization automobile suburbs combined with “urban renewal” (see:
https://www.segregationbydesign.com/oakland )
Please explain why/how 'containerization of shipping' fits in here?
You need way less people for transshipment with containers then when everything was break bulk and had to be handled out of the hold by longshoremen. You also need way less ships (and therefore docks) and warehouses for the volume of cargo.
This is way more efficient for the economy as a whole, since you're dramatically dropping the price of shipping, but it's damn hard on the neighborhood around the docks, which grew up to support the huge number of longshoremen previously required.
Tangential to this, the drop in shipping costs also affect a lot of other places than just the docks. The Rust Belt--containing steel mills and the like--formed because it was at a nice transport juncture. The least-valuable-by-weight part of making steel, the iron ore, could be shipped from the mines in Minnesota and the Upper Peninsula by water, the cheapest shipping option. Limestone for flux, also very dense and not all that valuable, could come by water from Wisconsin. Meanwhile, coal for coking fuel came up from Pennsylvania and West Virgina on a more expensive but shorter journey via rail. These all came together on the shores of the Great Lakes. Then, once the city has formed, inertia kept them going: a lot of cities continue to exist because they have a long tradition of existence, which means people are willing to move there.
However, transport is so cheap in general nowadays that there's not a huge advantage for that location. Making the steel overseas with cheap labor can take advantage of the cheap shipping, so the margins for the Rust Belt got super thin, and once a demand shock killed a bunch of firms, it was no longer "the place to go" to build a new steel plant, and the area decayed.
On an even bigger tangent, but still kinda related to the OP as long as I'm writing, it's a lot more difficult for a small town to form and become a big town today than it probably was in the past, because transport is cheap. I came from one of the mining towns in the Upper Peninsula that would have supplied the Rust Belt. It formed to support an iron ore mine, which has since closed and the town is dying. However, if CCI were to reopen that mine, it probably wouldn't save the town: back in the late 19th century, you really had no choice but to live pretty much right on the mine headframe. When a mine formed you formed a town, and if it lasted long enough it accreted enough ancillary business and population to build schools and the like, so that the "has a long tradition of existence" might allow it to keep going as long as the mine was still providing a job base.
However, if you were to found a mine on that exact spot today, 1) you're going to have way fewer miners than you would have in the past, because machinery, and 2) the miners can live in a town that's not dying and drive to work from a much larger catchment.
About a 30 minute commute today would get you to a somewhat struggling, but not outright dying town, and 45 minutes gets you to Marquette, with Northern Michigan University to anchor it as well as a bunch of other amenities. It's not a major city, but not getting hollowed out, and therefore has better schools for your kids. Compare this commute to a story from a local UP author who grew up in the '40s in the town I discuss. When he was a kid, going to Marquette was literally such a major trip--requiring his mother to dip into their rainy day fund to get train tickets--that it made it to a book of stories. A miner damn sure wasn't *commuting* to work from that far away at that time. But they can now, and that means the town is not likely to come back. The conditions that created the town were more than just "had a mine", it was the entire transportation economy that existed at that time, and those conditions aren't coming back.
Containerization and the cheap shipping that resulted disrupted a lot of existing economic networks, making them susceptible to shocks. Sic transit gloria mundi.
Wow, there are a lot of run-on sentences in that that weren't apparent in the post window. I apologize.
> You need way less people for transshipment with containers then when everything was break bulk and had to be handled out of the hold by longshoremen.
Something that intrigues me is that the classical world (and the pre-classical world!) shipped their goods around mostly in giant sealed clay jars. This obviously reaps all the benefits of containerization, right down to the use of dedicated machines to make loading and unloading easier; it is containerization. Nobody's pocketing some grain from the big clay jar with a wax plug blocking it.
How did such an important -- and simple and intuitive -- technology get lost?
https://en.wikipedia.org/wiki/Pithos
This is a great comment. Thanks!
Before containers, loading and unloading the cargo was extremely labor intensive, and that was the kind of labor that required practically zero education, you only needed a strong back, two strong arms and two strong legs to be a dockworker. And since large cities both produced and required a lot of goods, they had to support a large population of urban poor that loaded and unloaded their ships.
With containers, you could build a large port away from the city where a few crane operators and their ground crew could unload a container ship and load the containers onto a waiting cargo train quicker than a thousand dockworkers could. Then the container would be unloaded and moved to a warehouse by a few more skilled tradesmen: a few more crane operators, a truck driver that would take it from the urban cargo train station to a warehouse, a forklift driver that would remove the pallets from the container. Suddenly, all these urban men who would support their family by carrying heavy sacks were redundant.
I'm amazed nobody mentioned crime, since Detroit fell apart when that surged and it experienced riots.
https://devinhelton.com/why-urban-decay
What if good jobs follow from density but with a delay? So if you build new houses now, prices temporarily decrease, then they increase in a decade or so once the jobs appear.
That seems plausible. Though I don't think the delay in NYC or SF would be a decade.
> There are good jobs there because the cities are dense
There are are some jobs there because the city is dense. But in SF the good jobs are tech, and tech isn't in SF just because it's dense but because it's a tech hub. There are plenty of other cities in the U.S. where you can have access to a much larger work force. Just not one specializing in tech.
I think you're modeling employees and employers as a homogenous blob, and assuming a city is the total market. But many companies clump together in industry cities/districts and produce value that is consumed across the nation.
Companies go where they can hire their specific type of an employee. It's the size of talent pool for that specific job not general density that drives that phenomenon. Facebook hiring site reliability engineer vs Halliburton hiring a petroleum engineer.
But I think what's happening is there an industry specific agglomeration effect. You want to start a start up in SF since it's easier to get funding because of previous successful exits. And once you're successful it'll be easier to hire for niche roles like a node.js site reliability engineer who has scaled an application to a billion users.
This leads to a clumping of certain industries like Tech in SF, Finance in NYC, Oil/Gas in Houston. Some of these industries pay high wages, and people like living next to where they work so this drives up price which can support higher density.
It's industry aggolomeration -> high density of high paying jobs -> high demand for real estate -> high prices/density.
There's a whole literature on generalist vs specialist agglomeration, which I mostly haven't read, much less have the ability to properly summarize, but a quick-and-dirty version goes something like this:
Employers tend to locate where there are employees. Some industries employ so many people that there are suitable employees in every city (e.g. lawyers, accountants, baristas). Some industries need lots of different skills and tend to end up only in the biggest cities where the labor market is deep enough for them to get all the specialists they need. This is "generalist agglomeration". Other industries need lots of people all from a single specialist skill and tend to cluster in one or a small number of cities (e.g. tech in Seattle and SF, biotech in Boston). This is "specialist agglomeration".
If you look at the most recent era of decline for big cities, ie the 1930s-1980s, part of the story was specialist agglomeration in manufacturing. Individual manufacturing industries each concentrated in a different smaller city (most famously, cars in Detroit). The result was that growth was mostly in the smaller cities, rather than in the biggest ones; when considering metro-area population the big cities levelled out rather than actually declining, but suburbanisation meant that urban core population was dropping and this had a dramatic effect on real estate prices in those urban cores.
While density does make generating economic growth easier, it is definitely possible for housing to outpace jobs and vice versa. Indeed, San Francisco, San Mateo, and Santa Clara Counties added significantly more jobs than housing in the last couple decades. Planners partly enabled this by green-lighting commercial real estate development (office towers downtown, big tech campuses down the peninsula) while restricting new residential. The resulting increase in housing demand then was absorbed by the East Bay and further inland, driving up prices.
I suppose deindustrialisation is also a part of this. You can pack workers much more tightly in an office than a factory, even before you start expanding upwards.
You've read Seeing Like a State, you *know* that just building a bunch of housing doesn't materialize people who want to live in it, or businesses to employ them.
Not so long ago, housing in Williston, North Dakota cost more per square foot than either NY or SF. And I can guarantee you that the average rental in Williston was rough, compared to what you got for comparable money in NY or SF.
That was when people were making well into the six figures, while living in their cars. Magical times.
This shows pretty clearly that demand for housing is driven mostly by jobs.
I am sure that it wasn't because people just wanted to see the Williston Ballet.
As an aside, I knew a young woman, an Indian investment banker, who got transferred from Singapore to Williston. I wonder whom she pissed off and what she did to do make them that mad.
My niece recently moved from Heber, UT, which is one of the highest cost rental markets in the US—more than $6000/mo avg. Which is shocking when you're there because it's a little farming town. But its near ski resorts and there are enough hyper wealthy people in the world who think nothing about buying land there, so the whole housing market is whacked.
Definitely talked about less than major cities (and imo less important given their smaller populations) but resort towns from Jackson Hole Wyoming to Vail Valley of Colorado are among the best examples of wealthy NIMBYs cynically wielding zoning to make it unaffordable for the working class they rely on to live.
There aren't that many ultra wealthy people in the world who want to own a home in a ski town in Colorado. But there is a lot of land in rural Colorado. If you just went full libertarian and let people build whatever they want, you would pretty quickly saturate the market of ultra-wealthy individuals and prices would crash.
Perhaps it's too distant, but I was surprised not to see any discussion of Chinese cities here. There are hundreds of Chinese cities that have mega dense developments but didn't really see the changes proposed for Oakland, because just adding endless housing alone will not induce demand.
I think it’s a hard comparison to make given how radically different the Chinese economy operates and the migration restrictions imposed by the Hukou system.
The hukou system doesn't stop you from migrating. People do it all the time. What the hukou does is stop you from receiving government benefits when you're outside your native region.
It doesn’t stop adult workers from coming, but my understanding is it does stop families (children and elderly) from migrating.
Is migration of the elderly a normal phenomenon elsewhere? Where are the examples of countries with such free internal migration that young adults moving to the city bring their parents with them?
The price of housing in China has skyrocketed over the past few decades, as all those extra apartments have been built. I live in a pleasant but unremarkable southern city, and I paid London prices (about 4.5m yuan/$650k for a 1,300 sq ft flat). That seems to match Scott's hypothesis that high density leads to high prices. House prices here have risen much faster than incomes. They've risen in rural areas, too, but the increases in price in cities have been stratospheric.
For China you have to account for the very low rental yields. There people do not trust other other classes of assets which inflates purchase prices, but not rental prices. Rental prices in major Chinese cities are comparatively low in my experience, my rent was about half as much for my Shenzhen apartment compared to my roughly equivalent London one.
Crowd sourced cost of living data like numbeo.com seems to corroborate this.
You're conflating the price of buying a house and the price of renting one. House prices are subject to speculation just like any asset. Rents aren't subject to speculation because you can't profit by renting 5 units and hoping the rent goes up. Rents are the way we measure housing affordability and in China, rents are crazy low because of the oversupply and many mom and pop landlords can't find tenants for their apartments, so they sit vacant.
Yeah, I see what you mean. Rent variation isn't anything like as extreme as house price variation, that's true... but rent variation still follows the same pattern as house prices. You try to rent a nice flat in the big cities, and you'll still pay a lot. Smaller city, not much; in the countryside, there's no rental market. So, it's still the same graph, just a shallower gradient.
Take it to an extreme: I have built an apartment in a pocket dimension (TARDIS-style) in New York. It has effectively infinite capacity. What will this do to New York real estate pricing? Do we expect that the apartments next door to mine will become more expensive as a result?
Not sure about the apartments but I expect the value of a storefront next door just became almost priceless.
the storefront next door was previously in the middle of the city. now it’s on the outskirts of the city. i can imagine that many occupants who previously used that store will now use an even “closer” store inside their complex instead.
depending on how you read “infinite density”, every unit inside this infinite density block is on equally prime real estate, and there’s infinite of it so the land portion of rent is driven to 0. the exterior storefront can’t become priceless, else they’d pay so much more on rent that they can’t be price competitive with the interior stores.
The comment I was replying to specifically said apartments, nothing about retail space. "Realistically" you're probably right but then it's unclear what's really "realistic" when we're talking about magical infinitely dense real estate.
The apartments will become cheaper as you've made yourself impossible to compete with. Other landlords will be forced to charge much less than you to give people a reason to rent from them rather than taking a space out of your infinite capacity. But, as you've just given the public-facing businesses in the area a massive number of additional potential customers, all the real estate that isn't housing will become more expensive.
If its capacity is truly infinite, and is to be auctioned off or otherwise used in a profit-maximizing way, then the limiting factor on occupancy would appear to be congestion at the inter-dimensional transit point. The apartments next door to yours will be expropriated to build transport infrastructure meant to support getting through the bottleneck, and compensation for that is a legal and political question. It suggests that the whole analogy is rather too far afield to be useful.
You can kind of make the analogy work. If you build a large skyscraper in the middle of Mountain View, you would need to also improve transportation infrastructure to make that viable and some of that burden would fall on the government who might use eminent domain to sieze neighboring land to expand the road or build a new subway station.
Or more likely, the government would just say "we don't feel like building transportation infrastructure, so you can't build your TARDIS apartment".
Some clarifying questions:
1. Is this the only TARDIS-apartment in the city/universe?
2. Is the TARDIS-apartment geographically fixed or mobile?
3. Is their sunlight and fresh air inside of the TARDIS-apartment?
4. Is the MTA planning to build a subway line inside of the TARDIS-apartment?
4a. Is the new line expected to open before 2045?
1. It's the only one in NYC because after he built it, the city introduced a new interdimensional permit process that takes 10^23 years.
2. It's technically mobile, but relocating it to a new site requires a new environmental impact review for each relocation, even back to the original site, so in practice, it's stationary.
3. Yes, but because the weather has to be the same for all tenants, there's a complicated process with 3 different agencies having oversight over the weather setting process to ensure fairness, accountability, transparency, and equity.
4. The MTA is still in the design phase for building a subway line. Despite being in a pocket dimension, the janitors' union doesn't want to share a break room with the engineers' union, so interagency discussions are ongoing.
4a. Time in the TARDIS is also omni-parallel, so technically everything is happening all at once. But city code requires an 18 month notice and public comment period, so no, they don't plan to finish before 2045.
The doorway is the bottleneck. Even with a clever traffic management system I can't see how you could reasonably accommodate more than ~10,000 people, and even then you'd probably be facing long lines to enter/leave at peak hours (in which case you might as well be commuting in from Connecticut).
So I'm sure you could make some good money but I doubt it would significantly affect the real estate market.
Supposing _everyone_ could have a Tardis-apartment (but that these Tardis apartments are not moveable) then I guess you'd completely revolutionise real estate. Land would become less valuable but the right to place your doorway in an in-demand location would become valuable. Cities could easily accommodate populations of many millions, all within a short walk of each other, so urban life would be very different, just a bunch of corridors.
Reminiscent of "Fall of Hyperion"'s Farcaster houses
Rather than a single fixed door, suppose the development is shaped a bit like the Mandelbrot set, an irregular hyperbolic manifold in higher-dimensional space, perhaps some distant cousin to the Eldar Webway or https://questden.org/wiki/Haze_Town , and residents can freely teleport to or from any otherwise-open public roadway on the same continent as the central anchor point... but the teleportation process takes up to an hour per mile 'as the crow flies,' so realspace travel is still faster when possible at all.
As to legalities, let's say it was formally recognized as the embassy of some alien empire, and installed near the UN building, before the whole teleportation thing was well understood by relevant policymakers. Forcibly removing it would be an act of war, and systematic action against "applicants for refugee status" (as renters in the fractal embassy are technically classified) would be thwarted by bureaucratic gridlock even if it was somehow logistically possible. However, the alien empire is also sufficiently corrupt, or at least lax in enforcement of extraterritoriality, that it poses no significant obstacle to the NYPD or other local authorities when they've got a court order to look for someone or something specific.
Now, how you want to manage your TARDIS aparment is by first offering super cheap rents to drive down the rents of all the competing apartments in the area. Then buy them out at low prices, then jack up the rents and rake in monopoly profits!
What do we expect would happen? The government would tell you that you can't build your TARDIS apartment there because you didn't get an interdimensional permit and also it would have an impact on street parking.
This is not actually Matt's view per se.
The important thing is to uncouple housing and land. Density increases the value of the land. But it also allows more units to occupy an existing parcel of land, which decreases the per-unit cost of housing.
So here is what you expect to see happen when new units are added at the margin:
1) Cost of all nearby buildings go up (this is actually the land value increasing, but we usually bundle land and building)
2) Value of existing single-family homes increases for the same reason as (1)
3) Cost to move into the neighborhood goes down because there are now more places to live.
It doesn't always happen precisely this way, but this is broadly what you'd expect.
I don't have the link handy, but Matt has argued before specifically that existing single-family homeowners should expect to see their house values go up in neighborhoods that become more dense, even as the cost of housing per unit goes down. This is part of his case for why homeowners should in general be less worried about YIMBY policies.
The value of their house may go up, but also their quality of life may go down. And it really does depend a bit on who is moving in there.
In a mixed income post industrial urban SF-home area with a lot of rentals and poor people scattered about, creating a bunch of density is probably going to help the homeowners financially. They already need to lock their doors, and put away their valuables, etc.
In some area with little to no poor people, and very high quality of life and good services/little crime, creating a bunch of density can be catastrophic to the quality of life. It is pretty situational/granular.
One person is like OMG I would love it if there was a trendy bar across the street even if it means I need to park a block further away. Another doesn't like fancy bars and thinks the dive bar 2 blocks away is fine, and the trendy bar going in across the street is a 100% negative.
The fact that density has both amenities and dis-amenities is a good argument against what Scott is saying here.
The frustrating thing to me about posts like this is that the whole NIMBY vs. YIMBY dynamic is at least as much cultural and aesthetic as it is economic. You can explain the dynamics of real estate valuation to me all day; That doesn't change the fact that if the woods around my suburban home were to be razed and replaced with apartment blocks my quality of life would go down palpably.
A sea of two story single-family units might not be optimally efficient but there are reasons why the people in those neighborhoods chose to live in that arrangement.
I mean, the value of your land would go up appreciably, you would be able to sell for a nice capital gain, and buy a nice suburban home for cheaper elsewhere. So you end up with the suburban living you desire + a bunch more money.
Some people have sentimental attachment to the land, the environment, and the community of people who lived there. And sometimes, when they put a dollar value on all of that, the loss is more than the gain.
Then buy the woods and maintain it.
Another doesn't want a bar across the street or down the block because they have children. Density annihilates family formation.
> Density annihilates family formation
Uh, citation please?
Unaffordable housing annihilates family formation. Billions of people have and do raise families in apartments when large enough apartments are sufficiently affordable and there are integrated services that families need.
https://twitter.com/BrentToderian/status/1255661763602690049
The Georgist perspective, I wonder how LVT would change this dynamic
A good theory should make predictions
Here's what I'd expect to happen under an LVT:
1) Upzone an area to allow more density
2) This immediately increases the value of all that land (since there is now more freedom in how that land is used)
3) Owners now owe more in taxes
4) Owners have three options: eat the tax increase, take advantage of the upzoning to make more money off their property, or sell to someone with a plan to take advantage of the upzoning
5) This leads to a virtuous cycle of land improvement -> increased value -> land improvement
6) The money captured through the LVT can then be distributed throughout the community as makes sense. Anyone who feels they've lost out due to the transformation of the area can in theory be compensated out of this revenue stream.
Honestly agreed, I don't think Georgism is a practical political program. This is just my prediction of what would happen if it were magically implemented.
Assessing land accurately at scale already happens across the world. Several countries already have LVTs: Denmark, Estonia, Lithuania, Singapore, and Taiwan.
Implementing it is a solved problem. Getting it through a vetocracy I guess isn't.
What I'm always a bit surprised about is that America is *so productive*, even with such terrible land use. Imagine productivity with dense cities? If the Bay Area has such agglomoration as it is, imagine what it could built if it densified to London levels? Paris? Barcelona?
I think I've understood Matt's view and am taking this into account. I agree that price per acre of ground-floor land will increase faster than price per housing unit, but I think price per housing unit also increases. This is why the cost of 1000 square feet of living area is higher in Manhattan than North Dakota.
In a perfectly competitive market, market price should just be equivalent to the marginal cost.
Marginal cost of building housing (NOT land) is slightly higher in denser areas because cost of labor is higher. But that's not what's causing the delta between North Dakota and Manhattan.
Oh a lot more than just the cost of labor is higher. More regulations, more zoning, harder to work on build sites, inability to store materials on site, etc.
"More regulations, more zoning"
I meant in a situation with none of those ("perfectly competitive")
Well but some of those aren't just "obstacles from crazy bureaucrats", but actual rules you need about building codes and rules for construction etc. when the nearest building is 3ft away and the nearest residents 6ft away instead of 500. And there are 4,000 people passing on the sidewalk out front instead of 3.
There are certainly regulations that are unneeded, but most of them are needed. They are built into the reality of the level of density already existing in those places. More stakeholders, with more harms doled out.
Even in an imaginary perfectly competitive large city, a large, high-density apartment block will need to devote more of its square footage to things like elevators, leaving less (proportional) square footage for actual housing. Also, building a 50-unit high rise apartment will cost much more than building a 50-unit 2-story block with external access to all units.
Also, I'm pretty sure the cost of building one 20-story unit is considerably higher than the cost of building 20 1-story units.
It’s never just the cost of construction, it’s always also (often mostly in expensive areas) the cost of the land to build on. Also construction costs go up non linearly based on fire protection, elevator, and structural requirements. Building a 20 story building is way more than 2x the cost of a 10 story building and waaay more than 4x the cost of a 5 story building.
Hmm. I do see what you're saying. But I think this conflates a second-order effect with a first-order effect.
The primary drivers of demand for living in NYC are the specific opportunities available in NYC. It is true that on long time horizons, one of the reasons these opportunities have tended to collect in NYC is that it is a dense place. But those aren't the only reasons - NYC is much more important than other, bigger cities in other parts of the world for complex historical reasons. Even if a catastrophe were to wipe out half the city, there would still be a great deal of demand to live near important institutions like Broadway, Wall Street, Port of NY & NJ, Columbia, etc (assuming those institutions survived the catastrophe).
Increasing the number of housing units has a very mechanical impact on how many people can live in the place. But it has only a second-order impact on the types of institutions that drive demand to live in the city. People don't just generically crave to live near other people for the most part (a handful of urbanist freaks like myself excepted).
The Bay Area is a great example of this. It is much less populated than other much cheaper cities. Density isn't why people want to live there - it's access to a specific culture and specific institutions. Demand for that is not simply a function of density - some people want to be part of Bay Area culture and others don't. Adding more units will induce some demand as a second-order effect, but will bring prices down as a first-order effect.
To relate this to your model: we might be able to say that the country has a certain number of abstract "culture points" that have been allocated to different cities by various historical forces. Each culture point a city has increases demand to live in that city by a certain amount. Adding more people to the city may allow it to generate additional culture points over time, or acquire culture points from other cities, but this doesn't happen right away, and is determined by a host of factors other than just density.
Under this model, we expect a place like NYC to always cost much more than North Dakota (since NYC possesses a large number of culture points), but we would also expect that adding additional housing units to NYC would bring costs down (since there are now additional housing units per culture point). Perhaps this process will over time allow NYC to steal away some culture points from Chicago, Boston, or other cities, but this is a secondary effect.
Price per square foot in Manhattan will always be higher than in North Dakota just because building skyscrapers is more expensive than building single-story wood frame houses. But in a free market, the difference might be 1.5-2x, not 10x.
I think there are amenities that aren't available in Manhattan that put a floor on the price per square foot, as you wrote in the text.
But I think there are simpler supply/demand calculations. Chicago used to have ~1,000,000 more residents than it does now and that abundance of supply is why I live in an industrial conversion here with five bathrooms for about the same price a 2br in Brooklyn. And the median value of a home in Chicago's worst neighborhood--Austin--is higher than the median price of a home in Metro Detroit, where supply greatly exceeds demand.
I believe it's a multivariable problem, that's supply/demand + fashion + (external value of shared amenities) + (price for dividends from aggregation economics.)
You need to disaggregate housing and land.
In a perfectly competitive environment, price of housing (not land, the literal house) would be driven down near to what it cost to build. Denser cities usually have more productive people, so labor costs are higher.
Land is also fixed, so that does scale with amenities. Land close to amenities is valued higher, all else equal.
Wouldn’t cities having more productive people make labor costs *lower* rather than higher, assuming that higher productivity included the building trades? Or are you implicitly assuming Baumol’s cost disease here?
In this theory, how would something like California upzoning everywhere work? Would the local effect drive prices up? (California is one of 50 states) Or would the global effect drive prices down? (All cities doing it together)
Same question if the US upzones. Same question if a city upzones. This local vs global dichotomy seems poorly thought out.
I think two apartments in the same city in California are almost perfect substitutes, an apartment in LA and an apartment in SF are partial substitutes, an apartment in LA and an apartment in NYC are weaker substitutes, and an apartment in LA and a house in the country are very weak substitutes. You would have to check empirically how strong the substitution is in each case.
I think it's plausible that California upzoning everywhere could decrease prices (because it absorbs a substantial amount of the demand to live in California), or increase prices (because it directs people who would otherwise want to live in NYC to live in California instead). I think most likely at that scale it would decrease prices, but I'm not sure.
Why would 2 apartments in the same city be a near perfect substitute? People have very strong neighborhood preferences and city politics is hyperlocal. I would propose that housing is endlessly fractal such that this local/global dichotomy really breaks down and you're left with a contradiction. Does upzoning one parcel lower price per sqft on that parcel? One block? One neighborhood? One city? One region? One state? One country? One planet? (ok, I'm kidding about the planet)
Also, just want to add that the mechanism for this local price increase is presumably something along the lines of "X place is hip, therefor I want to live there instead of Y place". Call it the "SoDoSoPa effect". I think it's tempting to think that everyone else is a hipster, but in reality, most people are boring people looking for a boring house near their boring job. Maybe with good schools.
Yes, sorry, I meant two identical apartments.
That's either a tautology, or wrong
"Identical", how? Square feet and cost of furnishings? Then no, they're not perfect substitutes. One's near the Orpheum, one's near Golden Gate Park, and another is in China Basin.
Another one is on a Bart line that doesn't get too crowded.
Location, location, location is often a matter of tenths of a mile, not tens of miles
I think you should read Matt's take on the case against induced demand. He's responding to the same argument I think you're making. "What if building housing lures in more rich people?"
https://www.slowboring.com/p/induced-demand
I linked this article on the top of the post. But I'm not sure my argument has anything to do with class or how rich anybody is - it would still apply in a world where everyone had exactly the same income.
I think your estimates of elasticities of substitution are a little off. I understand you're abstracting away from neighborhood amenities at a city level and just thinking about broad location, as others have quibbled with, but still there's a lot lacking. It seems that your mental model assumes everyone has a desired location to live in, and demand for housing is mostly driven by urban amenities. But demand for housing is really mostly driven by employment. If I work in downtown San Francisco, and I like my job and want to keep it, then I'm not substituting towards apartments in LA or NYC, but rather apartments in Oakland or houses in Tiburon or wherever.
For most people who aren't fully remote workers, in order to live in a city you need to find a job there, and the jobs available in different cities can vary based on industry composition. So if you work in, say, the film industry, you probably need to live in LA, maybe NYC, or a few other metro areas. Those effects will drive measured rates of substitution.
Increasing supply (mass California upzoning) causing *increased* prices (all else equal) would be very surprising!
Do those intuitions still hold when you reverse the hypothetical. (i.e. could we decrease CA housing prices by decreasing supply?)
Sure destroy all the houses and watch the state collapse and no one lives there!
Interestingly, prices went up when fires destroyed many homes in California!
Doesn’t it depend on the link between population and housing? Manhattan isn’t Manhattan because of the number of apartments but because of the number of buildings (and all the services and amenities that follow them).
I doubt the link between the two is as strong as you’d think; there may be a few people who don’t move to a city (think metro area, not urban core) due to house prices, but I suspect they mostly just live in worse (smaller, less convenient, further away, more crowded etc) housing. If you build more housing in Manhattan, you might suck people in from Brooklyn or Jersey City, but I’d bet on it lowering prices in Manhattan’s internal housing market, and Greater New York’s, because you won’t suck more people into the metro area.
In other words, I don’t think housing density causes population density; I think population density snowballs itself, and tends to cause housing density as a byproduct.
It is a bit bi-directional, but yes the jobs/amenities/services are doing most of the heavy lifting.
>because you won’t suck more people into the metro area.
Oh you would for sure suck *some* more people into an area. There was a period in my life where I was constantly being offered jobs in DC. But the pay was generally not much more than my current pay (say 20%-40% more), and the $300k house I have, would cost $700k AND be 10 miles further from my job. That absolutely was a huge factor in me not taking any of those jobs and not moving there.
Now you might say "well they will jsut hire someone else", and to some extent yes. But availability/cost of qualified labor absolutely will change corporate behavior about where to locate.
This raises the key point, that I can't seem to find data on --- do people move because they want to live somewhere else... or do they move to a place where they get a job? Your anecdote suggests your pressure to move to DC was purely economic. I suspect MOST people move to places because they have things they want--jobs, schools--not because they want to live there. BUT In order for "induced demand" to be substantial, we'd need a large % of people who move just to live somewhere else. Otherwise, as this comment notes... people's decisions would not be impacted by housing prices, which I suspect they're not.
My guess is it’d be mostly job-related but not entirely; however, people will probably decide whether to take a job based in large part on where it is, and some will specifically look for jobs (or university places) in places they want to live.
How much do people look for a job that enables them to live where they want to live?
I live where I live because it's close to my job. But I looked for a job here because I wanted to live here.
I think you'd find that it's really hard to tease that sort of interrelationship out of the data
It depends on the data. You could ask people why they moved in a nonrepresentative survey sample, match that with existing data, find some predictor of reason for moving, and estimate the total distribution.
I'm not saying it's impossible to estimate, just that it's hard and likely to be very imprecise.
Liking the place and availability of work aren't independent factors (places with jobs have strong economies, which leads to availability of amenities, for instance, but also employers like creating business in places they want to live).
By some people's comments here, we wouldn't need a very precise estimation, just a general sense of how large the group is. I tend to agree with people who say the voluntarily mobile class is very small as a fraction of overall housing demand.
As I type this, I also realize that we could first ask the much easier to measure question of what overall housing demand is from immigrants. Realty data might have that, i.e. moving from out of town without reason specified. If that amount itself is relatively small, we might be able to discount the induced demand argument. (We'd want to consider people from truly outside the economic/geographic area, i.e. not people from the suburbs or exurbs moving in.)
But sucking in people from Brooklyn into Manhattan lowers prices in Brooklyn too, which will potentially suck some people into the metro area. But overall prices still have to fall - if people wanted to live in Brooklyn and were willing to pay current prices, they would already live there.
I think my argument is they’d come from Queens or White Plains, but not Des Moines; the testable claims are that built density (as opposed to population density) wouldn’t increase the “metro population,” defined as the number of people for whom New York is their socioeconomic hub, and it’s metro population that snowballs (I’m less confident about the second half, and not that confident about any of it).
Imagine we built 10x houses _everywhere_. What would it do to the land price? I imagine that the total price of all land would remain more of less the same, but the price in the most popular places (Manhattan) would rise because it would be possible for more people to live there. It seems like it implies that the prices in the less popular locations should drop.
Of course I may be wrong about the grand total remaining the same, after all building more housing will create value.
I agree that if we waved a magic wand and dectupled housing everywhere, land prices would fall in some less desirable locations.
E.g. I live in Queanbeyan, across the border from Canberra. I bought my house here because Canberra prices are poisonously high, and it's close enough to Canberra. Many other people in Queanbeyan commute to Canberra for work too. If Canberra had a crap load of new housing and it was cheap enough to just live there and travel less, demand for housing in Queanbeyan would drop off a cliff.
Everyone is bringing up Tokyo, which was my first thought, so I'll instead mention that London is a place that's experienced quite a lot of growth and while it's pretty dense, it's also not very easy to build new stuff there which is why rich people build big underground complexes under their existing houses. For that reason it doesn't seem like a good example of YIMBY not working.
> it's also not very easy to build new stuff there
>For that reason it doesn't seem like a good example of YIMBY not working
YIMBY means building more housing. London is yet another example of not increasing supply to match demand causing the price to go up.
I agree and that's was the thrust of my comment.
"YIMBY not working" is an odd way to phrase NIMBY prevailing.
"For that reason [London housing prices increasing a lot with little new construction] it doesn't seem [London is not] like a good example of [the thing Scott used to say YIMBY is making housing prices worse] YIMBY not working [London is not actually YIMBY paradise]".
I've reread what I wrote about a dozen times and I'm perplexed that two people have both read it to say the opposite of the only meaning I can see it having.
People aren't good at reading double negatives. I had to reread the sentence twice before I noted the double negative.
The key empirical facts that go against your story is that physical mobility has declined in the past decade while housing prices have shot up. The tiny share of hyper mobile people you're thinking of aren't nearly enough to move the needle for cities. In general, people move to a city they have no connection to for jobs, not housing.
I think one intuition you're missing here is that allowing for easier construction of housing at the policy level in general shifts housing costs closer to their actual construction cost. And, higher density housing is (to a point) cheaper to construct per unit than sf housing.
How has physical mobility declined in the past decade?
I should have been clearer--domestic migration is what I meant to say and what has been trending down for quite some time https://www.brookings.edu/research/americans-local-migration-reached-a-historic-low-in-2022-but-long-distance-moves-picked-up/%3famp
Link is broken, you gotta edit that last part out.
Thanks https://www.brookings.edu/research/americans-local-migration-reached-a-historic-low-in-2022-but-long-distance-moves-picked-up/
There's an edit option in the ellipses (...) menu; you don't need to post a new comment.
I asked an academic about this because I was interested in what the effect taking zoning controls off in areas marked R-60 (single family dwelling) as the local developers and their supporters kept saying it would help develop affordable housing (yet at the same time it seemed like everything new getting built was more expensive than the stuff it was replacing). Locally it does drive up prices. According to my colleague, in the wider DC-metro area it should not because areas in which there were 'old' housing stock have to reduce prices to remain competitive with the 'new' build areas. So Chevy Chase isn't going to get affordable, but mid-South East might see a price drop. At least that's the theory. There's a good example of this in Minneapolis (as they took zoning controls off in 2018). See
https://www.bloomberg.com/opinion/articles/2022-08-20/what-happened-when-minneapolis-ended-single-family-zoning?cmdf=minalpois+zoning+controls+result#xj4y7vzkg
and the effect of Covid with WFH now means they are going back to the drawing board again.
https://www.minnpost.com/cityscape/2023/03/minneapolis-2040-zoning-remains-stuck-in-the-1960s/?cmdf=minalpois+zoning+controls+result
Right! I forgot about that, but you're completely correct.
New housing comes in at the top of the market: developers build top of the line expensive apartments. So wherever they build it may see prices increase, since it's a neighborhood with apartments for rich people.
But! When they do that it creates a hermit crab effect. The rich move to the new apartments, the less rich move to the apartments the rich were in, the middle class move to theirs, and so on down the line until you reach the poor.
So building new housing may make a neighborhood more expensive, but it should lower housing prices for the city as a whole by creating more supply at the top of the market.
It's too bad nobody builds apartments pre-rat infested with old plumbing, old electrical, and smoke stains on the walls and carpet. All new housing is luxury housing.
Yeah if you look at that article, almost all the growth in units is in large apartment buildings. The upzoning of SF neighborhoods has had, and will continue to have almost no impact. In most metros there are more than enough brownfields, and dilapidated structures, and commercial/industrial spaces no longer in use to accommodate all the rental units the market will bear.
The unit demand is most filled by 120 unit 4/5-over-1s on major roads replacing run down 1960s commercial strips, not upzoning SF homes. The duplex/triplex initiative is more a political statement than anything honestly.
In principle I agree with you, but in practice it seems unless there's specific money tied to building on brown field sites, developers would much rather build on green sites or knock down family homes to build apartments (also something we've been seeing arguments about locally. Such as why should the county give tax breaks to build apartments next to a metro station when that's one of the most attractive places to have an apartment building?).
>but in practice it seems unless there's specific money tied to building on brown field sites
Sure but there often is. HUD and state/local governments spend a lot of money incentivizing developers.
Developers are big political donors and (secretly) fund most of the housing non-profits out there doing research and lobbying. It is one reason the housing/urban development world's research is always so in love with developers. It is who pays the bills.
I agree often the tax breaks are ill advised, outright graft, or are paying someone to do today, what they would have done 6 months from now anyway.
I think the people who are joining YIMBY movements are doing so because they read a Matt Yglesias article, not because developers are paying them.
Meh partly, but there is a lot of local organizing. Additionally I don't think you want to underestimate how much of the "research" people like Matt point to, is funded by developers.
> New housing comes in at the top of the market: developers build top of the line expensive apartments
It doesn't have to. What developers do is a compromise between what they want, and what they are allowed to do: you can force them to build a proportion of affordable housing.
>you can force them to build a proportion of affordable housing.
Not only can, but this is extremely common.
Including the US?
Yes. I work in affordable housing. Huge portions of the overall units constructed have some income restriction on them. basically any project needing money or any special favors/variances from the government will have some affordable housing restrictions on it.
The Department of Housing and Urban Development spends $250 billion a year subsidizing housing (that is not getting into state/local money and restrictions). A lot of them ends up as partner financing on housing developments in exchange for some units being made affordable.
The critical distinction here is that upzoning drives up the price of *land*, not the price of *housing*. A single-family home in a newly-upzoned neighborhood becomes more expensive because the *land it sits on* can be sold to a condo developer, but the resulting condos will be cheaper to purchase than the single-family home was, either before or after the upzoning.
I think this is missing an important piece of the puzzle. There's a big potential difference between the number of housing units in a city and the number of people living there. If Oakland had 4.5 million housing units suddenly appear that wouldn't summon an additional 4.5 million people into existence into the city.
The thing that makes New York a more desireable place to live than some island off the coast of Maine isn't the amount of housing there, its the number of people. And not just the people, the pattern of economic activity too. If you created those 4.5 million new houses in Oakland and just teleported people in randomly from across the country they'd all want to move out immediately because they wouldn't have any job to do in this hypothetical Oakland and the things that make a city a pleasant place to live like theaters and restaurants wouldn't exist either without a big shaking out.
If you just created 4.5 million new homes what would happen would be that maybe a few tens of thousands would move in immediately or lets be generous and say 500,000. Then the people who owned the other 4 million would have to slash rents to try to not stay empty and you would see prices plummet enough to start attracting people from all around the Bay Area driving down prices in that metro. But most people have a job or friends of family that prevents them from moving across the country just to take up residence in some apartment that happens to open up.
" If Oakland had 4.5 million housing units suddenly appear that wouldn't summon an additional 4.5 million people into existence into the city."
I sort of disagree.
Imagine they built 4.5 million housing units in Oakland and it *didn't* summon 4.5 million new people. Then the houses would be empty and the developers wouldn't be making any money. So the developers (who in this case would be regretting their choice to build so many houses, but that's neither here nor there) would lower prices until it was a really good deal.
I don't think you would have to lower prices very much - there are lots of people who really want to live in a city (even a current-Oakland-sized city) and who would do so if the apartments were easily affordable. At some point prices in every other city in the world would have to go down to compete, and we would reach some equilibrium where Oakland was about the same size as other big cities and had about the same price.
There are only about 10 million people in the whole Bay Area and moving is very disruptive. If you had to lower prices enough that half the population of the Bay Area, including the people who have been there long enough to own homes, move to Oakland you would have to send prices crashing, not have them remain at about the same price.
1: You are assuming that the 4.5 million new homes are all built to be expensive. But that's unlikely, and a bad idea. Build 4.5 million low cost 1 - 2 bedroom apartments.
Now a whole bunch of people can stop having roommates, and move into their own place. Or at least stop having quite so many roommates.
2: This cuts the demand for the 3 - 4+ room places, which leads to a drop in price for those
3: "there are lots of people who really want to live in a city". You keep on claiming this. What I consistently fail to see you do is provide any proof that it's actually a true statement.
IMO, people who want to live in Oakland want to live there for the Bay Area weather and proximity to SF. Essentially none of them are going to move to Houston, Phoenix, Philadelphia, or San Antonio (pop 4 - 7 US cities) as an adequate replacement for Oakland.
And they're not going to move to Jersey City or Paterson NJ, either, even though those are #2 & 3 in population density
It's tempting to think that everyone out there is some sort of faceless hipster NPC who only wants to live in Oakland because it's a big city. But in reality, most people who want to live there are doing so for jobs or family or other external factors. In order to attract 4.5M new residents, Oakland would have to be significantly cheaper than other major cities and it would take decades to fill that much supply.
Counterpoint: Detroit.
Detroit has a population about 50% larger than Oakland. A quick google tells me that housing prices in Oakland are about double those in Detroit.
There are other factors than just density and price?
I agree completely. However Scott's position is that density is the big picture determinant of price (at least within the context of an overall housing-constrained jurisdiction with free intra-migration like the USA), and Detroit is an effective counter-example to that.
I don't think Detroit is a good comparison, even putting aside other factors.
Oakland is effectively a SF satellite, while Detroit is an independent city. Housing in Oakland is basically housing in the SF metropolitan area, but Detroit is just Detroit. Considering Detroit as an independent city, the graph in Scott's post that has Detroit on it, puts Detroit at about as much a deviation from the trend line as NYC. So it seems to fit the trend as well as anything else.
You're gesturing at a supply and demand model; better to actually do it formally.
I agree that they wouldn't have to lower there prices that much if they built a smaller number of houses... but 4.5 million?
Sure there are a lot of people who want to live in cities. But there are also a lot of cities. Also people have all sorts of constraints like: wanting to live near their family or their jobs or not wanting to move etc.
And 4.5 milllion people is over 1% of the country. Getting 1% of the country to do anything is hard. Getting 1% of the country to uproot their entire life and move to Oakland sounds impossible. You'd have to make the apartments practically free.
Sure if you did make the apartments free and 4.5 million people moved in could you then raise the rents because now you've created a desirable location? Maybe. Although you might have to wait a few years for the amenities, jobs, culture, attractions etc to develop around the 4.5 million people.
Doesn't all need to be new arrivals. If there are ten million bay area residents, who in aggregate have at most two-thirds as much living space as they'd prefer (which seems plausible, given that many are stuck with multiple roommates or homeless, while anyone who somehow ended up with space they didn't want could soon find a buyer), increasing the bay area's overall housing stock by 50% might simply mean that existing residents become less crowded - thus less stressed and more productive.
Ok, that's a true and good point, but if people have "less space than they want" probably a big part of that is that space is expensive. So if building more units didn't "decrease the price per unit" then it wouldn't make existing residents less crowded, less stressed and more productive.
Could be some renter wants an extra ten or hundred square feet, and would gladly pay theoretical market rates for that amount of space, but a unit of the desired size simply does not exist within acceptable commuting range of their employer. http://www.threepanelsoul.com/comic/real-estate Even if prices don't strictly decrease, improving liquidity could mean less deadweight loss, better matches between all the hard-to-quantify quirks of supply and demand.
Overall, though, I figure a Georgist LVT is more likely to be the true long-term fix.
I think you're making a very common mistake here of confusing supply/demand with *quantity* supplied or quantity demanded. (This is very common! we teach students about this in micro 101 because it's so easy to make!)
What you're seeing is that the quantity supplied is correlated with housing prices (true!). But this is very different from establishing that the supply curve--i.e. the amount of housing that would be produced at any given price, and what moves up/down when we regulate/deregulate supply--is positively correlated with price. Figuring out what supply curves look like is a lot less intuitive and requires some high-grade econometrics, which is why economists had to set up a whole commission just to study this particular problem (the Cowles Commission).
In terms of resources for understanding how these concepts are different, a micro 101 textbook will cover this distinction. For the econometrics side of this, I've heard good things about Scott Cunningham's *Causal Inference Mixtape*, although I haven't personally used it.
Is this the concern I try to address with this paragraph:
"Could this be reverse causation - ie New York is very dense because its prices are so high (which incentivizes developers to squeeze the most out of every parcel of land)? Yes, obviously this is part of the effect. But equally obviously, it isn’t the full effect. Stripped of its density, Manhattan is just a little island off the US East Coast. There are plenty of little islands off the US East Coast - Maine alone has dozens - and none of them are as expensive to live in as Manhattan. Manhattan has a few extra natural amenities, like a river and a good harbor. But nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife. This induced demand effect is so strong that it overwhelms the fact that Manhattan has millions more houses than the empty North Dakota plain (or lower-tier cities like Des Moines or Cleveland). So empirically, as you move along the density spectrum from the empty North Dakota plain to Manhattan, housing prices go up."
That's part of it, but the mistake being made in that paragraph is the confusion of demand with quantity demanded. In particular, demand doesn't vary with quantity demanded.
However, the effect you're discussing here is kind of real in a sense. When the marginal utility of housing increases for *other* people, density arguably becomes more desirable for me, which is kind of like the demand curve shifting up. These are called bandwagon goods and discussed here:
http://econfac.bsu.edu/research/workingpapers/bsuecwp200804gisser.pdf
In theory, the bandwagon effect could be so strong that parts of the demand curve are upward-sloping. Solutions like this are not, technically, prohibited by the laws of mathematics, just the laws of economics. (And arguably of physics--see paper for conditions where these kinds of bandwagon effects imply the amount of housing in the city would have to be negative).
In practice, this effect exists but just can't overcome the normal, non-weird economics that says "making more of a good makes the prices fall." Economists have spent 100 years looking for these weird kinds of demand curves and never managed to find one; moreover, such a curve would have bizarre implications, e.g. that building new offices providing high-paying jobs would cause housing costs in San Francisco to fall, while a drop in demand (like discovering the drinking water was contaminated) would push prices up.
Thanks for the link on Bandwagon Goods! I'm an economist (I assume are too?) and had somehow missed that potential exception to the Law of Demand. I often talk about Veblen Goods in my lectures - this will be another fun possible exception.
But I think this discussion calls for an analysis of why the bandwagon effect doesn't lead to increased prices specifically in this context. I'm writing up a longer top-level comment that will try to address that.
I'm not really grokking your argument here.
There's a number of people who would move to New York if the rent was lower, but it's not an inexhaustible number of people. Keeping housing limited means that the price of housing stays high. The only way to get it down is if supply rises to meet demand. We know that there is an artificial constraint of creating more supply in the housing market in these cities, so it's no suprise that supply is not meeting demand. Every apartment you build is a step closer to satisfying the demand that already exists.
I think that's the issue. The demand is there already, building housing doesn't create demand, it just allows the demand that already exists to be satisfied.
I don't even know what to say further than that. I'm just don't get the induced demand argument. You can't lower the price of something by restricting supply, that just doesn't make sense. London and New York have expensive housing because they restrict supply, not because they encourage it.
This is what I was thinking. In a theoretical city where the number of people who want to live there is exactly equal to the number of housing units available, the housing prices would be very reasonable - but also, a new person wanting to move in couldn't get a house at any price.
I think this analysis is mostly good, but it simplifies the demand for big cities too much by assuming it is linear with city size, when it's more likely to be exponential.
A slightly denser Oakland isn't going to make people who like NYC level density move there. A much, much denser Oakland might, which is where you would start to see the rise in price.
Essentially the "less parsimonious" answer you scorn is probably more accurate
Also what I was thinking. I often hear people say "just look around at all the construction, clearly we're building housing and it doesn't bring down prices!" But generally the population is increasing more than the new units of housing can support. Building even less would just exacerbate that.
> There's a number of people who would move to New York if the rent was lower, but it's not an inexhaustible number of people.
I think the idea is that if you could build enough to housing to let all those people move to New York, it would become an even more attractive place to live and there would be another set of people wanting to move there if the rent was lower.
I get that, but if they're moving there because the rent is lower then building all that new housing lowered housing costs! And if the new demand causes housing prices to rise, then that demand will disappear, because the rent isn't lower anymore.
I think what one also needs to consider is that $1 is in a sense worth less in NYC than in North Dakota – everything is more expensive in NYC but people also have higher incomes. (I think similarly, 1€ is worth less in Germany than in Latvia. It must be like that in order to balance supply and demand of things from Germany and Latvia, or something like that.)
So, I wonder what that housing price graph would look like if you corrected for that effect.
There's data out there for median percentage of income spent on housing by metro area. I don't have anything on hand but IIRC New York City is still comfortably on top.
Yes, this is how "purchasing power parity" works.
Also, there's a whole complex of tradable and non-tradable goods and services. You can buy an iPhone from Apple's website and the price is the same anywhere in the United States, but if you want to buy housing in New York City, then there aren't any non-NYC substitutes. The result is that there are some goods that are sold at a national (or even international) price, and others where there are big geographical differences in price. That makes PPP calculations difficult. If you double your income and treble your housing costs by moving to NYC, housing might go from a third to half your income, and you'd still be better off because your non-housing expenditure is mostly on tradable goods (or on food, where the pricing is higher in NYC but not to the same degree).
Price of a house is a function of 2 things: price of land and price of constructing a drywall box with a toilet. Upzoning Oakland definitely wouldn't drive the price of land down, but it would split the land price more ways. So instead of 1 person paying for a 5000 sqft lot, you could have 10 people paying for that same 5000 sqft lot. Even if the price doubles, the price per person goes way down. The cost of construction is higher for building tall skyscrapers vs building single story drywall boxes, but the difference is on the order of 1.5-2x, so as long as the cost of land makes up more than half the cost of your house, then you have margin to decrease that price by building taller. There's probably in theory an optimal density given the supply/demand and construction costs for each parcel and in Oakland, the optimal density is clearly much much larger and best determined by the free market, not city bureaucrats.
The price of housing is strictly determined by supply and demand. Your definition ends up being pretty circular - given fixed construction costs, the price of land rises to equalize supply and demand. In a lot of places, construction costs are irrelevant because new housing is basically illegal to build. And in others, the equilibrium price of housing is actually less than construction costs, so existing houses sell for less than they cost to build, and no new housing gets built. Your distinction is mostly relevant only when it's possible to build new housing, and you're trying to determine how much new housing to build in a certain plot of land.
It seems to me that the "density increases prices" is not a direct effect, but part of a feedback loop. People are not attracted to more people per se. But to the things those people create (jobs, parties, theaters etc. ). If you just build a lot of houses you won't immediately get these effects, so you can't turn a small village into New York overnight. If you build new houses you get a temporary drop in prices. Untill the new people that live in these houses have allowed for more development to occur (they build a new buisiness or they are customers for the new theater). After that prices increase again. If you then build new houses the prices will lower again. So constant development of houses result in lower prices.
This is what I was going to post. You have to consider the time dimension. Build a huge number of houses and prices will crash for a long time, but eventually recover. In practice, though, they will be built at a slower rate corresponding better with the increase in amenities, and the price won't change too drastically up or down over the short term.
Yes thank you! Except I'm not sure about your last sentence. Call the short term price-lowering effect "dampening". Could you not have perpetual dampening from constant development of houses, while also seeing a longer term trend of prices going up?
I think there are two forces affecting prices in opposing directions, and you need to know the numbers to know the overall effect. If we build new housing at an extremely.high rate,.we should be able to outpace the delayed effect of making the city more desirable. That's the scenario described by your last sentence. But at a relatively lower rate of building, we'll be making the city more desirable faster than we can eat up demand .
The YIMBY interpretation of the positive association between price and density is that virtually every city in the country adopted a strict zoning regime sometime in the mid 20th century, and the degree to which these laws caused a supply squeeze is mediated by density.
To falsify that we’d need a dense city to drastically liberalize development such that supply spikes upward and see what direction prices move. There aren’t really enough examples of this yet. Outside the U.S. there’s Auckland, which seems to support the YIMBY thesis. But not much that qualifies domestically.
How much liberalization do the YIMBYs think this would take?
In my theory, it would need to be enough to absorb the entire country's housing-seeking population, so maybe a number in the tens of millions of houses.
In Auckland, it took upzoning about 3/4 of the core urban area from single-family. Multifamily housing starts spiked and rents were flat six years later while they rose in the rest of New Zealand.
https://onefinaleffort.com/auckland
Surely there's demand from New Zealanders to move to Auckland, so that data point seems to cut against the induced demand = high prices theory.
Six years isn't a long time for induced demand to operate, though. In the short term you get intra-city movement which lowers prices, but in the long term you get inter-city (or inter-national) movement which may raise them again.
Build fifty thousand new housing units in Auckland and you've got a hundred thousand new people moving in (whether from Palmerston North or China) while prices basically stay flat. But now Auckland is a bigger city, it has a greater share of the New Zealand economy, which means it's even more likely to be the destination of choice for people who might otherwise go to Christchurch/Wellington (or even Sydney/Melbourne).
I like the considerations of time scales here, it seems like the missing piece of the puzzle. Bringing housing on line would intuitively drop housing prices locally in the short term, which allows a segment of people willing to rent/buy at the new price but not at the old one to move in. But then it's a bit more believable that increased economic activity due to density and size would build up over time, and shift the demand curve with it.
My general impression is that most New Zealanders who would want to live in Auckland already live there (mostly people who don't really want to be in New Zealand but can't yet afford to live in New York or wherever).
Is Auckland too much of an isthmus to be comparable to most cities?
Auckland seems like a weird example because Auckland also competes with Sydney/Melbourne/Brisbane - a pretty significant number of NZ-ers who work in Australian capitals.
If the rent decreased in Auckland but pay increased in Sydney, many would-be Aucklanders will still work in Sydney.
Who is this "house seeking population"? Faceless hipster NPCs?
Obviously you wouldn't move to another city just because it was hip and cheap. You live in the Bay Area because you have friends, family, a job, and deep roots. Maybe other people are mostly like you and this "house seeking population" is actually rather small and insignificant?
Possible typo: “ But if becoming just as big as Manhattan or London would make Oakland more expensive, shouldn’t we assume that a little step in that direction would make it a little bit less expensive?” Shouldn’t that “less” be another “more”?
Thanks, fixed.
You lost me at "So I don’t understand why Matt believes that building a few new apartments in some city - a very small move along that spectrum - would do anything other than make local prices go up." How would they make prices go up? The would just accommodate the latent demand (unless those newcomers have somehow a stronger preference for city housing and willing to pay in excess of existing ones). Of course, one may observe an average increase because the new construction is probably of higher quality/more luxurious, but presumably you want to look at quality-adjusted prices.
I think your mixing up the agglomeration effects of density, which is what induces the demand, and the housing supply. You can't just build a city and expect people to move in, China has tried that. But if you have the agglomeration effects of density and shortage of housing due to artificial constraints, which we have all across the US, then you get dense areas with high housing costs.
>Reporting in 2018, Shepard noted that "Today, China’s so-called ghost cities that were so prevalently showcased in 2013 and 2014 are no longer global intrigues. They have filled up to the point of being functioning, normal cities".
https://en.m.wikipedia.org/wiki/Under-occupied_developments_in_China
Tokyo and NYC both attract tons of new residents But Tokyo's housing rents have been stable, while NYC rents keep rising.
Why? Tokyo has permissive housing construction laws. NYC makes building new housing almost illegal.
Yes, dense cities are attractive, and that makes them get more dense over time. But it only makes them more expensive if you forbid new housing to keep up with the new residents.
Wouldn’t there be a lag effect?
Should increasing the supply of housing not induce demand until that supply had been soaked up and the new people have started doing exciting things that induce demand?
So as long as the increased supply keeps ahead of the demand then housing prices shouldn’t go up, but go down by some proportion
There's two things going on here: confusing shifts in demand with movement along the demand curve, and getting causation backwards.
You're assuming density causes prosperity, rather than prosperity causing density. There are ways the former can happen, but the bigger thing is that, for a wide range of historical reasons, you can make a lot of money in NYC and SF, so lots of people want to live there, so they get very dense. This is the prosperity shifting demand right, so at any given price, more people want to live there; this drives prices up, and they go higher the more fixed supply is.
If you built a bunch of housing in Oakland, lots of people would move there because it's cheaper, which is movement along the demand curve; it's still the same number of people who want to live there at any price. Now, it's possible that the increased number of people living there makes the city more prosperous (this is the phenomenon of induced demand), which would shift demand right, but there are way more differences between NYC/SF and Oakland than just the density, so I don't think it would shift demand enough to offset this. In particular, if it's just a small increase in small, it's also a small increase in density, so there's almost no shift in demand (but there is movement along the curve).
I think Scott is well informed enough about economics to recognize the difference between shifting demand and shifting along demand. I think what he's arguing is that the first effect, density causing prosperity (in both increased productivity, and increased desirability), is locally greater than the effects of shifting supply along the demand curve.
I agree that he's probably wrong about that, but I don't think it's a simple economic fallacy.
If the argument is, "Increasing supply COULD increase prices for that reason," I'd agree; I think that's not what will happen, but it's economically possible. But the argument is, "That IS what would happen, and I don't see why that wouldn't happen," which begins to look like simple economic fallacy to me.
"Lars Doucet, please report to the comments section. I repeat, Lars Doucet, please report to the comments section."
Tokyo! But I’m like the 10 person to bring it up…
The post mentions why I don't think it applies!
Strikes me that the missing factor in this analysis is jobs/industry.
Consider two scenarios: in one (Scenario A), a city permits a bunch of new apartments, but no new offices. In another, (Scenario B) a city permits a bunch of offices but no new apartments.
Obviously the simple existence of an office doesn't guarantee a tenant...but it doesn't hurt (more available offices means it's easier to start a new business). Lots of offices means lots of office workers, means lots of people with professional salaries hunting apartments...I don't think it's crazy to argue that apartment rent is going to go down in Scenario A, and up in Scenario B.
And of course none of these cities appeared from nowhere. You start with a favorable port (usually). Some businesses supporting the operation of the port; then some industry taking advantage of the port; now services for all the people working at that stuff; now corporate headquarters for the growing businesses here. And so on and upward as the network value of the business and industrial cluster goes, achieving true takeoff when you get a New York or London style global financial hub, or a San Fransisco tech hub.
There's clearly a back-and-forth dependence with housing there; the business cluster can't grow if it can't find workers. But I'd argue the housing cost calculation isn't more housing -> bigger city -> more desirable -> higher prices. It's more like industry cluster -> more industry -> more desirable -> higher prices. And critically, that suggests that at any point in that industry network effect takeoff you can add new housing at a rate that will bring down the price of an apartment, because the new apartments aren't the critical factor in driving the business cluster value spiral.
Or to put it another way: NYC isn't the most expensive place because they built the densest housing, NYC is the most expensive place because of the network effect of being the business and financial hub of the richest economy in the history of the world, coupled with regulations on housing artificially restricting access to living near that business and financial hub.
I agree with most of your reasoning, but it's important to keep in mind that the prosperity of an industry depends on its ability to attract workers and pay them less than their productivity. Once housing gets more expensive and they have to start paying their workers more for them to be willing to live in that city, industry growth slows down. If you believe there's not just pent-up demand for urban amenities, but also pent-up labor demand, where firms would hire a lot more people if wages came down slightly, then that could lead to building a bunch more housing causing prices to barely budge. And if agglomeration effects and urban amenities increase by a lot because of that increase in housing, you could even see housing prices increase.
Isn't the Tokyo example just what happens when you exhaust the pool of Japanese people who want to live in big cities? (Or maybe not exhaust -- my guess is that Tokyo is more expensive than random Japanese small towns -- but the gap is not as large as in the US because the fraction of the population wishing to move is smaller). The reason for this is that Japan's population hit a peak at some point in the late 21st century and has since been shrinking; I think if every new Japanese generation was larger than the one before it prices in Tokyo might still be soaring.
I am so old, I a) remember when Tokyo had the craziest prices anywhere. When their "Pentagon" sold its main building there and thus could cover half of the defence expenditure. b) I personally met Japanese in London 1992 who told me about their "rabbit-houses". The Japanese (and West-European) population may shrink; their demand for nicer, bigger homes is still far from satisfied. 100 million having 15 sqm/each need LESS housing than 50 million each insisting on 40 sqm. (Germany 1991: 35 sqm - as is Portugal now, as is Hamburg now. Germany 2022: 48 sqm).
Banned for a week for this comment.
"Change my mind about housing, but don't mention Tokyo" is like saying "Change my mind about gun possession, but don't mention Switzerland."
You can't test the effect of allowing new housing unless you're willing to look at cities that do, in fact, allow it.
Most cities around the world block new housing. It's a popular policy!
And that means looking at cities subject to state-level permissive housing policies, like Tokyo.
You're assuming that cities want to decrease prices. Palo Alto homeowners only care about 1 thing in life: the price of their home. If they could drive up the price of their home by building more, they absolutely would do that. In reality, they know that building more homes would mean more competition for them and also nicer, newer competition. Who would buy a 1200 sqft home built in 1950 when you can get a nice new 2000 sqft townhouse for less?
> Who would buy a 1200 sqft home built in 1950 when you can get a nice new 2000 sqft townhouse for less?
Me, assuming the 1950 house comes on a bigger block of land. Then I'd knock down the 1950 house and build a 3000 sqft modern one.
Oh, I'm aware. I'm shopping for a used California shitbox right now for exactly this reason. But my point is that in an efficient market, you wouldn't have any incentive to do this because there are people out there who are much better at developing than I am, so any improvements I can make to the property are vastly less efficient than the improvements someone else can make. At equilibrium, the price of a new townhouse should exactly equal the value of the land + the cost of construction. But in reality, the markup is significant because the permits themselves have enormous value.
I’m no economist but it seems there are a few things going on here:
1. Constraining supply when there’s high demand increases prices: this is the main YIMBY argument and I think it makes sense.
2. Currently, dense places are also expensive. Sometimes this is used to argue density doesn’t decrease prices, but surely part of it is about a third variable, namely demand. Again I think this is the standard YIMBY retort to the observed positive correlation between density and prices: nyc isn’t expensive because it’s dense--density and cost are both responses to demand.
3. Demand is driven by a bunch of things, likely including a high density of people (extent of the market, etc). I think this is largely the point you’re making here, right?
I agree that the relationship is probably complex because demand isn’t constant and (possibly) is driven in part by supply. But I think even that could be an oversimplification. People don’t just move to dense cities because they have lots of housing units, they move in the search for opportunity (economic and otherwise). So building more supply per se doesn’t necessarily increase demand: in large part it meets existing latent demand, as per 1 and 2. But to the extent 3 is true, then it’s probably also true that: increasing supply satisfies that demand, increasing number of people, which could in turn increase demand as per increasing extent of the market. Which I think is the feedback loop you’re identifying.
I just don’t think it’s a clean relationship or clear feedback loop though: increasing housing units doesn’t predictably increase demand, presumably--otherwise non-superstar cities like Detroit could just build more housing and would see increased demand and economic growth; but that’s not the relationship we see (afaik). This implies that a large part of demand is independent from (not caused by) housing stock, which is also what a YIMBY would argue, I think. Which means that to the extent supply is limited and demand is high, building more supply is important for satisfying that demand.
But I don’t know. I’m just speculating and this admittedly feels difficult to tease out empirically. It’d be a start to draw some DAGs, though.
If you read Matt's piece, it's quick walkthrough of "standard econ says if supply goes up and demand stays put, prices go down. Empirical work confirms this is also true for housing."
Alexander seems to have an intuition that this is the reverse of what's actually happening and thus put together this post.
Surely you meant "prices go down"?
yes
I thought this was all caused by network effects.
Maybe I'm crazy but I thought I remembered an old Krugman paper on the positive network effects of large urban areas, written to explain why the trend of suburbanization was reversing in the 80s or 90s.
Like, there's nice things about SF and the Bay but most people want to be there for the tech scene. If you're a startup, it's worth paying $80k/year for the founder to live in SF because all the VCs and talent is there. Let's say that benefit is worth $100k/year over living in North Dakota. Alright, so if you build 20% more housing and 20% more startups and VCs move in, say decamping from Denver, then regardless of what the rent is, it's now worth $120k/year for the founder to live there because there's more VCs and more talent and more support there.
Like, I'm sure I read this in an old Krugman paper, I cannot find it, but if the primary appeal of a city or location is the network effect for a specific industry and/or general networking effects (like dating options in NY vs North Dakota) then increasing the supply can easily increase the value more than it increases the supply.
> This is a coordination problem: if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work.
There's a much worse problem involved: everyone who already owns property in a city doesn't want the property prices there to go down. "The city" might want that, whatever that might mean, but individual home owners don't. Nobody who bought a house for $1,000,000 wants it to cost $500,000 after the housing supply in the area doubles. All those NIMBY talking points about the crime and whatnot mask the real problem: they don't want to lose money because their house price decreases.
This is not a coordination problem and you got the incentives exactly backwards.
I don't see an ethical way of solving this problem, in a way that that isn't like, "I want to move into your city but the prices are too high so the people in your city should have half of their wealth wiped out so that I, not a resident currently, could move in".
That is, sure, building a megacity on the plains of South Dakota would work and then the property owners in other megacities complaining would look just as ethically unfounded as people complaining about NIMBYs. I think that it's a good idea.
You are delusional if you think the crime/QoL concerns aren’t the main concerns for most NIMBYS. I would bet an infinite amount of money that on a per capita basis the people objecting to the new apartment building on the end of the block are more concerned about that than property prices. You just couldn’t be more wrong about this.
The QoL concerns are super real, there is a huge difference in neighborhoods outside walking distance of low income housing and those within walking distance. That is practically 60% what the suburbs are about.
I'm not saying that crime/QoL concerns aren't real.
I'm saying that if you entirely eliminated them, by, say, targeting "affordable housing" at middle class families without any special exceptions, you will still have a pushback from the property owners when you ask them to support a policy that would wipe a million bucks from their net worth overnight.
There are obvious ways to not bring meth addicts to an area while building it up, there's no way around this fundamental issue, which is why it is fundamental. At this point I'm beginning to suspect that this is by design, that everyone on the ground is a NIMBY because of this reason, but "YIMBY"(NIMBY)s specifically include methhead provisions in their plans to give NIMBY(NIMBY)s a respectable reason to resist their overtures, so nothing ever happens.
>There are obvious ways to not bring meth addicts to an area while building it up
Yeah but the government policy mostly doesn't interact with them because the government policy is generally to demand affordable housing be a decent slice of any project that sees government dollars.
It's not clear that falling home prices are bad for owner-occupiers. It reduces your net worth, but it also reduces the amount of wealth you need for housing, and which is tied down in it. If you don't plan to move and don't have children, it doesn't affect you at all.
If you want to eventually save some money and move to a bigger home, or if you want it easier for your children to buy homes in the same city, falling home prices are good for you. Home sizes generally gradually increase as a society gets richer, so it should be a significant benefit to many people if they can buy additional housing space for less money.
It's bad for you if you are looking to move to a smaller home (but you're most likely to want that when your children move out, but they need to be able to afford homes of their own for that), or if you're looking to move to a different town.
It's also good for net tenants (people who use more real estate than they own), bad for net landlords (who own more real estate than they use).
A particular problem is that cheaper housing in a city is bad for anyone who considers moving elsewhere at some point. But this is precisely a sort of tragedy of commons between cities that a higher level of government can solve. If a national government forces every city to have policies that reduce housing prices, then the reduction in the value of your home is compensated by that you can buy a home for less money, even if you move to a different city.
You're missing the basic tradeoff of a city: the closer to the central business district, the higher the prices. The bigger the city in total population, the higher the price in the central business district, because there are more people fighting for that desirable place with the best transportation network access to everywhere else. This central area is expensive because of demand, but also because of physical constraints, skyscrapers are inherently more expensive than wood-frame buildings. The higher the skyscraper, the more costly it is. New housing will never make Manhattan affordable.
Where there is room for affordability is on the periphery and on transportation lines going into the central business district. This is the main lesson of Tokyo. One might look at Tokyo's central business district's prices and tiny expensive apartments and conclude market urbanism is a failure to achieve anything. But along the train lines that go into Tokyo, things get rapidly more affordable. YIMBYs should still support bigger skyscrapers in central business districts, but they should only look for affordability further out in 6 story buildings within walking distance of high-quality public transit lines.
So if NYC upzoned single family homes in the periphery burrows and improved transit, housing in Manhattan would probably get more expensive, even as there was increased affordability for the area from which one could commute into Manhattan. It's possible in the short run we might have uneven growth in demand that could continue to outstrip supply. Trains can move lots of people, cheap 6 story buildings can accommodate lots of people, and even if the ocean blocks expansion in one direction, that still leaves a half circle that grows the area people can live in quadratically. There's lots of capacity to meet demand to live within commuting distance of a desirable city center if there's political will to build transit and allow housing.
Edit: After reading other responses, I think I might agree. It's unreasonable for YIMBYs to expect small increases in housing supply to necessarily decrease short-run prices. Achieving affordability would be a long-run project. Short-run expectations should be heavily managed.
So, a good plan for cities might be to put in light rail (or other equivalent transit) going out in multiple directions, and aim for dense housing near every stop?
Yes, absolutely. Increased high-capacity transportation has to be a part of the conversation. Ideally there would be tolls to maximize car throughput and expansion of trains and buses that scale much better than cars.
Lots of European cities are like that. It's pretty great. You can be a half-hour commute from the city centre whilst living within walking distance of the countryside.
Why do you think that upzoning in the periphery would increase housing costs downtown? Seems like the only way that would happen in a big increase in induced demand. Otherwise, people who were previously living downtown would decide to decamp outwards, lowering downtown demand and thus prices.
I think it depends. It's definitely possible what you're describing could happen. It's especially likely if there was an extreme and artificial scarcity propping up prices that is suddenly allowed to relax. It's also possible that as the city grows outwards its amenities, job opportunities, and prestige would also grow, attracting new immigrants. This increase in desirability of a city could happen even faster than development. If this happens there will be more intense bidding wars for the most desirable parts of town. I don't think it's a given, but YIMBYs should embrace this possiblity and recognize that it's a good thing for people to have access to such a vibrant city.
Density is not a destination or a characteristic of an area (and it's unfortunate we talk about it that way in Yimbyland).
- The more pedantically correct Yimby claim should be "increasing supply elasticity in the housing market, via regulatory reform, will reduce housing prices relative to local incomes and blunt price increases during economic expansions as well as set up loca housing markets for bigger price reductions during recessions (because we let developers build themselves off a cliff at the top of the market)."
Density doesn't drive prices.
- Prices drive density (within the constraints of the local land use regime), and prices are driven by demand. Yes, if we allowed denser construction, which definitionally would mean a reduction in per capita land consumption, ///relative/// prices would decline and more people could move in to a high demand area...but now we're talking about more people moving in to a high demand area ///because of the decline in relative prices///.
All cities are not perfect substitutes for each other for prospective residents.
- There surely some people doing the digital nomad thing or choosing which McKinsey office to work from in their late 20s, but I see no evidence that this population is large enough to have any appreciable impact on housing prices. Folks' personal and professional networks aren't perfectly distributed across all major cities.
This seems to me the key missing point from Scott's article, as mentioned by a few commenters here: "There surely some people doing the digital nomad thing or choosing which McKinsey office to work from in their late 20s, but I see no evidence that this population is large enough to have any appreciable impact on housing prices."
The work-from-anywheres are numerous enough to move the needle in Vail and Tahoe, but not in Oakland (also, the WFH revolution led to an exodus from the densest places, which cuts against Scott's density-as-amenity hypothesis).
What Scott is missing is that "density" isn't one thing. To a first approximation, it's comprised of JOBS and HOUSING. These are complements. If the amount of JOBS density increases, the price of HOUSING increases. If the amount of HOUSING density increases, holding JOBS constant, then the price of HOUSING falls.
This isn't at all counterintuitive and comes out of the canonical Alonso, Muth, Mills model (although without my cartoonish names).
Addendum: A lot of people in the comments are saying "but Tokyo". An equally good rebuttal is "but Cleveland". Metro Cleveland is a lot denser than the average spot in America, and its wages are just below the US average. But the balance between jobs and housing is so out of whack from job loss that housing is now quite cheap (about 2/3 the national avg).
Economics PhD student here, and first comment here.
I think Scott's basic framework is mostly right, but could use some tidying. His starting graphs basically depict a supply curve -- a positive relationship between prices and quantity, because if prices are higher then developers build more houses. But he's confusing a shift of demand along a supply curve with a shift of the supply curve itself.
Here is what I think Scott is trying to say. There is a simple supply and demand model that YIMBYs appeal to, with a simple result that pushing out the supply curve increases quantity and lowers prices, hooray. Scott is saying that there is a knock-on demand effect, what he calls "induced demand" and what activists call "gentrification" and what economists call "endogenous amenities".
This is a thing that definitely exists, but the relative sizes of the effects will determine what the end result is, and we also have to bear in mind that development occurs in response to changes in price. And the studies that Yglesias points to are essentially concerned with precisely disentangling and measuring these effects. The results generally say that the supply and demand curves are such that the price ends up lower overall, due to a combination of the slopes of the curves and the sizes of the shifts. We frequently do observe increasing prices and development together, but this is because the increase in prices causes development, which then (as the studies show) causes prices to be lower than if development had not occurred.
So that is why density does not cause price increases -- increases in price cause development, which causes a counterfactual reduction in price, which outweighs the effect of the endogenous amenity of density.
"that is why density does not cause price increases"
But... it clearly does. Several different economists have said this to me, and I still can't make head nor tail of it. How can you reconcile your claim (or the claim of certain published papers) with the brute fact that in every place in the world, higher density is correlated with higher prices?
Is the answer some fancy definition of "cause"? If we said instead: "increasing density is likely to lead to higher prices," would that be better?
No, it is the standard definition of cause. The positive correlation of density and prices is the supply curve. Developers build houses where they will get a large return. It's a causal relationship, but it's not the one that we are concerned with when we talk about NIMBYs and YIMBYs.
If we change policy in a YIMBY direction, this is a shift of, not along, the supply curve. Now, for every potential price, there are more houses. Because there is a downward-sloping demand curve, the actual observed price goes down. I'd draw a picture for you if I could.
It is quite common that people basically just don't buy that. But it is one of the most important occasions where we need to remember that correlation and causation are different. People see that a neighborhood has skyrocketing prices and new construction. But the prices are causing the construction, not the other way around. Imagine that same neighborhood with skyrocketing prices, but no construction is allowed (the supply curve is a vertical line). The price increase is coming from increased demand, and if we prohibit construction then the price ends up higher than it would have been.
But wait, there are upper income liberal urban cosmopolitans who like density and nightlife and avocado toast! Yes, there might be a third force as Scott discussed; the shift in supply will cause greater density and then attract rich people who are willing to pay more and this creates an additional demand effect. Yes, this is real, but it is smaller than the other effect. When you put them together, the price goes down on net.
It's tricky because rich people moving into the neighborhood could indeed be the cause of the initial price increase! And if we build more houses, this attracts more rich people! But building houses is not the root cause of the original rich people (gentrification happens for a variety of reasons), and although it can attract more rich people, this ends up being a small effect.
Thank you for helping to clear this up. There's way too many people who don't understand how the laws of supply and demand apply to housing because too often they see the effects of the housing supply curve. Have you seen the working paper "Folk Economics and the Persistence of Political Opposition to New Housing"?
Thanks, I appreciate this effort. But I found it completely unconvincing. The reason is this one sentence in the middle: "...the actual observed price goes down."
But, it doesn't. That's the whole point of Scott's basic observation. It is blindingly obvious to anyone that in general, with greater density, the actual observed price goes up. Like, always. I'd like to see one, just one nice clear example of a price actually going down with increased density. (Not that one counterexample would be enough, but it would be nice to have one!)
So you didn't actually address the contradiction that I asked about:
How can you reconcile your claim with the brute fact that in every place in the world, higher density is correlated with higher prices?
All you did was deny my brute fact. And... that's nonsense. My brute fact is true. If you can't give an explanation that actually takes account of this basic fact about the world, then *your economics isn't working.*
The price goes down relative the counterfactual where the new construction didn't take place. That change is just swamped by the overall change in pricing in the area.
It's like if a famer goes to the market and see that egg prices are through the roof because of a massive shortage. So next week he shows up with a couple dozen eggs that his hens laid, intending to sell them. But this week it's Easter so even more people want to buy eggs this week and prices are even higher than last week!
Your "bare fact" is the equivalent of yelling at the farmer that by bringing his eggs to market, he's increased the demand and driven prices higher. (Perhaps he told his friends he'd be bringing eggs and they got excited?) But that's absurd; prices are higher because demand went up.
And if you want to argue that the effect of the farmer's friends being excited for his eggs was a larger effect on demand than Easter, then we've moved from "bare facts" and onto empirical questions, which, to return to housing, were addressed in papers discussed higher up on this thread.
So, every time in history that someone's built a new city, it just happened to be Easter?
Your argument, so far as I can tell, says this: yes, it's true that prices in reality go up. but that's just because of some exogenous factors.
It seems like a bizarre way to read the data, doesn't it?
"...the actual observed price goes down."
This is the contribution of various recent urban economics papers. To show that the causal effect goes one way when the correlation goes the other way is difficult, basically how we do this is with some kind of natural experiment. Of course it is very easy to do bad natural experiments and very difficult to do good ones.
So how do we know that the quasi-experiments used by these papers are any good? Well, it's difficult because it's highly technical. Pennington argues that residential fires are as good as random and empty out lots that can then host high-rises. Asquith et al and Li say that the timing of when regulatory approvals come in are as good as random and so we can look at the time series of local prices around the time that new buildings are finished. In these papers, economists generally also include a bunch of stuff as controls and think carefully about the kinds of biases that can manifest and how they can be mitigated.
Finally, we can make an appeal to the notion that the research and researchers have been validated by the field. The Asquith et al paper is published in a good journal. Li's paper is published too. Pennington's paper is not yet published, but it is the capstone to her PhD that got her a job at the Census Bureau, and will likely be published in the next year or two.
I don't love appealing to authority, but experts in the area using the best methods available have found that yes, prices go down after construction. This is fairly intuitive for most people when considering other markets, if something becomes less scarce then naturally the price goes down. But for some reason it is not intuitive when it comes to housing.
Thanks. It would be nice if there was a nice, clear example that anyone could understand without fighting through a thicket of potential confounders. The fact that I've asked several economists, and none has been able to give me one leaves me... curious (e.g. Scott Sumner over at Econlog, who also responded to this post in an unsatisfactory way).
"But for some reason it is not intuitive when it comes to housing." - yeah, that's because intuitions come from experience, and the experience of every person on the planet is that denser means more expensive.
I'm willing to believe the examples found in those papers. But don't they seem to you like a couple of rather small counterflows in the middle of a much bigger trend? If it takes sophisticated analyses using 21st century data techniques to spot this phenomenon, then it doesn't seem like it's a very general law, does it? The general law is: density correlates with price.
We're unlikely to get this sorted out here in this thread, but I suggest this to you: if you really don't love appealing to authority, then find a way to communicate it better. Because nothing that's been said here (or at Econlog) comes remotely close to changing my mind. Scott Alexander will speak for himself, but it sounds like he sees the same things that I see. You have people here who will genuinely listen (but don't have time for an economics PhD). It would be cool if you, or someone, could explain it to us.
"But don't they seem to you like a couple of rather small counterflows in the middle of a much bigger trend?"
The critical thing is the nature of the mechanisms. If governments consciously work to build housing, it mitigates the pressure on prices from other things (increased demand for housing due to employment access and amenities).
Look, the best way to communicate this whole thing is with a supply and demand graph. You can show every dynamic that we are arguing about. The fancy research basically just confirms that the insights from basic supply do apply in this situation.
"It would be nice if there was a nice, clear example that anyone could understand without fighting through a thicket of potential confounders"
Here is a thought experiment. Imagine that suddenly, every person on earth owned ten houses, without changing relative geography due to a discovery of ten extra dimensions or something. What would happen to the price of houses? Would everywhere suddenly become as expensive as NYC and London? No, houses would no longer be scarce, they would be practically worthless. We are looking at two different points on a downward-sloping demand curve. If the amount of housing in the Bay Area doubled overnight (again, due to magic) then it would decrease prices because housing is less scarce. If you want to argue that this would increase prices, then you have to argue that there is a huge number of people who strongly prefer high density and would be willing to pay those prices. But... that's absurd. People mostly live in cities because of job opportunities. It would require demand curves to slope up, for people to like higher prices, which happens in rare cases but mostly if an economist observes this it means they messed something up in the model or the analysis.
But how does this thought experiment differ exactly from reality, where there is a strong correlation between density and prices? Because the thought experiment is about what would happen if the houses appeared due to something happening outside the market (God, or the government). In the real world, some places are highly valued for one reason or another, and those are the ones that attract profit-maximizing housing developers. If we could do something to lower the production cost of housing -- like getting rid of zoning and regulations -- then this is moving the supply curve, which means we are moving to a new point on the demand curve, just like in the thought experiment which means quantity is increasing and price is decreasing.
I'm not sure that the demand-increasing effect of density is big enough to make a substantial difference in practice. E.g. if lots of housing, enough to constitute a large fraction of the total, were built quickly in an already large city, then the opportunities arising from density would go up, & probably so would demand. But on the margin, the effect of each unit of housing on the opportunities arising from density is minuscule, so that that marginal upward effect on prices would probably be outweighed by the downward effect of normal supply & demand. (& of course, if a similarly enormous amount of housing were built quickly in a small city, it probably wouldn't cause demand to increase in the same way because there would be no guarantee that enough people would move there to generate the opportunities produced by greater density.)
My guess is that price as a function of housing supply would follow a relationship along the lines of Price=M*Quantity+B, where M is negative but B increases enough to offset that if the population density goes up by a lot (this depends on other things besides quantity supplied, like the local economy, so that New York, a typical small city, & the empty field in North Dakota can't be modeled as two points on the same line).
Good piece. As a longtime gentle YIMBY skeptic, I've always been a little bemused that the same crowd insisting that the rental market is 'just supply and demand' would be horrified if you said 'immigration obviously reduces wages, don't you know about supply and demand'. They would rush to explain to you that no, wages are much more complex than an Economics 101 understanding of supply & demand, that the new immigrants create demand for new goods and services and so actually create more jobs by their presence, and so on. I would personally agree with this pro-immigration argument, I just think it's funny that to the YIMBY crowd simplistic 'supply & demand' explains real estate prices but doesn't explain wages.
Cities are huge agglomerations of network effects- they're valuable precisely because there are more potential employers, romantic partners, friends, business connections, activities and more- it's quite possible that a higher population makes the city more valuable and so raises rents! (And wages). I think Devon Zuegel had a post about this from a few years ago. Anyways, 101ism is a bad way to understand complex systems
IDK, as a YIMBY I'd never claim that immigration directly raises wages... The evidence is very clear that migrant workers work for less than natives in many industries. Remember not too long ago when there was a massive shortage of migrant farm workers and native Americans couldn't be persuaded to do the work...?
I'm still pro-immigration; it's good for the economy in a thousand ways and a moral good to boot.
"Stealing" is a bit specious lol
Letting people escape grinding poverty and murderous regimes like the one in Venezuela is a moral good; letting people move freely (within reason) around the world in pursuit of economic security is a moral good.
Another YIMBY here who agrees that immigration can reduce wages in jobs where the immigrants would work.
However, immigration still benefits the economy as a whole, as would allowing housing to be built in productive areas.
I think the basic problem is that you're ignoring other covariates in your regression, most importantly the demand to live in a city. As a result, the regression coefficient is incorrect. This is a well-known problem in statistics, called the omitted variable bias (https://en.wikipedia.org/wiki/Omitted-variable_bias). I believe if you account for the other variables then the regression coefficient will be negative as expected from economic reasoning.
This is why marginal analysis is important in economics. While comparing two situations many variables will be different, so it isn't clear exactly how the outcome is related to one variable in particular. In marginal analysis the two cases are pretty much the same and the only difference is the marginal change in one variable. So any change in the outcome can be attributed to that variable.
I think the answer to this hugely depends on your internal mental flowchart. This post seems to suggest a model of:
housing -> cool place -> high prices
Which I think buries the step that is:
housing -> support for cool amenities -> cool plate -> high prices
This in turn allows for some finer grained analyses: If Norman, OK (the lowest population density city in the US) built even a moderately large amount of housing, it probably would crash housing market there - no matter how much housing there is, it's not going to experience a housing boom. On the other hand, Austin TX strikes me as too far down the path of becoming a "cool city" to avoid price growth by building housing. The marginal person probably avoids moving to Austin at this point because it's too expensive for the existing amenities, rather than because there's not enough to do there. And finally a city like NYC or SF is probably already "too cool" to realistically discourage interest by preventing construction.
Oakland then becomes a bit of a weird case - it's close enough to a major high cost area that if it got cooler it really might start growing new amenities (restaurants, better (perception of?) public safety, better public transit, more people you know, etc.) and the increased amenities might in turn drive increased demand. But it's not really cool enough that its growth is locked in, at least as far as I can tell.
I think the "ground truth" here is probably somewhere between your and Matt's position - construction really seems to have a local, short term, effect in raising prices; construction is a key element in becoming a successful big city, which is correlated with higher prices; and the exact trajectory of a city between "low cost, mid sized city" and "high cost megapolis" is probably determined by some amount of coordination problems that are fairly opque.
I think you're dramatically overstating the influence of amenities on people's housing choices. The real issue is jobs. If you can't find a job in the coolest city in the world with affordable housing, you won't last long there. Of course, increased housing boosts labor supply, likely increasing the number of companies employing people there, but not enough to raise wages and thus willingness to pay for housing.
I don't think it's obvious that there is any agglomeration effect from the data presented.
Yes, there are some Americans who want to live in a big city. This is part of what makes New York more attractive than Lubbock, TX for a random 30 year old. But your charts make a comparison of density within a class of "big US cities". Do you really think people consider Houston and SF, and think "yeah I'm going to live in SF because it's really dense. I know it's half the population, I just want the density." It doesn't pass the common-sense test.
The reason people move to SF and NY is because of jobs and culture, not specifically how scarce housing is. In fact, that is an obvious reason people don't move to those cities. The culture/jobs demand drives up house prices, and consequently makes cities more dense. But if you just build more houses, quantity supplied is rising due to strong demand. There's nothing magic about density itself. If you build more houses, you have a shift right in supply. This lowers prices.
It's a fair argument to say, "well why hasn't this worked anywhere in America?" I guess the argument would be, it hasn't really been done on a sufficient scale, so any supply-side effects are overwhelmed by demand-side effects. But I'm not confident in this. Just not convinced that building houses has any positive causal effect on local house prices.
> It's a fair argument to say, "well why hasn't this worked anywhere in America?" I guess the argument would be, it hasn't really been done on a sufficient scale, so any supply-side effects are overwhelmed by demand-side effects.
I'm not sure that it's even really true that there aren't cases of supply-side reform working in a dramatically visible obvious large-scale way, but it is important to say clearly that there are an extremely large number of papers claiming to find supply-side reform lowering prices. I really don't see what the justification is for what you're saying here, other than perhaps a general sense that everything is always terrible and nothing changes, such that any possible solution is already discredited.
> They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife.
Ok, but these things are not synonymous with density. In fact, having more office space, museum space, restaurant and nightclub space, etc. means having *lower* population density, ceteris paribus, because you can't live in any of those other types of building. People would still want these things if there were no big dense cities. Either they wouldn't exist, or people would still try to live in the places where those things are available, which be more expensive than NYC is today. Basically, I think that the effect of density -> amenities is much smaller than the other way around. Cities are built for economic reasons--you say " Manhattan has a few extra natural amenities, like a river and a good harbor. But nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife." but this isn't really true. The harbor is why the city exists at this location in the first place. It's no longer the direct reason why NYC is an economic hub, but its current major industries (finance, research, media, tech, etc.) are there in large part because it was previously a center of immigration, trade, and manufacturing.
Building more housing would not turn Oakland into SF or NYC.
Consider also that the population of Manhattan peaked around *World War 1* (https://en.wikipedia.org/wiki/Demographics_of_Manhattan) at around *40%* more than today. Do you think it was cheaper to live in back then, or more expensive? Given the average salary of a factory or port worker, I'm going to guess cheaper.
>. But doesn’t induced demand violate the economic law of supply and demand?
No. See https://www.reddit.com/r/badeconomics/comments/8ghb8j/r1_what_is_induced_demand/. (It's also related to https://en.wikipedia.org/wiki/Jevons_paradox).
> if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work.
I don't think this is what the data really show. At this point, building housing in the expensive areas would just serve the already existing amenities that are already drawing people there. And it seems like it's a fairly common development pattern in the US for suburbs to be more expensive than the city they surround. But also, many towns don't *want* their own housing prices to be cheap. "Diminished home values" is one of the most common NIMBY talking points against, well, everything. If you own a home, then expensive housing is good for you, and bad for everyone else.
Ok, really silly. We are comparing the overall "life opportunities" of North Dakota and NYC and then wondering why housing is cheap & low density in N Dakota? Really? Maybe application of common sense should come first before writing.
A great deal of explanatory power is often unlocked by requiring annoyingly precise, proven explanations for "common sense" phenomena. People are not likely to accept ideas that are false in an extremely obviously checkable way, therefore such misconceptions and bad ideas as exist in the world will tend to give mostly correct explanations of "common sense" phenomena most of the time. Indeed often any given "common sense" phenomenon has nothing close to a majority-accepted explanation even among people who all agree that it is a matter of common sense.
"One common pattern is to prefer any big city"
Proof that this pattern exists is?
https://en.wikipedia.org/wiki/List_of_United_States_cities_by_population
Sorted by population density, NY #1, Jersey City New Jersey is #2, and Paterson New Jersey is #3.
Newark is in the top 10, and Philadelphia and Yonkers are in the top 15.
So your thesis appears solidly disproven.
People either want to live in city X, or they want to live in a small set of cities Y. They do not want to live in "any city Z with sufficient population density"
Great point.
Zooming out a little bit, can't we just focus on states instead of cities?
NJ should then completely disprove this thesis.
California, Hawaii, Washington, Colorado, and Mass. are the five most expensive states for housing (in that order).
The five most densely populated states are: New Jersey, Rhode Island, Mass., Conn., and Maryland.
Clearly, density does not increase housing prices; unless someone has a valid reason to differentiate cities from states?
I've anecdotally observed a couple things that could be rounded to "preferring any big city".
One is a strong desire for one or more features of living in big cities. Aspects that seem to appeal to some people include ready access to clubs/nightlife and a wide selection of restaurants, not needing a car for most things, enough density to support in-person niche communities and businesses that cater to them, multiple prospective large employers in very close geographical proximity, and ready access to cultural amenities (theaters, museums, etc).
The other is a desire to live in an intensely "blue tribe" cultural and political environment. This tends to correlate pretty strongly with urban density: city centers are almost always intensely blue, suburbs tend towards purple, and rural areas are usually strongly red. This seems to be particularly intense among young adults who grew up in conservative rural communities whose values they have rejected or which have rejected them, but I've also seem it from people who have lived their entire lives in "blue" communities. This attitude seems to be strongly interrelated with being LGBT or becoming atheist, for obvious reasons.
Both of these aren't just "density for density's sake", although they do correlate with density. There are definitely large, dense urban areas that strongly fit all of the above (most notably NYC), as well as rural and suburban areas that would be strongly unappealing to people who want the above. But off the top of my head I can also think of smaller cities (Santa Cruz, etc) and suburbs (Palo Alto, Redmond, etc) that combine many of the above features. And there's a definite spread among mid-sized cities in how well they fit the bill (e.g. Indianapolis vs Portland).
For the purposes of the original post, I think this points to an "it's complicated" conclusion to the extent it's a large-scale social thing and not just something that seems unusually salient to me (and Scott) because of peer-group feature bubble effects. There are definite network effects where increasing density would tend to improve the features and make an area more appealing to certain people as it got denser, but a lot of medium-density areas are already strongly appealing to many of these same people, and it's not clear for any given area whether YIMBY-driven network effects would shift the demand curve up enough to overcome the price effects of the downward shift in the supply curve.
Point, but you provided the counterpoints. :-)
I would just ask about your "anecdotal evidence", once those people started with those requirements, where did they end up?
Nearest "big city" that met those requirements?
Or "iconic" big city NYC / SF / Chicago? (I'd include LA. but not if "can get around without a car" is important"
Rather than disagreeing with the conclusion, I want to object to the whole framing of focusing on the effects on housing prices.
It’s not immediately clear what police goals should be with respect to home prices. Existing homeowners who think of their homes as investments would like prices to go up; renters and new homebuyers want prices to go down. Numbers on both sides of this issue are close enough that neither position is a political slam-dunk, and nobody on either side is going to change their mind easily (unless they buy a house I guess), because they’re all voting in their own economic interests.
So the end result of focusing on home values is always going to be political paralysis, and framing the issue in those terms already gives the game away to NIMBY forces that profit from political paralysis.
Nah, it's clear that the political system has an enormous bias towards demographics who are more likely to own homes. Libertarians love to rant and rave about scenarios where 51% of the people gets together to democratically rob the other 49%, thereby temporarily enriching themselves but destabilizing and impoverishing the long-term society. It doesn't make any sense because abstract atomized self-interest alone provides no incentive to actually go out and pull the lever, it's inherently an other-regarding act. Worldwide, attacks on commercially-minded minority groups justified as "affirmative action" or "economic democracy" are probably the most common failure mode. In the West, though, the homeowner's cartel is maybe the clearest example of a "two wolves and a sheep" democratic failure mode – so of course actually existing libertarians are at best ambivalent on it, and often outright for it.
I think it should be a non-controversial opinion that homes being an investment is genuinely terrible. I think the only reason it isn't is that history developed in a certain way, but imagine if any other necessity of life was like this. If food, or water, or electricity costs grew 10x over 40 years, and the response was, "well, silo-owners think of their grain as an investment, so there's no good political path to making bread affordable." It would be far better if homes depreciated as aggressively as cars.
Homes (as in structures) do depreciation (not as fast as cars: I live in a nearly 100 year old house but would not drive a 100 year old car.).
However the land/location upon which the house/condo/apt sits generally appreciates!!! Because "they're not making anymore land". Cf go west young man ...
Land is generally speaking inelastic. You can't make more.
Housing (the walls, etc) is elastic. You can build more.
I'm not sure homes do always depreciate in value. As far as I can tell, bare plots of land do not increase in value as much as land with a home on it.
Structures don't depreciate only so long as they are updated and kept up. (Additional labor and capital).
As to the land value, it's not really the soil that is going up in value it's the location. It's not the house on the land creating the value, its the proximity to the other lots with houses on them. A lot with a house usually is proximate to electric, water, sewer, road -- location location location
Even if you maintain a car in peak condition for its mileage, it's going to lose a lot of value.
I am not a real estate expert so I'm only speculating here, but I would put better than chance odds on a bare plot of land sitting right next to a housing development appreciating in value more slowly than the plots with homes on them. If homes depreciate in value then it should be the opposite, due to the house itself dragging down the overall value of the land.
A car has moving parts. Walls don't move.
I not going to teach land economics here. You could start with the physiocrats and then Henry George.
Your house depreciation drags your neighbors land value down, not your land value. Your neighbors' houses falling apart drags down your land value.
There are exceptions which I won't go thru here.
Most appreciation in real estate value is the increase in land value.
Yeah, the post seems to treat cheaper housing as an end-goal. It shouldn't be one. There's no shortage of bad places with cheap housing.
Building more housing only results in increasing housing costs if the place becomes more desirable *even after taking housing costs into account* (most likely in terms of more salary left even after rent), so much that the increase in desirability more than makes up for the increase in housing cost. If that happens, it's good for both homeowners and renters.
It's theoretically not impossible that housing housing prices would increase with density indefinitely, *if* productivity increases with density indefinitely, and some of that goes towards housing. I don't think that would happen indefinitely though. And a city could "defect" by staying a worse place with cheaper housing, but I don't see what it would gain from that.
I don't have strong opinions on the details, but I would be cautious about false assumptions of linearity. Part of what makes places like Manhattan and London expensive is the network effect, which makes them desirable. Density is one variable that contributes to their network effect, but:
1) it is not the only such variable, and
2) even only considering density, network desirability is not a linear function of density.
It doesn't seem crazy to me that, due to other variables, add a little bit of housing, in a way that doesn't much change network effects, could move prices in the opposite direction from adding a great deal of housing, that did.
"I don't think there are enough immigrants to really affect things."
Given that 31-39% of the Bay is foreign-born _right now_ and the global population of mobile individuals ready to leave their homes to work for a wage lower than prevailing Bay Area wages is at least a billion, maybe more... how can it not affect things? Net immigration is in the millions per year to the US... all of them by definition need somewhere to live... how the Bay vs. the US. vs. the World a self-contained proposition?
Source on the 31/39...
American Community Survey (ACS): https://www.census.gov/programs-surveys/acs
Select "Foreign Born" and then the "geography" filter to either San Francisco-Oakland-Berkely (31%) or San Jose-Sunnyvale-Santa Clara (39%)
My fundamental objection to what you're saying is you're just looking at correlations and reaching a kind of "ice cream sales cause murder" conclusion (referencing https://www.lifehack.org/624604/the-most-common-bias-people-have-that-leads-to-wrong-decisions).
I think we might agree to a rough model of "Demand = Price + Supply", and lets first consider what happens when demand is fixed: high demand expresses in high price and supply. Randomly generating some cities with high and low demand, you'll see high price and supply co-occur, as in your correlations. But once these cities are made and their demand is fixed, a hypothetical urban planner sees price and supply trade off each other, so increasing supply is how you decrease prices.
Now obviously demand is not fixed, and supply up -> price down -> demand up could happen (and I would wager does)! But what is the coefficient? If X>1 and each new home makes more than one person want to additionally live there, then building new homes raises prices, while for X<1 econ 101 holds and increasing supply decreases demand. This is precisely where you need to look at the empirical literature to measure X, and it says upzoning lowers costs.
I'm looking out my window at the crowds gathered to catch a glimpse of the celebrities arriving at the Met Gala in a few hours.
No matter the number of new housing units built, would Oakland ever have something like the Met Gala or in the case of LA, the Oscars? Maybe in a hundred years. It takes a great deal of time and luck to become a New York or an LA.
As for Miami, it's a contender, but way too early to tell.
Whether you think it's disgusting or not isn't the point. The fact that it takes place in NYC is an example of why a lot of people want to live here. To be close to fashion, art, and celebrity culture.
I mean, if they actually fill those houses with people, why not? Which large city doesn't have significant cultural events?
There's a difference between significant and glamorous. Glamor is rare and tends to be as more powerful attraction.
My point is that there are a few American exceptions to the idea that more housing of any type lowers costs. Maybe two or three.
For the rest of the country I think the rule holds.
1. This is why I'm so excited about the recent YIMBY bills passed at the state level in California. I think a change at the state level is the only way to move forward instead of hoping that each NIMBY city changes their minds individually.
2. This argument contradicts the stereotypical NIMBY reasoning of "if you build that apartment building 2 blocks away, it'll add more supply and the value of my home will go down". They should support housing, because the value of their property might actually increase!
3. If there's really people out there who are willing to choose "any big city", shouldn't these people move to the other cities as prices keep going up and up in NYC and SF? Maybe people and companies will start moving to Austin, Miami, Atlanta, Cleveland, Detroit, Sacramento, Minneapolis, etc. Honestly SF and NYC are not worth their high price *right now* in my opinion.
Out of those others you mention, only Cleveland and Detroit have the same level of historic cultural amenities as New York and San Francisco, and only Miami and Atlanta have comparable levels of new ones. The others are actually substantially less significant as metro areas.
>This argument contradicts the stereotypical NIMBY reasoning of "if you build that apartment building 2 blocks away, it'll add more supply and the value of my home will go down". They should support housing, because the value of their property might actually increase!
I've offered a variation of this argument in in-person NIMBY/YIMBY discussions when property values are brought up in favor of NIMBY positions. The intuition pump I lead with is "a piece of land you can build a high-rise apartment complex on is probably worth more than a piece of land you can only build a small one-story house on."
I think you are in general right that agglomeration effects are real, which is why bigger cities have higher value to residents. I agree that people move locations. But I think you can go a step further. If one city is growing faster and densifying, surely those people are not demanding homes in other cities and those cities build slower. This is part of the spatial equilibrium story that further makes claims about “build density and get cheap homes” less plausible.
My background: I used to work for property developers and have been researching housing supply for many years https://scholar.google.com.au/citations?user=P5s-_d0AAAAJ&hl=en&authuser=1
It is not reverse causation but rather the existence of a confounder - the attractiveness of the location. Imagine cloning that island off the coast of Maine and gluing it to Manhattan. Many people will want to move to the clone, but few will want to live on the Maine island. 20 years from now, after developers have built housing on the NY island, it will be both denser and more expensive than the Maine island.
Also, don't forget that demand is the willingness AND ability to buy. Those dense cities also have lots of well paid people. That increases demand and drives up prices. You need to control for income before concluding that denser places are more expensive.
Edit: Point 3: I just noticed that the Y axis is pct of income spent on housing. That will also be affected by income. Someone who takes home 10K after taxes will struggle if he pays a third of his income for housing. Someone who takes home 50K can afford to spend half of it on housing and still have plenty left over.
Popularity breeds popularity; that's a "network effect," and it holds for cities just like for music concerts or second languages.
But does popularity breed prices? That depends. Scalped tickets to hot concerts are super-expensive; learning English isn't.
Both "tickets to the popular concert" and "English proficiency" have network effects, but only one has limited quantities available. The price effect is obvious.
American cities, and most cities worldwide, limit the quantity of housing. So in most cities, popularity acts like concert tickets: density goes with high prices.
A very few cities like Tokyo don't limit the quantity of housing. So there, popularity acts like English proficiency: density goes with flat prices.
I think there are both amenity and disamenity effects from density, but the real thing that pushes up housing costs is having lots of jobs nearby. To some extent, jobs will tend to cluster near housing, but both job decentralisation in the post-war era and re-centralisation since the 90s show it mostly happens independently of housing growth in this our very regulated market.
I also think you too quickly rule out the reverse causation - it's pretty obvious that higher demand for living in a location pushes up land value, and that higher land values incentivise denser construction.
I think to some extent we can say that e.g. big multinational auto plants really have been attracted to growable areas. It's probably at least as large an explanation for why they moved South as Southern labor laws or Southern workforce development is.
I think this is missing something by categorizing a city as entirely "lots of people (and their housing)." You can do better by modeling cities as containing 2 categories of stuff: housing and attractions. People want to move to a city because of attractions. Building more housing raises the number of people able to live in a city without increasing the number of people who *want* to live there--possibly, in fact, decreasing it (because people want to live in areas with high attactions per (area, resident, etc)) In this model, there are 4 different ways you can move--increase housing, decrease housing, increase attractions, decrease attractions--each with obvious effects on pricing.
So, really, if we want cheaper housing in (say) NYC, we should bulldoze central park, close all the museums and restaurants, and ban broadway plays.
I am so excited that you've finally thought yourself almost all the way around to becoming a NIMBY like me.
The final bit you're missing, I think, is that the best solution is to build a bunch more housing everywhere _except_ the biggest metros. The San Francisco Bay Area has eight million people, which is too many, and its geography is amazingly poorly suited for a giant metro area (what with the huge bay in the middle, and the steep hills, and the earthquakes).
We need to find ways to stimulate growth in cities in the 100K-1M range, and maybe the 1M-3M range, without cramming more people into the small number of overcrowded megalopolises that already exist.
A great many cities in the 100k-1M range, and even some 1M-3M cities, already have minimal restrictions on density. What you actually want to do is deter growth and wall people out in such a way that they will settle for less desirable areas, in which they will be poorer and worse off and their children will have a narrower range of possibilities. You have merely changed the language around in a cognitive dissonance reduction strategy to put the emphasis on the downstream, secondary consequence that growth will be squeezed out to other cities, which you are presenting as some kind of difficult development task that needs wise investments to accomplish, when it is just the inevitable downstream effect of the privileges you are attempting to claim for yourself.
> A great many cities in the 100k-1M range, and even some 1M-3M cities, already have minimal restrictions on density
Right, that's a nice thing about cities in that size range, you don't really have to restrict density because nobody is going to build 50-storey skyscrapers in a small city anyway.
> What you actually want to do is deter growth and wall people out in such a way that they will settle for less desirable areas, in which they will be poorer and worse off and their children will have a narrower range of possibilities
No, what I want to do is to wall people out in such a way that they will settle new areas, build fantastic new cities without the restrictions of bad planning decisions made in the 18th-20th centuries.
San Francisco in the 1950s was a fantastic place, let's build another one of those in Crescent City, rather than throwing ever more people into the decaying husk of that once-great city.
You are clearly unfamiliar with urban planning issues at an extremely basic level and your purported opinions about what small towns should do is very clearly some ad hoc nonsense you've invented to rationalize your s.f. nativism.
Warning (50% of ban) for this comment.
You are unable to identify cranks and have allowed your comments on housing issues to fill up with cranks. Evidently it is now to the point where you ban non-cranks for being angry at having to interact with your preferred cranks and debunk their crank ideas such as "50 story buildings do not exist outside cities with millions of inhabitants, and would be economic madness".
Scott in Open Thread 184:
"I’m pretty annoyed by comments that say just things like “This is a bad post” or “You are clearly misinformed” without any elaboration. This is true whether it’s responding to me or to a commenter. I’m going to start banning these if I see them from now on. Feel free to challenge or criticize anything, but please share your reasoning. I will grudgingly allow things of the form “I’m an expert in this field and I just want to warn people this is wrong, though I don’t have enough time to explain how”. But if it’s just “u suck”, that’s a banning."
I think you'd have avoided the warning if you'd elaborated.
But you're still trying to wall people out, preventing them from fulfilling their preferences. If San Francisco is so bad, and if new cities would be so great, why do you need to stop people from moving there in order to make that plan happen? And why should current residents of SF be privileged over other people who might want to live there instead?
It matters what is being built. People don’t move to NYC because there are so many houses there. It is the industry and culture. If you are building more things like stock exchanges and museums, housing prices will go up at a constant housing density. That doesn’t mean building more houses will make housing prices go up.
Your argument works specifically because you assume building a denser and more desirable city.
You could make the housing prices go down by building a denser and more horrible to live in city, if housing prices are that important.
Economically desirable and actually desirable are two different things.
I like to think about Jakarta. I've never been to Jakarta, but I've never met anyone who had a good thing to say about it. It's crowded, polluted, ugly, and impossible to get around. It's so bad that the Indonesian government has decided to up and move themselves out of their own capital city just so that the politicians and civil servants don't have to live in goddamn Jakarta. And yet, for some reason, a whopping 31 million people choose to live in the Jakarta metro area. Why? Because that's where all the jobs are. Jakarta is a Molochian trap, which has somehow sucked all the economic activity out of the rest of Indonesia (give or take the occasional tourist area). Every year, even more people move to Jakarta, meaning it's an even larger fraction of the Indonesian economy, meaning that even more people need to move to Jakarta.
My point is that if you build more density you might wind up making something that's more economically appealing while also being a much worse place to live.
I think you might find similar effects in any country with a "primate city" (https://en.wikipedia.org/wiki/Primate_city) and low state capacity. The Jakarta city government might like to do a better job preserving quality of life there, even with all the density, but they can't. People say a lot of the same things regarding urban hazards with New York City, but life there is clearly better, it's just more expensive.
But the Molochian trap theory is interesting: do you think people keep moving to Jakarta because economic opportunities in other cities are actually getting worse due to Jakarta's dominance? Or does Jakarta just keep getting better and better? In Indonesia, people might be moving there away from the crushing poverty of subsistence farming, not because they lose their jobs in other cities.
I think the unstated assumption is that size in and of itself is what attracts more people to a city and hence increases demand and prices, rather than something unique about the cities, like architecture or neighborhoods. It’s not intuitive to me that New York sized Houston becomes popular just because it’s big. (This hints that other features that made cities desirable started the flywheel.)
The "induced demand" argument essentially says that there are a significant amount of people who don't want to live in area X now, but would if it were a bigger city. I can kind of see the argument for this in some cities, but who could possibly be thinking this about NYC and the Bay Area? Those are already *the* places to be - building more housing can't make them any more so.
Also, I'm going to nitpick the density-vs-pricing graphs you picked. The first one is weighted by a bunch of unlabeled data points on the lower end, and the second one shows a frankly unimpressive R-squared value.
Off topic I know but I can not find the SSC post talking about how scarcity leads to politics and scott makes up a fictional example of if there was 10% of the available water all the interest groups would fight for it but with enough water it is a nonissue. It could be a ACT post but I think its older.
I think the hypothesis isn't clearly defined, and the question is phrased in a way that makes a correct answer impossible. If building more houses causes local prices to go down for 4 years, and to go up from then on, did it make house prices go down, or up? If building more houses causes others to build more amenities, and attracts more businesses, creating more jobs... how far down that chain can we go, and still attribute raise in local house prices to building more houses?
Each of those additional steps--building museums, creating new businesses, etc.--costs additional money. It seems to me that the credit for the rise in housing prices should be distributed among the different factors proportionally to their capital (or other) investment.
You're approaching the question like a foundationalist, who believes that assigning credit for a result to a single cause is unproblematic. Correct epistemology must allow the dynamics of recurrent causal networks to be computed iteratively, and an answer to be given in a form that could reproduce dynamics like "price goes down for 4 years and then goes up".
It might be interesting to look at the Spanish market for a possible counterpoint.
Spain has a very uneven population, with most concentrated in the coast and the center. The sparse parts of the country are very sparse, and the dense ones are very dense.
In the rally to 2008 Spain was building A LOT of new units [1]. Prices were rising at a very rapid rate. At the same time population was growing fast, mainly due to immigration [2].
When the bubble burst in 2008, home prices started going down[3]. Not surprising considering the inflated prices and the massive uptick in unemployment [4]. However what's surprising to me is that this price slump lasted a really long time, and only recently we are approaching prices close to the top of the bubble. Is is true that population growth slowed down a lot, and for a few years between 2013 and 2016 total population actually went down. However median salaries [5] sort of grew steadily over the period, again, not accounting for unemployment. Still, the bottom of prices seems to have happened around 2016, when unemployment had been decreasing from it's peak for a few years.
Of course there are multiple interrelated causes happening at once in this case, but my take is that high density helped to tame housing price for a relatively long time, even as economy recovered from the recession.
[1] https://www.eleconomista.es/empresas-finanzas/noticias/10318431/01/20/Se-construyen-muchas-o-pocas-viviendas-en-Espana.html
[2] https://es.wikipedia.org/wiki/Demograf%C3%ADa_de_Espa%C3%B1a
[3] https://www.idealista.com/sala-de-prensa/informes-precio-vivienda/
[4] https://elpais.com/economia/2016/04/28/actualidad/1461866236_955613.html
[5] https://www.newtral.es/sueldo-medio-espana-evolucion/20220427/
I think a lot of the studies showing building reduces costs locally are accurate in the short term, but the reason you're right is that it takes time for the new supply to attract out-of-area residents, increasing the population, and increasing desirability. A lot of this can be a multi-year cycle, i.e. New York builds some housing, on the margin your friends want to move there, they do, 3 years later a critical mass of them is there, and you move there as well. And then at this point, it actually did contribute to a raising price.
I think what you and Matt are both saying could be consistent. For example, it might well be the case that on the margin adding more housing to New York doesn't increase its "New Yorkiness", i.e. its having of Broadway, Wall Street, and so on, because those are features of being the #1 city, not features of being a city of N million people. In this model there could be discontinuities when you get enough extra people to cause some sort of runaway migration to your city, but it wouldn't increase demand more than supply on the margin.
Of course this could totally be wrong, and it could be that with 5% more people New York would _also_ become the center of software in the US or something.
A topic close to my heart - and I suppose many other's too. Thanks for this. I am EXTREMELY skeptical of any claim that building more homes lowers prices or eases affordability for families. I live in an area that built tens of thousands of new units and rents in these buildings basically monotonically increase.
There are a few main factors as I see it (well, maybe it's really just one):
1. Living in a globalized world. More houses for sale is just more inventory from which wealthy domestic and international buyers can select from. If there is an ephemeral drop in price, it will entice more of these buyers until the situation returns to exactly as it was before.
2. Everyone in the housing market (buyers and sellers) have wisened up and are playing the same game. With the explosion of equities and real-estate following the zero-interest rate environment for so long, people's net worth blossomed. Though equities are down a little, most have now wisened up and have moved that wealth into money market and related bond funds that are earning them a nice 5-6% interest rate. This means lots of people have lots of money - in my area development just keeps going further out and, even in April 2023, open houses are packed and houses sell after 2 days for 100s of K over asking - often in cash. Just as before, if creation of new housing temporarily lowers price due to a higher supply, it invites an even larger horde of potential buyers who are in the (n-1)th tier of wealth - and then it returns to the equilibrium of before, where everything beyond the affordability of almost everyone, yet any house on the market (unless utterly dilapidated). Building more houses just invites more buyers from more places -- and rinse and repeat.
3. Building new housing (particularly in wealthy, economically dynamic areas) increases the population and with that comes more business, jobs, investment and all the things that make a place desirable and expensive. The ultimate attractor of the system is to be unaffordable. If it was affordable, everyone would buy it all up until it was unaffordable all over again. I think the logic is as simple as that. Maybe a wealth tax? And/or a severe recession where people lose jobs and wealth and HAVE to sell are the only things that would change this.
I think you're mixing up cause and effect in your example. New housing keeps getting built because of continuously rising demand for housing in your city. You're watching increasing demand move along the supply curve - there's a lot of housing development that doesn't make sense at lower prices, but does at higher ones, so it gets built when prices rise or are expected to rise. If they stopped building housing, prices would rise even more.
And even in your argument, people in the (n-1)th tier of wealth can't big up prices quite as high as those in the nth tier. So building new housing would indeed increase prices in the long run, albeit marginally.
I think the YIMBY argument is that it's interesting that altering the amount of housing in an area, resulting in higher density in that area, doesn't result in higher prices. You seem to be saying "ah yes, but under our current planning laws, more people moving to a city does increase prices in that city".
This seems like the same argument seen from different angles. You're making the point that in the past, prices rose with density on a city-wide basis, even if that doesn't hold for small areas within a city. Which sounds like something YIMBYs would agree with.
I think the response might be "yes, the point of the small scale studies is that they suggest it's not increased density itself that increases prices. It's something else, something that only shows up at a larger scale, over a longer time period, and we think that that something else is the overarching planning regime".
And that's where Tokyo comes in - you can say, look, there's another wealthy, developed country with far less restrictive planning laws, and in that country increasing density doesn't seem to lead to increasing prices.
If you've got a vetocracy, increasing the number of people with vetos will probably decrease the number of laws passed. But that doesn't mean that it is inevitable that larger populations are more inclined to paralysis. It means you have to change your system of government.
I'm skeptical about this model at the city level but I think there's some truth to it at the micro-neighborhood level. Building ten new homes on my block would not meaningfully increase affordability of my immediate area, since this block is more or less fungible with dozens or hundreds of other blocks surrounding it. If anything, it makes the micro-neighborhood slightly "fresher" and should increase property values in the immediate area (for example, because those existing properties are now adjacent to brand new homes instead of overgrown vacant lots or crumbling warehouses). This is the core of the NIMBY problem in my view: building housing on my block has diffuse affordability benefits far beyond my block but very concentrated harms (living through construction, etc).
According to AAA (old data from three years ago) the cost to own a car in America is about $800/month, including depreciation, insurance, gas etc. So living in a community where you can take transit or a ride share easily can make up a significant portion of higher rent. Some. Not all. Just something to keep in mind in moderate priced regions.
Re: SF; a few years ago I saw a study where the researchers kept drilling down on why NIMBY's hated new development, and the biggest draw was hatred of already rich developers getting even more rich. So the green monster called jealousy may be a factor in a classism response.
The driver that both sides seem to be missing — or at least are not being explicit about — is that _density is necessary but not sufficient for valuable things beyond more housing_.
In particular, density allows for thick labor markets and increased specialization, making people more productive; and thick social markets, making life more enjoyable (try finding a date today to take to a show tomorrow in NYC vs. SF!). Those things take time for cities to develop and are dependent on things other than density, but they are valuable, and so folks will pay for them if they come to exist years down the line.
That's why:
- building more housing in NYC will immediately decrease rental prices
- building a huge amount of housing in rural China won't increase rental prices alone
- ...but building a huge city in rural China _and_ having an industry cluster form around it — such that people have productive work and enjoyable lives — _will_ increase rental prices
- inner city Detroit is both dense and extremely cheap, and building more housing won't change that
To believe that building more housing in NYC would increase rental prices in five years, we need to believe that more density makes living in NYC _even_ more valuable. Is that the case? I'm not sure — maybe beyond a certain point of density, it doesn't make us more productive or our lives more enjoyable. Or maybe there's no limit.
Regardless, the model of "Density Increases Local But Decreases Global Prices" is unambiguously wrong for places that can't build those other things — inner-city Detroit as an example.
I mostly agree and find this a good sum-up. Except: _density is necessary but not sufficient for valuable things beyond more housing_
'Necessary' is too much said. There can "valuable things beyond more housing" that do not rely on density. Thinking e.g. about some smallish mountain places with very high costs for example.
This is also a good example to emphasize that 'demand' clearly doesn't depend only on the amount of people who are living in a place all year around and their personal demand for space/person. Some places more than others significantly suffer (in terms of prices) from a high demand for second or third homes in that place.
>The two densest US cities, ie the cities with the greatest housing supply per square kilometer, are New York City and San Francisco. These are also the 1st and 3rd most expensive cities in the US.
Let's distinguish between the housing stock (quantity of homes) and the supply curve, which represents the quantity of homes as a function of price. Also note that price is determined by the intersection of the supply and demand curves.
https://en.wikipedia.org/wiki/Supply_and_demand
>For example, if my home city of Oakland (population 500,000) became ten times denser, it would build 4.5 million new units and end up about as dense as Manhattan or London.
Are you thinking of a shift in the supply curve (moving along the demand curve), or a shift in the demand curve (moving along the supply curve)? If you shift supply, prices go down and quantity goes up; if you shift demand, prices go up and quantity goes up.
>Right now, more Americans prefer to live in big cities than there are housing units in big cities, so prices go up and these people can’t afford their dream. As new cities become “big” (by these people’s criteria), they’ll move to those cities, increasing demand.
Assume a two-sector supply and demand model, where we have graphs for Big cities and Small cities.
In the initial equilibrium, prices in Big cities are higher, because more people want to live there than there are homes. But note that Small city people still show up in the demand curve for Big cities: they're in the section below the equilibrium price, because their willingness-to-pay is low.
Now suppose that a Small city (somehow) transforms into a Big one. This shifts supply right in the Big city market, reducing price. If the price reduction is large enough, we move down the Big city demand curve so that some Small city people are now willing to pay the lower Big city market price. Note that Big city demand hasn't increased; it was always there.
(Exercise for the reader: what happens in the Small city market?)
At the micro-economic level, adding more housing units can indeed "lower" the median household price in a given metro area. Even in an affordable city like New Orleans while simultaneously increasing the adjacent cost of housing in certain neighborhoods via market stimulation. The best example I can give is an affordable housing project I worked on that was comprised of 79 affordable units for working artists (income qualified). It was renovating an abandoned school in the historically black neighborhood of Treme. The school had been left abandoned since Katrina (2005) and the immediate surrounding blocks reflected the slow decline of the nieghborhood hollowed out by dis-investment, subsequent broken-window crime and poverty.
Shortly after our project began construction, local builders and individuals began buying adjacent abandoned properties and either renovating/constructing new single and 2-family homes. By the time our project had been completed, the 79 units helped to lower the "overall" median rental price yet the adjacent neighborhood saw an increase in housing costs as gentrification took hold. This story repeats itself in other cities I've worked in like Denver, Washington D.C., Nashville, and Dallas. Phoenix was the outlier in that there's so much sprawl, gentrification can't really happen.
I have yet to see an in-depth study that quantifies the impacts of new housing units on market pricing at the overall median price level for a city and the immediate local affects of those same units on a particular neighborhood. I think the NIMBYs and YIMBYs talk past each other in this regard where each point to the relevant data that best supports their position without taking into account the complexity of how increased housing density affects are regional/metro and hyper-local. Which is why you have YIMBYs like Matt claiming more housing ultimately lowers the median housing price (nominally/briefly) while NIMBYs claim every new neighborhood development causes housing prices to rise and gentrification by yuppies/hipsters/bohos push out the the BIPOCLGBTQ+ artist/teacher/essential oil craftsbeing/zen gardner/retiree.
Thanks, this puts into words something I've been struggling to articulate.
Sure. Housing as social policy is complicated and gotten more complicated over the years. I've watched my hometown Denver and the greater metro area struggle for several decades to keep housing affordable despite increased multifamily and mixed-use developments, and transit-oriented developments along the lightrail corridors, it's pushed housing costs up and out into the outlying suburbs which then sees costs go up w/ marginal density increases in the burbs. Hard to infill single-family lots w/ multi-family stuff if zoning doesn't adapt.
There's actually a working paper that comes pretty close to exactly what you're looking for: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3867764 "Does Building New Housing Cause Displacement?: The Supply and Demand Effects of Construction in San Francisco"
The author looks only at cases where new housing was constructed because the previous building burned down - not caused by increasing demand for housing at that site. She finds that hyperlocal rents do go down by a tiny bit, and local businesses do better - the best of both worlds.
Thanks for the link. It's unfortunate though that her study only focused on replacement units and impacts. I can see why rents would drop a tiny bit because you're really only reducing market demand by the loss replacement for the displaced tenants. But I plan to keep looking for additional studies.
I actually need to research the tax & rental records for the Treme neighborhood and see what the long-term impacts have been since those 79 units came on-line 5 years ago. That immediate neighborhood saw a bump in economic investment and increased property values in 2018 as result of the redevelopment but did the prices stabilize or continue to go up? If they stabilized and overall rental/purchase prices dropped then that may translate to an overall drop in the median rental/ownership costs that YIMBYs cheer but may result in a temporary rise in hyperlocal housing costs as the initial capital investment works through the system.
Which may mean NIMBYs can really only hang their hats on a short-term "rising" housing cost impacts to block projects. And there are probably some low-cost policies to blunt that short-term impact.
The conclusions you draw from your urban density & housing affordability correlation graphs are falling prey to the classic correlation is not causation problem. You acknowledge the potential reverse causation effect, but there are other reasons correlations don't imply causal relationships that you are missing from this analysis. In particular, you are not accounting for an omitted variable that affects both urban density and housing affordability: desire to live in e.g. Oakland vs. Manhattan, AKA housing demand. You correctly identify that induced demand is a thing that sometimes happens, but induced demand does not describe the whole dynamics of density and housing prices--you yourself say: “[People are] moving [to large cities] because they want to be in a big city - with friends, jobs, museums, and nightlife.” These are related but not perfectly correlated with density of housing for a multitude of reasons. Not all big cities are interchangeable.
Or: there are three relevant factors to the theoretical YIMBY argument about how marginally building more houses lowers housing prices, and you are kind of ignoring how demand/desire to live in a specific place is a separate thing from density, and should be controlled for when you graph a price function of density. This omitted variable biases your causal conclusions.
At least, that’s my read. If I got any of your arguments/thinking wrong, I do apologize.
Whether the induced demand effect overwhelms the regular more supply lowers prices effect at the marginal level is an empirical question, which the studies Matt provides try to answer.
Coming back to this, trying to explain my thoughts better.
The supply and demand argument states: holding demand & other factors constant, if you increase supply, prices for a good drops.
For housing, the possibility of an induced demand effect is a good point to raise. The induced demand argument states: if you increase supply, you automatically increase demand as well, possibly leading to an increase in prices given your all-else-equal increase in supply.
Distinguishing between these two theoretical possibilities is an empirical problem. But you cannot answer this empirically by simply looking at the correlation between supply (housing density) and prices, because a positive correlation between these two variables is possible in a world where the simple supply and demand framework is true!
Elaborating, you can see a positive relationship between supply/housing density and prices at the city level even if increased supply lowers prices, because it is possible there are other factors that are positively correlated with both supply/housing density and housing prices: for example, weather, amenities, jobs, presence of family/friends, etc. I consider these things determinants of housing demand alongside the induced demand effect. If they indeed exist, then you can see a positive correlation between supply/housing density and prices even if increased supply actually lowers prices, because e.g. nice amenities will increase demand for living in a specific city, leading to an increase in not only prices but also supply to meet that demand. Demand is the omitted variable in your causal conclusions drawn from the density/price graphs.
A good study on this topic will not look at the overall correlation between density and prices, but try to see how a marginal unit added to supply affects prices, because that is what will answer the empirical question at hand, and actually distinguish between the two theoretical worlds (one where the regular supply-and-demand theory reigns, and the other where the induced demand effect overwhelms the simple supply-decreases-prices theory).
Terminology comment: “induced demand” in economics traditionally refers to when a supply increase increases demand but decreases prices as well, at least according to quick Google search. Not exactly sure what the thing we’re using it for (supply increase increases demand and prices both) is technically called. Maybe it’s still called induced demand but you specify the effect on prices.
Hm, why didn't I read that before trying to write up my own. ;)
This paragraph is wrong I think:
“For example, if my home city of Oakland (population 500,000) became ten times denser, it would build 4.5 million new units and end up about as dense as Manhattan or London. But Manhattan and London have the highest house prices in their respective countries, primarily because of their density and the opportunities density provides. I don’t see why Oakland being able to tell a different story of how it reached Manhattan/London density levels (“it was because we were YIMBYs and deliberately cultivated density to lower prices”) would make the end result any different from the real Manhattan or London. But if becoming just as big as Manhattan or London would make Oakland more expensive, shouldn’t we assume that a little step in that direction would make it a little bit more expensive”
If Oakland all of a sudden had 10x the housing supply I would NOT think it would be as expensive as New York. I think you would have a ton of empty housing and princes would be dirt cheap as people tried to get something for their homes for which there was not enough demand...
The reason we don’t see his is that no developer is going to build a ton of supply beyond demand. Since it’s so hard to build this is rarely the problem. But we see it when cities de-populate. There was a time when Detroit homes in some areas were going for ~free. If someone added a bunch more supply in Detroit it would be unlikely to “induce more demand than supply”
It seems like a lot of the argument rests on “we can all agree it is true at the extremes, so doesn’t that counter the studies that show it is not true at the micro level”. But if someone (me!) doesn’t believe the extreme argument then the studies that show that induced demand does not outweigh increased supply effects seem totally plausible.
So I disagree with this argument for a lot of reasons.
I think the first (and easiest) counterargument is a money-on-the-table one. Let's suppose you're right; that if a town has a density similar to Athens, GA (where I live, good sized town, 100Kish people), then it should have housing prices similar to Athens (about 300K for a single-family home). Athens has lots of ordinances about what can and cannot be built, you are going to have to apply for permits, etc (this is true anywhere). So, just buy up 100 square miles of land in rural Georgia and build a similar sized amount of housing. If you did this, your profits should be astronomical, since you would have very little regulation to fight (this is especially true of building an Oakland sized city in not Oakland). But we don't see venture firms actually building brand new cities wholesale in America, so maybe this should tell us that there actually isn't money on the table here.
2: I think that this has been mentioned before, but jobs are probably a bigger driver of rent. I think this is especially true in single-employer cities. If you consider most rust-belt towns, their land value dropped like a rock not because more/less houses were built, but because the factories closed and were automated/went abroad (this happened to my hometown). You can even see this in bigger cities like Rochester, NY, which has a pretty high population density for a city, but not an extraordinary cost of living. It used to have Kodak as its #1 employer, but when Kodak closed, the city took a huge hit. Maybe I'm wrong about the numbers, I'm open to someone beating me back with hard data, but this is my overall impression that a lot of cities/towns lose land value from loss of employers, not housing issues.
3. I think that there's an important replacement rate issue. I do think that you're right in general, that as a city grows, housing becomes more expensive. But what I think is going to matter is how quickly housing grows relative to population; if a city could maintain 10% of its occupations as uninhabited, then I think it's land prices are going to be lower than a city with 1% uninhabited, even if their populations grow in lockstep. I think though that as a city gets bigger, its regulations are going to make it harder and harder to add new housing, and so the percent of uninhabited places is going to slowly drop, adding to the rent increases.
There is also a question of why any property owner would build so quickly that it forced prices down. There is an inter-temporal equilibrium here too as I explain in this paper.
https://link.springer.com/article/10.1007/s11146-020-09815-z
Many people simply assume that changing planning rules will change how fast new building happens. Sure, it will probably change where it happens, but probably not how fast more housing is built across all substitute locations.
Cameron this is an incredibly obvious 101 fallacy where you are conflating the purported class interests of a dispersed group of owners with the individual interest of any one owner.
I have now downgraded my previous understanding of you. Formerly I regarded you as akin to one of those creationist biologists who goes out and gets assigned by their ministry to do a biology PhD so they'll have a creationist PhD they can point to. But it is clear from this comment that the creationist biologists are ahead of you, because I have never heard of one of them, like, being confused about what a cell is or something.
It is incredible that you were able to get this far. You are an obvious fraud. Go away and get a real job.
i think it would be helpful think in terms of elasticities rather than in levels. wine (nyc/sf) is more expensive than coffee (north dakota). but if demand for either increases, price responds very little because supply is inelastic. if more people want coffee, coffee producers just harvest a few more beans, hire a bit more labour, etc. marginal cost barely increases, and if the market is competitive same for the price. if housing supply were elastic, there would still be a gap between nyc/sf and north dakota (like the gap between wine/coffee), but it would be much less. the current difference reflects inherent factors (better amenities and higher real wages in nyc/sf) and the "distortion" of inelastic supply causing excess demand to drive a wedge between prices
the point about cities being in competition is just another way of saying demand is elastic (since cities are close substitutes for each other), so any increase in supply in a city won't lower own-city prices much. this isn't a problem if the people deciding on how many houses to build are "price-takers" (i.e., they don't consider the effect of their housing construction on overall prices). as long as MB > MC at current prices, they'll build and the market will clear. the current situation--where interest groups who *want* prices to rise use regulation to make supply inelastic--is the opposite. it's more like local political economy oligopsony than classical general equilibrium perfect competition.
i also like to think of it in terms of flows rather than stocks. suppose there are 1m houses in your city (stock). mostly people occupy their houses year after year. every year, 10k people show up in your city looking for a house. if there are fewer than 10k vacant houses V, they bid up prices. if there are more than 10k vacant houses, prices drop. it's the ratio of vacancies to people looking to search V/10k (what economists call "tightness") that determines the price (i.e., it's the 10k flow not the 1m stock)
if a city had a one-time extreme increase in its housing stock, but then implemented laws to make the future housing stock inelastic (i.e. the history of ny/sf), you would see low prices for a few decades, then over time as demand increases eventually prices would explode. this makes me optimistic because it means we don't have to make huge permanent investments in the housing stock, we just need to loosen things up enough so that every year, the number of houses coming onto the market exceeds the number of people looking for houses. this seems more manageable
Increasing supply has 2 effects (abstracting from the land price vs building cost distinction for now):
1) For any negatively sloping demand curve, it lowers prices.
2) Increasing density makes the city a more desirable place to live and increases wages through agglomeration effects. This shifts the demand curve for living in that city upwards/to the right, increasing prices
I think you're making the case that the positive correlation b/w density and prices tells you that effect 2) usually dominates and is what would likely dominate in Oakland if the Oakland were to build more housing.
I don't think this inference works because many amenities that make a city desirable aren't perfectly correlated with/entirely caused by higher density. That is, dense regions can be expensive for two reasons:
A) They happened to have nice amenities for reasons that are not caused by their density (e.g. nice beaches nearby). These nice amenities increase demand and prices.
B) Density causes better jobs and better amenities as in point 2) above.
A) would cause the correlation between density and prices to be positive (if weaker) even absent B).
For an example of A), were NYC density to reduce by 20%, Broadway wouldn't decrease in quality by 20%. Similarly, if Miami decreased it's population by 20%, I don't think it's amenities (the beaches) get 20% worse.
Similarly, if Oakland increased density by 20%, it becomes a moderately more desirable place to live because of B). However, if A) explains a substantial share of the variation in desirability, then Oakland doesn't attain the amenity/desirability/price level of a city that currently has 20% more density than it.
I think this means that it's totally plausible (though not guaranteed) that effect 1) is larger than effect 2) and that an increase in supply lowers prices. Indeed, this is what Matt's studies seem to show.
This is what I try to argue against in the paragraph:
"Could this be reverse causation - ie New York is very dense because its prices are so high (which incentivizes developers to squeeze the most out of every parcel of land)? Yes, obviously this is part of the effect. But equally obviously, it isn’t the full effect. Stripped of its density, Manhattan is just a little island off the US East Coast. There are plenty of little islands off the US East Coast - Maine alone has dozens - and none of them are as expensive to live in as Manhattan. Manhattan has a few extra natural amenities, like a river and a good harbor. But nobody moves to Manhattan for the harbor. They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife. This induced demand effect is so strong that it overwhelms the fact that Manhattan has millions more houses than the empty North Dakota plain (or lower-tier cities like Des Moines or Cleveland). So empirically, as you move along the density spectrum from the empty North Dakota plain to Manhattan, housing prices go up."
TBH I think part of the issue is how you define the "urban area". It's a bit circular - I'm assuming "urban area" (defined independently of administrative division as your source says) means area above a certain density.
So you're measuring "the area around city X above density cutoff Y, measured by average population density".
A big part of the average density is how big a surrounding suburban area above the cutoff you have. The highest ranked areas on here aren't all high rises, they're *geographically constrained*.
Chicago is less geographically constrained, it has the same-ish population density as Miami in the city proper, but its "urban area" is twice as big and its "urban density" is significantly lower. Because there's more space to have a long tail of "not very dense, but dense enough to be a part of the 'urban area'"
I think we agree that exogenously increasing density has the directional effect of nicer amenities and higher demand. I think what we're disagreeing about is that this higher demand effect will overwhelm the first order supply effects in all/most cases.
Say in time t-1 we loosen land use regs, which has the first order effect of allowing 10% more people to live in Oakland and average rents to marginally decrease in time t. Now, two (stylized) things could happen in time t+1:
1) A large chunk of the people who have moved in were ex Biotech CEOs and employees from Boston and actors and musicians from Broadway who create new fast growing companies in Oakland and massively improve its cultural scene respectively. I agree that in this situation rents go up in Oakland
2) The people who moved in were a slightly talented version of Oakland's current population. The higher density means that a few new restaurants are possible that previously weren't and some new niche businesses are possible that previously weren't, but fundamentally, Oakland is only marginally more desirable than it was before. In this situation I think rents most likely go down.
There's obviously lots of intermediate options between 1) and 2) (these are stylized) but I think the median/modal upzoning causes something closer to 2) than 1).
Disagree?
In short: Most upzonings: you get slightly cheaper housing + slightly nicer city, but occasionally the added density creates something like SV or Broadway, in which case you get higher prices.
I think the way you move along the density spectrum matters. In principle you could pick any spot on the (density, price) plane, but naturally occurring city formation picks points along that upward sloping line. This would probably not be the case if you artificially (exogenously) introduced new housing units, for instance through a government program that does not care about the constraints faced by market actors. Looking for historical experiments of this kind can reveal the causal relationship between density and prices. Alternatively you could try to formulate a predictive model from first principles, the way physicists do. A starting point would be Fick’s law of diffusion with a negative diffusion coefficient to describe people’s bunching behavior into which you would have to work price dynamics somehow. I suspect there is extensive literature on both approaches.
I think this is a good frame. It’s also helpful to think of the supply side, which in theory can cal prices. There you’d expect housing costs to be higher as density increases because land prices go up and you’re building more complex tall buildings (this doesn’t have to be true, perhaps once you have subway network, say, you can build more efficient apartment buildings at scale). Say it’s true though, that’ll create an upward sloping supply curve. More density means higher prices, exactly as you expect! (Upward sloping demand possibly too, pretty plausible as the world is increasingly urbanizes).
However, apartments in these cities being studied are wildly more expensive than the cost to build. Or the costs involve a large amount of regulatory costs in waiting and paying off interested parties and fighting locals and whatnot. In this world easing supply constraints raises prices by making the city more attractive and increases some costs (land price up), but those effects are dominated by reducing regulatory costs/rents and alleviating excess demand.
The missing link here is that by just focusing on housing prices, we are ignoring the other key components that go into what make people better off (what economists usually define as "utility"). People don't just isolate one component when making a decision, they consider the bundle as a whole.
Let's say that people's well-being has only two components: 1) quality of local amenities and 2) budget for non-housing consumption (think especially of tradable goods like iPhones and airfare).
It can make sense to move to NY from a lower cost city if you value the local amenities highly (walkability, Broadway), even if you keep the same income. You can consume fewer iPhones but you're still better off.
Now let's throw another important wrinkle in here: income. Big cities literally make some industries more productive (knowledge spillovers, scale), and some component of that productivity is captured by workers in higher wages. If moving to NY changes your after tax income from $50k to $100k, you can change your housing expense from 20% to 50% of your income and still have a larger budget for non-housing expenses ($40k to $50k) in this example.
The point is that narrowly focusing on minimizing housing prices is a dead end, because the other components of utility will tend to overwhelm it.
The YIMBY argument should be that construction lowers housing prices *holding everything else constant*, which increases utility - more people living in high productivity areas (more economic output for everyone) and having access to amenities that require density (if that's what they desire, and people wouldn't move to bigger cities voluntarily if they didn't want it).
There’s also a demographics issue here. When I was 24 and single, I would have moved to any of 5-10 big cities where I was offered a good job and had at least one friend. When I was 28 and in a relationship, I would have moved to any of 3-5 large cities where we could both get jobs and had at least two friends. When we were 35 and had to decide where to raise our kids, we really only had two large cities in mind, and we picked the one with grandparents in it. The fluidity of the market is constrained by how many people are in brackets like these at any given time. Also, I wasn’t buying property at 24, so we’re really talking about a supply of renters who might be willing to stick around and compete for houses long after they’ve moved. I’m not sure how you control for that.
Yes, building more housing only increases housing prices if it makes the place more desirable even after taking higher housing costs into account (so much that the increase in demand outweighs the increase in supply). If so, it's a huge deadweight loss to prevent this.
If building more housing in a city would increase the value of real estate in that city, perhaps we can count on political forces in that city causing more such housing to be built. (Renters might not like it, but they probably don't have nearly as much influence over the housing approval process as land developers.) Consequently, cities that are not seeking to increase the quantity of housing are likely cities where building more housing would lower the price of housing.
Why don't they build twenty-story skyscrapers in rural areas?
Because induced demand only works when there's a certain amount of latent demand. There exists a population of people who kinda-sorta want to move to New York City but don't because prices are too high. There's zero people who kinda-sorta want to move to Lacy TX but are priced out.
There’s also the question of whether cities can actually generate a sharp increase in housing supply from the usual policies that YIMBYs advocate, such as mass upzoning. There are good reasons to be skeptical. Recent work by Cameron Murray has explained why “landbanking” is so common and why rates of supply in cities are closely tied to market demand conditions, not to zoning policies. You should check out his research:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3417494
https://www.fresheconomicthinking.com/p/why-i-am-anti-anti-zoning?utm_source=%2Fsearch%2Fanti&utm_medium=reader2
There's a relatively clean theoretical answer, which is that demand is a function of social features (like good food, cultural events, ability to find your niche, variety of jobs...), and social features are a *superlinear function of population.* Social stuff is dependent on the number of possible pairwise interactions.. city X with population double that of Y will produce more than twice the number of patents, creative collaborations, etc... as well as more than twice the amount of crime, all things equal.
If social features scale superlinearly (and demand depends on it) and housing scales linearly, then you'll see housing prices go up as density increases. If you add housing without adding density, say by building outwards, you won't see the same sort of price increases.
But that's not all... what we should really look at is density and point to point travel time. A city that spreads out with good travel infrastructure may have housing prices similar to a city that builds up with mediocre travel infrastructure. I'd guess that population, how many other people you can reach within a fixed unit of time, and housing stock together predict most housing prices.
This analysis seems to have trouble explaining why anyone would ever build a detached suburban-style development in, say, Houston; all new construction everywhere should look as much like Kowloon Walled City as it is legally and architecturally possible to do so, because from the developer's perspective, density is a free money-making machine. In fact we basically never see anything like this, suggesting that short of maybe some Neom-like scheme on a truly grandiose scale, it is impossible for agglomeration-effect-induced-demand from normal building projects to come anywhere close to outweighing the supply increase.
What is the upper limit on geographically mobile yuppies ?
China is able to erect new ghost cities for a million+ people in a decade. If yuppies flood to a town, then there are no technological barriers to building at a pace of 100k/yr. I can't imagine 100k yuppies moving to Oakland every year. Inevitably, there will be a surplus and prices will go down.
The rise in local prices only persists when supply is limited. In fact, the local increase you speak off, is no different than scalpers re-selling new consoles at extortionate prices. This only lasts until manufacturers can get all their supply chains ready for the massive demand. Eventually, the manufacturers catch up, and the massive demand allows them to build their product at much lower costs due to scaling benefits.
With the deterioration of mid-western cities and their terrible weather, I'm surprised that internal migration to fair-weather states is as low as it is.
Everyone keeps wanting to bring up Tokyo, but they're ignoring the third biggest city in the US: Chicago. Chicago has world-class urban amenities and a broad range of high-paying employers. But housing prices are significantly lower there than in comparable US cities because they've consistently made it easier to build new housing.
Of course, you can bring up other reasons why Chicago might be less attractive, like Illinois politics and taxation, cold weather, crime, etc., but I don't think those are enough to explain the huge gap in housing costs. This kind of disproves Scott's model that there's a huge pool of people in the US who just want to live in a big city and growing bigger might attract them. If they were really as location-agnostic as Scott claims, they'd all be living in Chicago now. (Or maybe Dallas or Houston, the fourth and fifth largest metro areas in the country, that again have significantly lower housing costs).
This is an excellent point.
So according to your hypothesis, homeowners should support construction of new housing nearby, because it will increase prices of the homes that they own. But typically we see the opposite. Are homeowners wrong?
I think homeowners care much more about quality of life than about land value per se.
There are much stronger arguments that upzoning increases land value (ie per acre) than housing prices (ie per unit), since upzoning increases the number of units that can be built per acre. I don't know for sure that homeowners understand these arguments, but the smart ones do. If they're still opposed to upzoning, then I think it's for quality of life reasons - which is, in fact, what they're always saying.
Why couldn't they just sell their expensive low-quality land and use it to buy quality of life somewhere else? And don't tell me it's because *every* suburban landowner has deep community roots and will live there forever. Entitled townie landowners routinely calumniate their neighbors who are long-term renters as some kind of rootless transients who are supposedly bad for the neighborhood because they lack a stake, but mysteriously never seem to think this about anyone who buys property, even if they are quite openly very loosely attached to the area. So the admission rule to the cartel pretty clearly seems to be based on financial interests and not some more abstract stake in the qualities of a particular place you are especially attached to.
Because in reality there's friction. You don't need community roots to want to keep your house, and to want it quiet and the street around it free from construction. Moving is a pain. A big pain, in many cases. I'm currently renting, and still would need a major difference in rent/ quality/ location to overcome these factors.
Whether this individual preference overcomes the societal needs is a separate discussion, and I happen to be somewhat pro-YIMBY, but pretending people who disagree with you are all insincere entitled villains is not productive - or fair.
(edited to add missing "with")
Anyone interested in this topic should read the paper from Moretti and Hsieh on it. Examines the effects of reducing regulation for land use and how it’s related to employment, wages, and city size.
https://www.aeaweb.org/articles?id=10.1257/mac.20170388
Maybe Houston and Austin are instructive here? Similar climate, similar amenities, similar density,, similar per capita GDP. The salient difference is land-use policies, and the rents in Austin are 50% higher. There's a lot of artificial scarcity baked in to housing prices in some places.
Not very similar renters.
I'm tempted to ask if part of the issue is that the areas with more expensive homes relative to wages are simply areas with more established money.
On some level, in a classic economist "assume a can opener" sense, it's odd to have this difference between areas. If in some areas housing prices were higher relative to wages, you'd expect a movement in wages or in housing prices (or in people moving) to equalize it. Various reasons why that wouldn't happen ... maybe it's reduced costs in other parts of the budget (e.g. cars), maybe it's that they're more attractive places to live so people pay more for a better product, maybe something else.
Or maybe it's that in the areas with higher prices relative to wages, there's an added element of housing being bought with old wealth instead of wages.
In this view, some project city YIMBY utopia built out in the plains in Nebraska would be cheaper than NYC, simply because there's no rich trust fund babies.
I think the issue is that you are treating all types of building as the same, MattY is separating out hones and other stuff. People don't want to live somewhere because of the homes available (otherwise there wouldn't be lots of cheap property in the rust belt) but the other stuff. If you build more homes but keep the supply of everything else low (schools, shops, jobs, parks, etc) the prices will go down. If you build lots of nice new stuff but keep houses fixed price of housing goes up.
Love this step-by-step reasoning.
The big picture concept you're grasping is "spatial equilibrium", the idea that migration equalises quality of life. Quality of life has pull factors like "friends, jobs, museums, and nightlife" (agglomeration) and push factors like rents, travel times, and crowding disamenity. Basically, quality of life equals wages plus fun things minus costs and not-so-fun things, and this residual equalises across space. Imagine water levels equalising when the tide changes.
BTW there's two parts to "equalising". One is the direction: people migrate from worse to better. That's your "perpetual motion machine". Another is the impact: in-migration bids up rents, bids down wages, increases congestion, and worsens crowding. That's what stops the machine.
Example: Oakland gets cheaper and induces in-migration. More people = more bars = more fun, yay! In-migration continues. Bartender wages fall. Rents rise. Traffic gets slower. Bar fights increase. People stop arriving. Oakland is bigger. Maybe it's more expensive, or maybe it's cheaper if the growth was managed badly and had high amenity costs. Falling rents can represent falling demand just as much as they can represent rising supply.
This is spatial equilibrium, and it eats up housing price gains faster than we can induce housing suppliers to deliver them.
We totally need better write-ups of this concept. It's critical for zoning debates, and very underappreciated. Many people assume upzoning will change supply without changing demand. But that's wrong. (Some economists even embed this in models of housing density by assuming a "closed city")
Cameron Murray's stuff covers so many parts of this.
Example: stable rates of rent to disposable income suggest you can't sustain lower rents for long (unless you've ruined amenity at the same time). https://www.fresheconomicthinking.com/p/why-is-the-rent-to-income-ratio-flat
And the parallels between spatial equilibrium in housing and the Downs paradox:
https://www.fresheconomicthinking.com/p/downs-thomson-housing-paradox
And a cracker on AMM models which assume a "closed city":
https://www.fresheconomicthinking.com/p/its-time-to-throw-out-the-standard
Doesn't this theory require induced demand to increase demand at >1:1?
Oakland has 500,000 housing units, plus 10,000 people looking for housing.
Oakland builds 1 housing unit.
Oakland has 500,001 housing units.
What happens next:
1. YIMBY: Oakland has 9,999 people looking for housing, so housing prices fall.
2. Scott: Two people hear that Oakland is a larger city with better night life and try to move to Oakland. There are 10,001 people looking for housing. Housing prices rise.
It seems like Scott's smoothly parsimonious pricing function requires that any increase in housing supply/population generates a >1:1 increase in demand. So if someone moves to an empty patch of land, that should induce two people to want to move there. Otherwise, constructing a second house on that land would cause housing prices to stay flat or fall.
I think you're saying "each marginal unit of housing built increases marginal demand more than it does supply", if I'm reading it correctly. I think this is obviously wrong -- the creation of 10 units of housing does not also create with it 10 people wanting to live there. If we think of it as a ratio of number of units demand created per unit built, the ratio is clearly not 0, but it's also obvious to me (with no evidence whatsoever) that it's less than one. Close to 1, perhaps, but not 1. The ratio also clearly depends on how big the city already is -- it's closer to 1 in NYC, and closer to 0 in the middle of the great plains.
There are also lagging factors here -- if you magic'ed 10 million houses in SF tomorrow, it'll take many years for the population to actually move there (after everybody already there all spread out to their own house). So the game is to build faster than people can move, otherwise house prices will go up as you build because you're not building enough.
Edit: I think your insight of the mobile young'un is broadly correct -- NYC is currently too expensive, so they don't move there. So the demand curve for these cities is actually very flat -- you can build 10% more and houses will barely budge. Another way of saying that house prices are inelastic to demand in big cities.
There is a problem with using median local income in this analysis. Restricting housing construction will generally raise rents which will price out the poorest residents, all things being equal (of course there are considerations like preferences around amenities and floor space and so on). This is part of why SF median income went up so much. Therefore building housing will lower measured median income as poorer residents move in, even though the incumbent residents are as rich as they were before (again ignoring effects on wages and so on). So you might expect housing construction to lower rent (a real benefit) and median income (a fake statistical artifact), thus keeping rent/median income where it was.
A good concrete example would be to think of someone working at Wells Fargo in SF 15 years ago. Even though rent/median income might not be that much higher in SF (growth of tech / low income people pushed out), for the typical incumbent SF resident, rent/income has probably gone up a lot, because banking wages (in this example) are determined nationally. (And then WF responds by moving jobs to NC to keep things in equilibrium). So construction is just this process in reverse - rent/median income will still constant but the typical resident will be better off.
I think what this misses is that demand is both number of people and ability/willingness to pay. The thing that NY has but other places on the eastern seaboard don’t is the global headquarters of the finance world. By connecting into that, the ability to pay goes up. Adding housing to the middle of Idaho doesn’t create a financial center and therefore doesn’t increase demand.
Not that this probably affects the central thesis here much, butfor any discussion of 'demand for housing' it's worth bearing in mind that the cost of housing is to an uncertain but significant degree artifically bouyed by its emergence as an apparently 'evergreen' investment asset. People buy urban property because the value is likely to rise, a prophecy which has become self-fulfilling over time.
I think you’re wrong because you seem to be misunderstanding the causation and some other factors at play.
Housing is not expensive in New York because it’s dense, but because that’s where the money and work to be done are. (Which began with the harbor, the river, etc.) That affects not just housing prices, but salaries, migration patterns, opportunities, culture, politics and regulations, square footage, demographics, etc. And yes, all that feeds on itself to increase demand which puts upward pressure on prices. But only because demand rises faster than supply – which is caused by people seeking money and work, not housing.
It won’t work if you start with the supply side. You can’t build a new New York, or 10x Oakland’s economy, by simply building enough housing.
People don’t move to places with housing, but to places with money and work (even if they can’t get a hold of it, as slums around the world illustrate). Ideally places with work and money would be the same places that have housing, but as so many dying towns, bereft of corner-stone industry, testify to, it’s not. Having the housing doesn’t guarantee the work.
Building more houses where there is high demand for housing *does* contribute to an already hot local economy, but has a net downward effect on housing prices.
PS: Note that new housing is always new, i.e. high quality, built for people with money, often in rapidly gentrifying neighborhoods. Newly built housing is rarely itself affordable housing (to local politicians’ chagrin). But it will make other, older housing, in adjacent or comparable areas relatively more affordable. Even if all prices go up, the prices for the old housing won’t increase as much as they would if there were less housing.
That also means that to understand housing prices for a city, you have to include the cost of housing for everyone who works in the city, even if they commute and don’t live inside city limits. (If public transportation is good, it’s not necessarily a bad thing to live in the suburbs or a nearby town.) We shouldn’t expect the average housing prices in SF proper or Manhattan to reflect the average rent/mortgage paid by the people who work there.
PPS: The difference between New York and Not-New York affects all the numbers: mean, median, modal, top and bottom percentile. I don’t think there’s any good number you can use to compare the cost and value of living in New York, to the cost and value of living on a plain in North Dakota or anywhere like it.
You’d get a better picture if you compare housing prices in different parts of New York State or NY metro area, which can be seen as part of the same market if you squint. And you don’t have to travel very far from Manhattan, before the housing market looks very different.
For good, generalizable understanding, it would probably be even better to use cities and regions that don’t have multiple world-class universities and industry epicenters, that attract people from the entire planet (and so doesn’t have practically infinite housing demand, like NY and SF). Looking at more normal cities will probably give a better picture of how supply and demand works in the housing market.
I think you would actively have to fight really hard to build a city with lots of people but no companies, restaurants, art, et cetera. The natural process would be for all of these things to come together. People move in, they want places to eat, so restaurants open up, et cetera. Employers move to cities because there are lots of people looking for jobs there so they get a good selection of employees, etc.
I think if Podunk built 4.5 million houses it's possible nobody would move in, but I think most desirable cities that have housing shortages now are desirable enough to prime the pump and continue the virtuous residents -> amenities -> residents cycle.
How does your theory explain the depopulating towns and cities throughout the rust belt? Albany, say? There's lots of housing there - so why aren't housing prices super high? Why aren't they bustling metropolises?
Plus, it seems totally plausible that a large enough building effort somewhere could start that pump. If Podunk managed to build a million houses, then they'll be cheap, and people who can work remotely will want to move in, starting the cycle.
Lots of empty houses already exist in the rust belt. Why aren't people moving in and starting the cycle?
Concerns about crime and poor infrastructure, or competition from places that *are* growing extremely quickly, like Arizona/Boise/Austin? I'm mostly guessing here.
The example was intended as a proof of principle that plentiful housing supply need not create its own demand.
The problem is that you can’t run an economy on amenities alone. If everyone just cuts each others hair and makes each others food, the city gets negative cash flow. (It doesn’t help that the first people to move to cheaper housing are typically the poor, who don’t have money to prime the pump. But even if trust fund babies moved in, and kept the economy afloat for a while, it wouldn’t be sustainable.)
A city needs some sort of primary or secondary industry to create value or bring it in from the outside. Those don’t just appear organically because people move somewhere, and the presence of employees alone is not enough to attract such businesses.
It may help that remote workers and industries that rely on them continue to take over the economy, but it’s not enough. There will always be other selection pressures for the economy than just housing cost: business taxes, geography and time zones, politics, climate, infrastructure, energy costs, social security, crime rate, educational opportunities, culture, etc. This is why cities (Detroit, Cleveland, St. Louis, Baltimore) shrink despite lots of affordable housing and potential employees.
Do you think your thesis applies to Atlanta? Chicago? Dallas? Seattle?
NYC and SF are special cases because they occupy a uniquely privileged position in our culture as a result of which demand outstrips supply by an extraordinary amount. This makes the price elasticity of demand exceptionally low. But I don’t think it changes the sign.
I was going to say this is a minor technicality, but actually the more I think about it, the more it may be a significant issue. In the early 2010's, the little town of Williston in the plains of North Dakota was actually *the most expensive* housing market in the United States:
https://www.theverge.com/2014/2/19/5425040/williston-north-dakota-most-expensive-place-to-rent-in-us
https://www.apartmentguide.com/blog/williston-nd/
It turns out that oil companies were willing to pay a lot for workers, and anyone who could have worked in construction could get more in oil, so construction got really expensive, and supply was not able to rise to meet demand. They probably developed *some* amenities that weren't there before, but the rise in price was really supply and demand, rather than the agglomeration effect for amenities.
The rest of Japan doesn't need good housing policy - it has declining population. Japan as a whole has declining population, but there's still some people that haven't moved to Tokyo, and as they do, Tokyo is still slightly growing (I believe).
Obviously, the time scale matters here. Certainly, if you simply disallowed anything more than single family dwellings you could prevent a sleepy town from becoming a major metropolis. So, certainly in the long term, there can be such a thing as induced demand (though whether this holds in expectation is unclear...not all possible cities will become cities). And what you are doing there is basically making the city less of an attractive place to live than it would have otherwise (maybe not to the people who want to live in a sleepy village but to the average person).
But, in the near term, we can model the amenities/jobs in the city as relatively constant. Or, to put the point differently, no one is deciding where to move by looking at the total number of units in that metro area. They look at the amenities and the price.
Thus, the only plausible way you draw more people to the city by building units is if house prices go down. In other words, absent the price signal what induces demand?
Now, in the longer term, more people draw more buisnesses, more restaurants etc etc... So certainly in the longer term you can induce demand but that happens after more people move in so on a longer time scale.
So yes, it's plausible that in the long term more housing leads to higher prices but only via reducing the prices on the margin in the short term.
Edward Glaeser (Triumph of the City) here would point out the relevance of the Z-axis (building height) and regulations preserving building stock, and in particular low building stock. San Francisco doesn’t have a lot of tall buildings. It has a lot of historic low buildings. So too does Manhattan, which brought us the elevator but also brought some of the preservation orientation that you are probably seeing in the data. Both cities could be denser and taller than they are. Enrico Moretti at Berkeley (where I teach) has a good paper on this that I will find and post a link to.
Japan has experienced a demographic transition, with an older population and few children, leading to negative population growth. There are whole villages where housing is very cheap since their owners have aged and their children are uninterested in the rural lifestyle. It's interesting that the problem is always "not enough houses (or water, or food, or jobs)" as opposed to "too many people".
Noah Smith did a post addressing this issue (or something very like it) about a week ago. (https://www.noahpinion.blog/p/luxury-construction-causes-high-rents).
Bottom line: more construction doesn't cause higher prices, ever, except in the sense that demolishing a 20-unit "average" apartment building and replacing it with a 20-unit "premium" apartment building will cause rents for that building to go up. There will also be a small effect on the immediate neighborhood, causing rents in nearby buildings to increase slightly due to the neighborhood being seen as more "premium". But housing prices in nearby neighborhoods will go down, because there is more supply of housing in the city.
You're wrong t think of housing prices as being driven primarily by housing density. Local desirability is far more important. In my part of Connecticut, house prices in low-density Avon are much higher than high-density Hartford or New Haven, because people with lots of money to spend on housing want to move to "desirable" communities - and one of the prime factors in making a community desirable is the quality of public schools. And public school "quality" (as measured by things like graduation rates, SAT scores, absenteeism, etc.) is influenced much more by the students attending the school than by any action the school teachers or administrators can take. So, house prices are high in rich towns because rich people want to live in the rich towns, so their children will associate with the children of other rich people, and absorb bourgeois expectations.
Re-consider your Oakland thought experiment: If Oakland were to build 10 times as much housing, why exactly would people with high housing budgets want to move in? They'd be moving into a hard-luck seaport city with poor schools and high crime. It wouldn't be for the awesome urban amenities, because Oakland doesn't have them. And no one will build them until the yuppies (or whoever has the money to demand the amenities) move in. Which won't happen because there's nothing to draw them in.
Extend your thought experiment to that wide-open plain in North Dakota: If you build a dense city with 3 million housing units to support a population of 5 million people, who exactly do you think will move in? Aside from the oil field workers. Would San Francisco tech workers move there as a more affordable alternative to San Francisco? If they want San Francisco's amenities, they won't move until your instant North Dakota city has the amenities. And who will build the bars and coffee houses the tech workers want if there are no tech workers for customers?
I think people are getting too caught up on the extreme thought experiment. Obviously you don't build five million new housing units in the middle of nowhere; what you want to do is to build marginal housing units in areas where there's marginal demand (and not already too many people).
So I dunno, maybe you build twenty thousand new housing units in Eugene OR or Boise ID, places that are already kinda nice and could be made more attractive by adding more people. Ideally you'd make everybody happy by ensuring that the increased demand does in fact raise house prices (so the current residents will be happy) but not nearly enough to put them at San Francisco levels (so the people choosing Eugene over SF will be happy too).
You can go further. What you really want to do is to attract young, mobile, middle-class white people. Once Eugene gets a sufficient influx of these people, it will quickly develop a reputation as a cool place to move after college so that it will attract people who'd otherwise be on the margin of moving to San Francisco. You need to build and subsidise the sorts of things that this sort of person would enjoy; maybe you build a government-subsidised bar district where bar owners can pay reduced rent and people can get cheap drinks... given that this is an investment in growing the tax base of town significantly, you've got a lot of money to play with.
(I have never been to Eugene OR, it just looks like a nice place on the map.)
I think you have to separate out *housing* density from job and amenity density. The places you're describing have a lot of both. But they're not the same thing. Think even more micro-level and this is obvious. The most expensive real estate in any given area tends to be in a central business district with lots of jobs and amenities but not an especially large residential population.
If you increase housing without adding more jobs or more bars or more museums, then you're not inducing any more housing demand. You're just creating supply and prices will go down. There's a tendency of course for housing to induce amenities which induce housing demand and so on. But if you just build a bunch more housing (especially in an area that's already pretty saturated and doesn't have space for new amenity development), you're not setting up that circular dynamic. A lot of the big ticket amenities are fixed in the medium-run anyway. You can double the size of NYC, and they're still not going to build a second Met or bring in two more baseball teams.
There are some weird, off-diagonal places out there to confirm this. City of Industry, California has a population of 264 and a density of 17/square mile, which sounds rural. But it also has 67,000 jobs, and it's quite expensive there. On the other hand, the densest cities in the US technically speaking are several New Jersey suburbs of NYC, all of which are much cheaper than the city itself because they don't have much to draw people in. The slums of major cities in the developing world are some of the most densely populated places you'll find, but they've got amenities and they're very cheap (consider that the most densely large populated cities in the world are Manila, Dhaka, and Kathmandu).
If Oakland builds only so many new houses that all the related factors of attractiveness would be perceived the same (diversity and density of jobs , higher quantity and quality of cultural/ social/ medical infrastructure etc.) I believe *this one* specific activity would lead prices to go down or at least to stagnate. The problem might be, that if Oakland builds only so many houses & the level of attractiveness stays exactly the same, the demand-effect of people wanting to move to Oakland is already surpassing the effect of the additional houses. So in effect prices go up. However, they do not go up as much as they would have without the additional homes. So Oakland, even if they were the only ones to build new homes, in this scenario is better off than if they didn't. (Except if they are perceived to be the only place around with a great YIMBY culture and sensible politicians, which might also increase attractiveness. But then it's *not* purely the number of homes again.)
I believe there are thresholds, and the attractiveness of our exemplary place O. rises only if there are so many more people, that this attracts, say, a new university, two major industries, a new high quality theatre ... or at least lots of new restaurants and cafes and local arts culture (I don't know Oakland, so using examples from my area). In other words, if it is perceived to be a bigger *and* therefore more high-quality / more opportunities / hipper/ ... place.
I would be interested to see good data, how density correlates with housing prices in my country. And how city size correlates with the latter. Or what about European cities ... okay, that's maybe a bit unfair.
And yes, I think building new homes makes sense, but I think housing prices need to be tackled by other means.
If you're specifically interested in: lowering housing prices for 'already inhabitants' of the place, or to enable children who grew up there to find affordable housing, or if you were specifically interested in providing more affordable housing for persons with low income, or to allow especially 'newcomers' to the city to find affordable housing: for all of those a combination of building new housing with specific regulation (for those new homes only) according to your specific goals could work well. At least in my country, where you're obliged to register with the local administration in all your living places within two weeks upon arrival.
>Or doesn’t it (as Yglesias argues) allow an economic perpetual motion machine, where you just keep building houses and generate infinity money as the price of each keeps going up?
Apropos of nothing, the canonical Urban Land Rent model in Econ, Alonso-Muth-Mills, assumes all workers labor at the platonic center of the city, an infinitely tall skyscraper which uses no land. I often think of this building and its employees.
Here's why you're wrong in a single sentence: Demand causes high prices, not new units.
Prices are high in SF and NYC because those are desirable places to live for a huge number of people. People all over the country and the world would live there if they could, and prices reflect that. The fact that the densest cities are the most expensive is true. But the high prices are not caused by density - rather, the density and the high prices are both a consequence of crushingly high demand.
Sorry, I don't understand.
" the density and the high prices are both a consequence of crushingly high demand."
As I tried to explain in the post, it seems like the "crushingly high demand" is itself a consequence of density. There is crushingly high demand for real estate on Manhattan, but not real estate on some otherwise-identical East Coast small island, because Manhattan is dense and the other island isn't.
As a thought experiment, suppose someone built a Manhattan-sized city on Chebeague Island (a random island in Maine, currently only 300 people, land value currently in the 5 digits per acre). Would land values most likely go up or down? If you agree they would go up, what is causing the increase, if not the increased density?
One major underlying variable could be attractiveness of the place. Attractiveness, which can stem from different elements: the status of the city as (local) capital, the natural environment in the surroundings, the city's image as being hip or you name it, the amount of available jobs and career prospects, the quality of cultural infrastructure (theatre or whatever you are into), the perceived likelihood to find like-minded people, etc.
The more attractive, the more people want to live there, the more dense/bigger it becomes and also the prices rise at the same time.
Some of those elements that drive 'attractiveness' are *linked* to density, but they *are not* density. I believe desity is an unperfect proxy for some of those (number of high quality theaters) - and unrelated to others (beauty of the natural surroundings).
> As a thought experiment, suppose someone built a Manhattan-sized city on Chebeague Island (a random island in Maine, currently only 300 people, land value currently in the 5 digits per acre). Would land values most likely go up or down? If you agree they would go up, what is causing the increase, if not the increased density?
A city is not merely a collection of buildings. Who is living in the new housing? Who is working in the new offices? Who is shopping in the new stores? These are all questions of demand, and the price of the land values is going to heavily depend on whether we conjured new people ready to hit the ground running.
It seems likely that building a large amount of new integrated infrastructure will increase property values, but this isn't guaranteed - sometimes constructed stuff has negative value, and we can call this "urban blight". It would be weird for an entire city to be blight, but then again it would also be weird for a city to be constructed with no pre-existing demand.
And I have to call you out for a bit of sleight of hand here, Scott - Yglesias is concerned with housing prices and that's what you engage with for the most part of the main post, but here you mention *land* values specifically. Putting on the Georgism hat, that's an enormously important distinction to be equivocating. In fact, the land values won't change at all - by tautologically useless definition!
I'm fine using either housing prices or land prices - the difference between Manhattan and a barely-inhabited island overwhelms any distinction there.
Fully engaging with the hypothetical then:
If you waved a magic wand and conjured a few million new homes on Chebeague, I have no idea what would happen to the housing price. You'd probably obliterate any ability to enforce property law, so they'd go down in a de-facto sense if nothing else. It seems quite likely that by the time the dust settled you'd have an empty decaying cityscape, so definitely lower than present.
If you conjured 300 homes on Chebeague, I bet prices would definitely go down in the short and medium term. Probably the long term too by my guess, but harder to say.
If you conjured a few million new homes with new residents and industry fully running, then I expect prices to skyrocket. But again, that's an effect of demand rather than supply. I do not take it as a given that demand will automatically and elastically materialize in the presence of supply.
One could also describe a feedback loop that involves density and high-demand somewhere: there is a high demand for a certain place, more people moving to a place leads to higher density, this leads to more industry being attracted and more needs for culture, which leads to more jobs & more new theatres set up, which leads to the place being more attractive, ...
Why is it important to distinguish between 'density' 'high demand' and 'attractiveness of the place'? Because it impacts the hypothesis that more housing leads to more density leads to higher prices. Whenever more density doesn't lead to 'higher *perceived* level of attrativeness', then in this model, it also shouldn't increase prices.
There's a feedback loop, but what matters here is the elasticity, which is less than one. We can measure this empirically.
New housing lowers prices via the mechanism of adding supply, which is basic economics and how we expect markets to work.
New housing could raise prices if it also made the city a more desirable place to live and shifted people's preferences, such that there was more demand to live there after the new housing is built.
If you think it's unclear which of these effects would dominate, luckily we have empirical data that over and over and over shows adding housing supply does indeed lower prices on a local level. This is a fairly well established result that replicates well.
You currently seem like you're at the stage of understanding the thought experiments pretty well, but not understanding them on a DEEP level. For example with your hypothetical, this has actually happened before! Kind of. China built a bunch of 'ghost cities' basically out of nothing, and while there was an initial craze of speculation and tons of investment and building... nobody went to live in those cities most of the time. And now they're deeply distressed assets worth basically nothing. When nobody actually lives in the ghost city, it doesn't matter that they have super dense housing. There's no demand. (the only reason they might be worth something is that the CCP very, very much does not want to pop their huge housing bubble and is likely to bail out some of the parties involved)
edit: I'm actually thinking about drawing out the weighted DAG graphs here to make the conceptual stuff easier, but it would be pretty long. I'd love to do this as a guest post.
If Oakland were to build many more houses, this wouldn't be a "ghost city", it would be responding to natural existing demand, in pretty much the same way New York City and other great cities were created. I still don't understand why the result would be different.
The ghost city comment was purely to your point about 'what if we built a bunch of skyscrapers on a random island in Maine'. China did *basically* that, and it went pretty badly for them.
For a case like Oakland, you'd again have to turn to the actual evidence. You can lay out theoretical models for prices moving in either direction, so it's up to empirics to tell us what happens. And empirics tell us that new construction lowers rent, and that's a very consistent finding.
What is the natural demand in Oakland today? What would it be the day after you built 5 million houses? There isn't a natural existing demand for 5 million houses in Oakland today, nor would there be the day after you built them. Induced demand might get you there eventually, but it wouldn't be overnight.
The fact that your model of density = demand cant explain the time delay indicates that you are missing important variables from your analysis.
At the margin, an additional unit of housing increases in “density amenity value” and increases the supply of housing. When the elasticity of demand is larger than the elasticity of “density amenity value”, an increase in housing units leads to lower prices. Empirically this has been found consistently
"As I tried to explain in the post, it seems like the "crushingly high demand" is itself a consequence of density."
Perhaps a downstream consequence, but there are other variables between them that explain the time response. People do not seek out high density any more than they seek out the crushingly high rents. They seek out Jobs.
If there were no jobs on Chebeaque, your island would sit vacant and not increase in land value, or perhaps go down.
Conversely, put a million well paid job listings for Chebeaque, and the people, density, and land value would follow.
I agree there is a relation between density and value, but it is not a two variable feedback.
You are identifying an effect that probably exists: if you make a city denser via building more housing units and having people move there, you will increase demand because the city becomes more attractive due to agglomeration effects. This theoretically raises the price of housing.
But there is an opposing force at play—the increase in supply. If the supply increase outpaces the induced demand, competition is introduced into the housing market and theoretically the price of housing goes down. The question is whether supply effects outstrip the demand effects or the other way around.
[This paragraph has been edited, apologies for being wrong and confusing before.] A simplistic thought experiment. If you build 100 houses and that induces the demand of 150 people—you have moved the demand curve more than you have move the supply curve and prices go up. If you build 100 houses and only 50 move in, there are fifty vacant units exerting competitive forces on the price of housing, making it go down. Both are possible in a world where density is observed to be positively correlated with prices across cities, but there are factors other than density affecting demand. The question is which one happens in ours. The answer can be different for different cities at different densities.
On other determinants of demand: demand for housing does not just depend on the presence of housing and/or people. Think to when the world ecomony was primarily agricultural. I am oversimplifying here too, but you had to live near a water source to make a living. You could magically instantiate a million houses in an arid desert but no one would move there if they could not survive. Why did people build settlements along rivers instead of a random distrubution across the Earth’s surface? Why didn’t we just all stay in that one place in Africa if the density of everywhere else was 0? The basis of your argument rests on density being the unique determinant of demand for housing and the rest of the variation being random noise, but that is a difficult claim to defend. And as long as there is something other than supply of houses that affects desire to live somewhere, you cannot draw conclusions from simply looking at the correlation between supply and prices across disparate locations. You must do something else to distinguish between the 150 world and 50 world, because those other determinants of demand are probably affecting city size and prices.
Of course present day technologies make living near a river less relevant to whether you can find a job. But you still see the other determinants of housing demand at play in dying coal towns. I’m skeptical you could really make a new Manhattan* in the middle of nowhere simply by virtue of building a bunch of houses. How will you get people to move there? What opportunities will you offer them? How will they make money and live?
[* EDIT: I realize the question is not about making a new Manhattan but rising land value(? I will suppose you just meant housing prices here instead). But what sort of conclusions are you drawing about the effect of density if housing prices do rise but not to the level of Manhattan? If that happens, why the difference in prices between the two locations if the density is the same?]
Also, housing density is not population density. I know I am being a little loose with the words, but it’s good to keep in mind. As long as it’s not true that a singular person moves in every time you build a singular housing unit, the statement holds. The theoretical question is whether half a person moves in or 1.5 of one for each unit built.
I generally agree with your hypothesis. More housing is more supply which should reduce prices. But a simplistic Georgist analysis would seem say that more housing increases the value of all the other property around it, which includes other housing. It doesn't seem impossible that in certain circumstances, the 2nd effect could outweigh the 1st.
I'm curious if any Georgists would like to weigh in on this one?
You vastly overestimate the percentage of Americans that want to live in a dense city. Some Americans do, but most don’t, so density is at best a wash and probably reduces demand. Thus, the causation flows almost entirely in the other direction, with high demand causing high prices which cause density.
When considering the price of a thing, demand is an important variable that can not be reduced to supply alone.
There are volumes of ink that can and have been spilled about the details, but you're not getting this to reduce to a function of one variable.
The argument is that, on the margin, increasing supply will reduce price of a particular good. An observation that the price of that good is currently highest where the total supply is highest doesn't really engage with the argument. Second-order effects are table stakes.
What about the following theory, which is consistent with both your arguments and the studies: if you build houses, prices will temporarily decrease, but then they will increase later after some amount of time (e.g. 20 years).
The delay in the price increase comes from the long time it takes for density effects to materialize: people don't just want to move to a dense city, they want to move to a city with jobs. However, it takes employers time to set up in a new city, and therefore, the increase in employment opportunities that follows from density might take time.
(As an aside, if people want to move to dense cities due to jobs and if those jobs materialize disproportionally in dense cities, then it is a bit of an economic perpetual motion machine; the efficiency gains from density must be *huge* to justify such a story.)
I found this a bit upside down and tried to put down some notes. Not ready yet, but as some points seem to recur in discussion ....
First, what if what if density doesn't drive prices, and prices do not drive density? What if instead, there is a third underlying variable that affects both. That variable might be attractiveness. Okay, the text mentions this.
Second, but what concretely is making a place or city attractive? Elements might be: the status of the city as (local) capital, the natural environment in the surroundings, the city's image as being hip or you name it, the amount of available jobs and career prospects, the quality of cultural infrastructure (theatre or whatever you are into), the perceived likelihood to find like-minded people, etc.
Third, what then is the relationship between attractiveness and density? I believe beyond a certain threshold density as such is not attractive to (most) people. I believe desity is an unperfect proxy for some of those factors of attractiveness (availability of high quality theaters) - and unrelated to others (beauty of the natural surroundings).
Forth, instead of calling it a proxy, one could also describe a feedback loop that involves density somewhere: more people moving to a place leads to higher density, this leads to more industry being attracted and more needs for culture, which leads to more jobs & more new theatres set up, which leads to the place being more attractive, ...
Fifth: why is this important: Because it impacts the hypothesis that more housing leads to more density leads to higher prices. Whenever more density doesn't lead to 'higher *perceived* level of attrativeness', then in this model, it also shouldn't increase prices.
Sixth: But what about the feedback loop? Well, it is probably happening in many areas, but there need to be other factors involved, and it doesn't need to happen always. Among others see next:
Seventh: There are probably also thresholds. Not every 1% of new housing leads to more attractiveness factors or the city being perceived as 'bigger'.
Eigth: Isn't city size the factor and not density? I suppose only few people really want to live in a dense place as such. Maybe city size is a better predictor for those attractiveness factors? Would be interested to see if prices are correlated better or worse.
Ninth: Correlation is not causation. That's clear to everybody here I suppose, but I had been missing a more explicit follow-through on this in the text.
Tenth: Why *perceived* level of attractiveness? It's all in the eye of the beholder.
TL;DR More housing lowers rents immediately. More density slowly increases rents.
I think it's important to be a bit more careful about the timing/delay of impact when thinking about the different steps in the causal diagram here.
Here's my mental model:
A) More newly built housing -> People in already in city consider moving to that newly built housing
B) Rent prices come down (on quality adjusted basis) -> People in other cities consider moving here
C) More people living in the city -> demand for the city goes up, since some people like living in denser places with more people and more businesses
D) Many high income people -> new businesses open that cater to high income preferences
E) Many high skill people living in a place -> more high paying employers set up offices in city
F) Many high paying jobs -> people want to live in the city (housing demand goes up)
In terms of how quickly these channels operate. I think A>B>C>D>E>F
Channel A is the fastest to act. So new housing very immediately affects the set of options of current residents and starts to lower rental prices (relative to what they would have been under the status quo).
This is partially offset by B, with people seeing the lower prices and considering moving to the city.
Channel B can at most partially offset the impact of A (since by definition B is people who are moving *because* the rental prices are lower). Considering moving to a new city is a slower process than moving within a city and as a result, this channel also generally reacts more slowly than A.
Channels C + D are related to the impact of the changing population on the desirability of the city (either directly through the influence of peers or via new businesses that open).
Both of these are even slower processes. It takes time for the population to expand in response to the new housing and for people inside/outside of the city to notice the changing demographics. Setting up a new business is also a bigger investment that takes more time compared to a family moving between apartments. Also notice that these channels only make sense if the population is growing, but if B is growth caused by lower prices, then it's still hard to see how this could lead to a net increase in rental prices (relative to status quo).
Channel E (employers choosing where to locate offices) is much much slower. Many cities wish they could convince more high paying employers to move to their city, but it takes a lot to overcome the inertia. Also high rents for housing and office space directly push against the desirability of a city to employers, since those add to the cost of moving to the city.
Channel F (people moving to areas with good jobs) doesn't happen until E happens, so it is yet more delay in the response.
In my view, the new housing lowers prices* in less than a year after the new housing. All of the other factors kick in much more slowly over a period of years, and at most partially offset the decrease in rents.
* on a quality adjusted basis, relative to the status quo of not building.
Channel D
How do you explain shrinking cities? E.g. Baltimore, Detroit etc.
Not understanding why you are only talking about reverse causality as a possible challenge to your interpretation. What about omitted variable bias: there is some other underlying factor that is associated with density, which is in fact driving higher housing prices. I would tend to think that OMB is a huge problem here, as there are many very dense slums in the world that are not in fact not expensive at all, most famously Kowloon City.
I have a few guesses as to the origin of OMB, most importantly, jobs. There are certain locations that are just much better in terms of jobs. If you want a job in the media or finance, you should probably move to New York. If you want a job in government, you're going to have to move to DC. If you want a job in the movie business, LA is really your only choice.
If jobs are in fact driving much of the increase in housing demand, building extra housing is not going to raise housing prices. Moreover, if these are relatively high paying jobs, then people are still going to come even if you don't build anything, because they'll be able to afford more than the average resident in the area. And this is exactly what has happened in the bay area: the working and middle class has steadily been pushed out by tech professionals.
This seems like a far more natural interpretation than people move to an area simply because there are a ton of other people already in that location. New York's density is a strike against it in my book: too noisy, too crowded, too stinky.
My guess is that what you're really thinking about is agglomeration effects, but returns to agglomeration come from industrial agglomeration, not from residential agglomeration. It's a critical mass of businesses in a given location that makes it into a jobs hub and attracts migrants.
I think this this analysis suffers from three problems:
(1) Reducing a complex multiple variable and step interaction to two factors (housing density & cost). There are a large number of motivation factors which you touch on but then discard from your model to use density as a proxy(Jobs and income being the most significant).
(2) confusing a correlative measure (density) for a cause. Density correlates with cost because they are both result from the same cause (Jobs and income). If stripped of its jobs, Manhattan would have low housing cost, despite the high housing density. Conversely, If you built 5 million units in Oakland or the North Dakota, the cost plummet, at least initially. This transient phenomenon only makes sense if you include the omitted variables.
(3) Explaining examples of urban population decline. There are many cities which have experienced population decline due to loss of industry. If population density were the primary motivational driver, this would not be the case.
At best, it can be said that people follow jobs, Jobs & employers follow population density, and higher housing density and housing cost both *result* from competition for increasingly concentrated locations.
If jobs opportunities are held equal, people will flow from high cost to low, not the other way around.
I am skeptical of the two charts you showed at the top because: (1) They use survey data when there's better data available. (2) The category "Urban Area Corresponding to Major Metro" seems like it allows the authors some choice in what to include or not include. The second one also seems a bit arbitrary - including San Diego & Cleveland, but not Minneapolis. (3) Neither of these includes "Podunk" or "Empty Space", so connecting them to the hand-drawn chart is extrapolation.
Is it better to use housing price or housing price divided by income as the vertical axis? I could see arguments in both directions. Both housing price and income probably change as more housing is built.
I am also confused by the relative positions of Miami and San Francisco in the two charts. Was Miami significantly more expensive than San Francisco in 2015 and significantly less expensive in 2019? If no, then the error bars on the data are large enough for me to not trust the trendline. If yes, then maybe someone should figure out how to do what Miami did.
I'm considering remaking these graphs using Federal Reserve Economic Data: https://fred.stlouisfed.org/release/tables?eid=1138280&rid=462 . Let me know if you think this would be valuable.
Some initial observations from looking for the highest things on the list: (1) The most expensive core-based statistical area is Vineyard Haven, MA, a little island off the east coast. Manhattan might be even more expensive - it's not listed separately - but Martha's Vineyard is more than twice as expensive as metro New York City. (2) San Jose, San Francisco, Los Angeles, and San Diego are all in the top 25, but so are Santa Maria, Santa Cruz, Napa, Salinas, San Luis Obispo, and Santa Rosa. It seems like California (or at least coastal CA) is unusually expensive, even for small cities. (3) Hawaii and Rocky Mountain ski towns (Jackson, WY, Breckenridge, CO, etc) are also unusually expensive.
My guess is that there is still somewhat of a positive trend between housing price and city size (or density), but that it is noisier than these graphs show, especially for smaller cities. It should be possible for a city which is currently surprisingly expensive relative to its size to shift down and to the right by building new housing. For example, on the top graph, if San Diego became like Las Vegas.
I agree that Tokyo should not be placed on these graphs. But it would be interesting to see where Tokyo lies on a graph with other Japanese cities. In a similar graph for Japan, is the slope positive or negative?
I can't follow your logic. Primarily cities are composed of a few moving parts. Primarily there is a source of a harbor or natural resource that fuels primary demand. Think of the ports in Chicago (and the stockyards during the turn of the century), or other major port cities. Indianapolis' main driver of economic growth is its interconnection of highways for example. These are elements of any city that can't be changed or relocated. The Chicago mercantile exchange is in Chicago because Chicago outbid St. Louis for stockyards (fascinatingly because they put in a sewer system) and because they have access to a river and ports. Surprisingly, not many people know that Cleveland, Ohio used to be much bigger than Chicago. This maps onto countries as well. Countries that are farther away from ports tend to be poorer, while countries that have large amounts of natural resources and are historically non-European tend to be resource cursed to exploitation.
If it were cheaper and more efficient (ie made more money) to have the Chicago Mercantile Exchange in Pidgeonforge TN it would be in Pidgeonforge TN. But it isn't.
So, cities that have a primary resource that can't be relocated tend to have a primary driver of economic growth that is stable through economic fluctuations. Software development can done anywhere, and often is, but the port structure of a Seattle or San Francisco won't change.
As to the cost driver of housing primarily? House prices in the long term appreciate in those places where costs are expected to go up. And prices are more likely to go up in those cities, over a ten, twenty or thirty year term, that are near resources that are structurally economically self sufficient. Were there some way in which Topeka Kansas had a structural comparative advantage over a port city on the coast then people would all move to Topeka Kansas and crowd around that source of economic development.
The farther you drive away from a major port the less expensive housing is, typically. Meanwhile ports tend to be geographically landlocked or have limiting geography, such as the LA basin, New York, or San Francisco.
Port cities are comparatively expensive because the ports are continual sustainable engines of economic growth that don't migrate with people with the fluctuations of the economy. That's it. There's not a whole lot of mystery here. This prisoner's dilemma unstable state Nash equilibrium notch is largely incorrect.
The NIMBY problem makes housing prices worse in those areas where people take over zoning commissions, but in cities that have a port housing in the long term will remain expensive. In cities without a port NIMBYism is much like price controls - all it will do is disincentivize housing even further and lead to urban blight. The less affect a port (and it's subsequent markets) has on sustainable long term effect on urban growth the worse NIMBYism will be for the economy because during a downturn prices will remain high. This is why NIMBYism in San Francisco is comparatively worse than say, NIMBYism in New York or Chicago as its economy is more heavily dependent on the tech sector which is highly cyclical. High prices during a downturn lead to people moving away, lead to empty store fronts and then urban blight which becomes self reinforcing.
You're overthinking it.
EDIT - On further review, I can't tell if you're joking or not. You could make everyone richer by burning money and causing a small amount of deflation, but I wouldn't recommend it. This looks like idiot bait.
I think what this argument is trying to show is, if Oakland got 10 times bigger, *with the same restrictions on housing development*, then the price of housing would go up. Which I think is correct, but it's controlling for the wrong thing, because loosening restrictions on housing development is precisely the mechanism that YIMBYs want to get more housing from. (One question about the scenario in the post is why people would build more housing if it's not easier to do so.)
What YIMBYs are saying is that reducing restrictions on housing leads to more housing and lower prices. This is clear from thinking about the supply and demand curves. In the absence of artificial restrictions on housing development, we would have a nice supply curve that goes from bottom left to top right. With restrictions, developers can't build as much as they would like, and basically the curve hits a wall at some amount of housing units. So the equilibrium with restrictions occurs at a lower quantity and higher price than the equilibrium without the restrictions.
The 1st order effect of loosening the restrictions is to move the situation closer to the equilibrium without the restrictions. If you read "The Economic Implications of Housing Supply" by Glaeser and Gyurko (2018), you see that the housing cost doesn't go too far above the minimum cost to build, if your restrictions aren't too bad and the housing market can adjust to demand (their example is Atlanta). For the Bay Area, the price is more than double the minimum production cost (these are both shown in their Figure 2). So there's a lot of room for prices to go down in places like the Bay Area.
What you're pointing out here is that there's a 2nd order effect, where having a bigger and denser city makes the demand go up. This is true, but I suspect that the effect is just smaller. "Growth, innovation, scaling, and the pace of life in cities" by Bettencourt et al. (2007) shows that if you double the size of your city, a lot of metrics around socioeconomic efficiency of the city goes up by ~15%. So things like your GDP per capita (and crime rates) grow by ~15% if you double the population, which explains why people want to move to big cities, and would make it more expensive to build housing (higher labor cost) and make people willing to pay more for housing, but it's not big enough to counteract the 1st order effect.
There's probably better studies to support what I'm saying, but these are just things I can think of off the top of my head.
Reading the Glaeser paper again, looks like they were actually arguing that the supply curve for housing looks very different from a diagonal line (it's very instructive for showing why Detroit, Atlanta, and San Francisco have different kinds of housing markets). But I think my argument in the comment still holds.
You're working with a theory that there is a pool of people who want to live in big cities, but individual big cities are to some extent substitutes for each other. This pool can be overwhelmed with sufficient supply, but if it is not overwhelmed then big cities will be expensive *because* they are big - there is unsatisfied demand for dense living.
I disagree. I think people want jobs, and they move to big cities because this is where the jobs are.
"But that's just adding another step! The jobs are in the big cities because that's where the other people are!"
To an extent this is true. You can set up a sandwich shop in Sydney and sell a lot more sandwiches than if you set up a sandwich shop in the Great Sandy Desert.
BUT it isn't enough! Each additional person creates LESS THAN one extra market-rate job. If this was not the case and density fed on itself in an ever-increasing way, we would see cities grow ever bigger and bigger, with the goliaths outcompeting the giants. Why do some people live in SF rather than New York City? It's not because SF is a discounted option relative to the more populous and therefore more desirable NYC.
As a further counterpoint, consider declining cities like Detroit. If density feeds on itself, and it is the mere fact of more people creating more demand, then these cities should have not depopulated. Detroit was bigger than many other cities that have not shrunk so it's not simply a scaled-up example of the broader urban immigration phenomenon.
What you're missing is that a city needs an underlying economic engine. This is very obvious in small towns where there is often one dominant local industry, and the whole town's fortunes rise and fall with it. Not everyone in Nangwarry works in the forestry industry, but it's the health of the forestry industry that decides what housing demand is like and how many sandwiches you can sell there.
This continues to be true even for mega cities like NYC or Tokyo. Yes, they have so many people that there are lots of jobs supporting all the other people there, doing things like cleaning, car repairs, etc. Yes, there are so many people that they are good places to set up industries that could be based anywhere but want a network of similarly-skilled people in close vicinity. But there is a fundamental driver of why these places are big - they have a geographically fixed multiplier of economic value that is extremely powerful. That engine is a port.
There is a reason that all of the world's biggest cities are located on coastlines, and it's the reason that Adam Smith identified in The Wealth of Nations. Sea trade is extremely efficient. If you have a port, you can cheaply trade with every other city that has a port. This in turn allows you to unlock greater division of labour and greater efficiency than would otherwise be possible.
That's not the whole story of course - you need to have things to trade through the port. But it's a key reason why everyone in SF and NY doesn't just move to somewhere like Austin where they're cool with building stuff and they can have a super-dense mega city.
I think D.'s and Robert Donnelly's comments together explain it well.
You're missing an intuitive understanding of causality that maps back to a logical framework. I recommend Judea Pearl's Structural Causal Models, which he explains simply in his Book of Why. Note that the Book of Why is imprecise in a few parts, but it's a good enough start. The "correct" explanation is given in "The Do-Calculus Revisited," also by Judea Pearl, though it's a harder read.
I want to address 2 points, the long term correlations vs short term studies and the potential gains for a defector city in scotts hypothetical.
For long term correlations, recall that its possible to be a failed city. Baltimore was the 2nd largest US city in 1840, now its 30, and not just because a bunch of western cities overtook it, many eastern ones did to. In regards to induced demand, if a city is a long term success, it will have many houses and high prices ie NYC. Within some margin of acceptable housing policy it could be expensive relative to its success or cheap, but still bound to that curve. The studies show how a city can overperfom its position on the curve. But it would be foolish to think you could easily control a citys overall success. A nimby policy on the premise of capping housing prices by capping city success is likely to become baltimore cheap, not upper west side 30
years ago cheap.
Success is relative. The defecting city would see short term increase in housing prices as it under perfoms its spot on the curve. Long term will be driven by success but intentionally restrictive policy is likely to cause the bad kind of price drop.
Suburbs dynamic is different because its success is largely a function of the nearby city thus exogenous. It can have no housing growth but still be very successful and therefore expensive.
I see statewide control a la CA as not primarily resolving a prisoners dilemna between big cities, but forcing suburbs to upzone along with the successful city they are attached to.
Finally, success is also good. The YIMBY appeal isnt just globally lower prices, you get 1) more successful city 2) overperform your spot on the curve. Win win.
how do we account for slums? clearly it's possible to build housing at very low cost in very high density locations, in the absence of any regulations.
If you believe that, at the margin, building a thousand new units of housing in Oakland would cause housing prices to rise because of the induced demand, then you must logically believe that at the margin, tearing down a thousand units of housing would cause housing prices to *decrease*. Do you?
I'll even throw in the explanation of why it "should": some of the people living in the houses that were just torn down will say "screw this, I'm moving back to Stockton", and some of the people on the outside planning to move to Oakland will say "meh, the city doesn't seem so hip and cool now that they tore down those apartments, so now I'm rethinking this move". Those are things that will absolutely happen. They are the mirror image of the things that will happen if new housing is built, that lead you to believe that building new housing locally increases rents.
I'm pretty sure you recognize that this is false - there will be *some* people who abandon their plans to live in Oakland if you tear down a thousand apartments, but there pretty obviously won't be so many of them as to drive down rents at the margin. And at the margin, the difference between -1000 units and 0 units, is going to be very similar to the difference between 0 units and +1000 units.
Alternately, I look forward to your argument that Oakland should help its fiscally stressed renters and can't-quite-afford-an-apartment homeless by tearing down homes.
We do get occasional natural experiments in what happens when you destroy a bunch of housing in a city. The Christchurch earthquake of 2011 destroyed about 10,000 houses in this city of 400,000 people, but only killed 185 people.
Did this earthquake cause a massive price spike as everybody rushed to cram into the remaining dwellings? Or did it cause a price reduction as people found the now-smaller city less amenable?
The answer is: surprisingly hard to find! Looks like it was kinda flat in the immediate aftermath as people decided to leave the city. Then by 2014 prices were increasing, but this was largely due to a spike in demand from increased building activity as tradesmen from across NZ moved to the city to get jobs rebuilding. (There's other factors too, of course, living next door to ruins is less amenable than living next door to empty land.)
I think I do believe this. Certainly if you tore down all the houses, turning it into an empty field, housing prices would decrease to the usual empty-field-in-California level. I'm not sure why it wouldn't be monotonic, so I expect this would decrease prices.
I think the main factor pushing against this would be inertia - people who already like living in Oakland would be reluctant to move. That doesn't apply in the building case.
I don't believe this. I think even if you entirely wiped San Francisco off the face of the map, it would get rebuilt, because the economic forces that caused it to become a city in the first place still apply.
Hiroshima got nuked, and then hit with a typhoon shortly after. It got rebuilt.
Rikuzentakata was mostly destroyed by the 2011 tsunami. It got rebuilt.
Cities like Mariupol and Bakhmut have been all but completely depopulated of civilians during extended fighting in the current Ukraine war. I fully expect them to be repopulated and rebuilt.
> I think even if you entirely wiped San Francisco off the face of the map, it would get rebuilt, because the economic forces that caused it to become a city in the first place still apply.
San Francisco used to be a major port, but it gave that up for the sake of its now-dead longshoremen's union.
The reason San Francisco appreciated in the recent past was that people wanted to move to Palo Alto but found they'd been priced out.
It's on terrible terrain; the reason you'd want a city there is really just to take advantage of the natural harbor. But since that's not currently in use, I don't see a lot of impetus for rebuilding. The other major natural advantage is beaches, for people who like living near beaches.
It shouldn't be monotonic *if* the amount of houses is not the variable driving the price, but linked to the variables driving the price. Linked in ways that are more complicated than 1 : 1. In what feels like 50 comments, this is exactly what is being argued.
Why wouldn’t the monotonicity apply in the other direction? Certainly if we built 1 billion housing units in Oakland prices would fall...
Maybe there's a Laffer Curve for housing development?
There was a test of this recently when a bunch of homes burned down in Northern California. Prices went up as supply went down.
>If you believe that, at the margin, building a thousand new units of housing in Oakland would cause housing prices to rise because of the induced demand, then you must logically believe that at the margin, tearing down a thousand units of housing would cause housing prices to *decrease*. Do you?
Many urban planners do believe equivalent claims in the context of street construction and induced demand for driving. The search term is "road diet".
I think the essential chain of causation is something like:
1. Faster economic growth causes higher prices
2. Higher prices cause higher density (and other negative externalities)
3. Higher density (et al.) causes slower economic growth
4. Slower economic growth causes lower prices
So you have a dynamic equilibrium. Density (and other negative externalities) is why economic growth and prices in clusters like NYC or Silicon Valley don't just explode upward endlessly. Density is a brake on growth and prices, not an accelerator. It is correlated with higher prices because higher density is needed to fully brake the growth of a region with greater economic potential, but the density doesn't cause higher prices but the opposite
> Wouldn’t the alternative be some kind of highly unparsimonious pricing function like this?
I don't get the argument of this graph. Doesn't your imaginary graph look like you're talking e.g. about Minneapolis-St Paul (on the real graph) and just pretend that all other cities fall exactly on the line?
> This is a coordination problem: if every city upzones together, they can all get lower house prices, but each city can minimize its own prices by refusing to cooperate and hoping everyone else does the hard work.
Well, you can also spin the opposite narrative just as easily!
Assume cities like high land prices (eg because it gives them more tax revenue, if they use property taxes or land value taxes). Then each individual city can get more revenue by building more, but overall all of them together might perhaps not make more money.
Building more would be a 'tragedy of commons' in this situation.
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Overall, I think your analysis is more-or-less correct, but that property taxes (or even better land value taxes) can fix the incentives for cities, so they can build up without having to coordinate with other cities.
Yes and no... the book I would point you to is Alain Bertaud's "Order Without Design" if you want a good, reasonably accessible foundation in how the economics of cities work.
Essentially a city is like a big party - it's a huge market that becomes exponentially more productive the larger it grows... so long as the city can effectively mitigate the downsides of proximity and density and avoid having the party fall apart after a few crucial guests leave. The biggest issue is maintaining mobility - most US cities are car-dependent. Car dependency allows cities to sprawl out and provide a lot of living space per person, but it also makes moving around very difficult above certain densities - thus making it hard to build an effective city of more than a few million. To get bigger, cities have to get more creative with their transportation networks.
New York and San Francisco are big, very successful parties that everyone is trying to get into. In one sense, they are unaffordable because it's very hard to get into them and allowing more people in would make them more affordable. But in another sense, it is the fact that so many productive and attractive people are clustered together in these cities that makes them so attractive and hence unaffordable.
It is certainly not true that building more housing makes prices go up. But to strong man this argument: ultra high prices are a drag on growth in very productive and attractive cities. Building more housing will lower prices, which will in turn allow more people to live in the city, further increasing its productivity and in turn attracting even more people, causing prices to eventually go up. Sort of like if you start turning away guests at your party just because you don't want to have a big party. Turning away people doesn't make your party more accessible (it makes it more exclusive obviously), but maybe it will stop the party from really gearing up and becoming even more popular.
So the real conflict is over urbanism: do you think it's a good thing for lots of people to be able to live together in cities and benefit from them? As a city planner and urbanist, my answer is yes: I think cities provide all kinds of benefits and I defer to people's expressed desire to live in cities. Outside of Manhattan, I would argue most US cities aren't very dense at all and that there's no reason to be afraid of letting them densify and shift towards different forms of transportation. Right now I think we have a chronic undersupply of the kinds of urban places people want to live in and that are capable of providing satisfying and high-paying job opportunities and life experiences in an advanced economy, so I support letting people build more cities.
Noah Smith had an excellent article last week covering just this topic:
https://www.noahpinion.blog/p/luxury-construction-causes-high-rents
He cites plenty of econ papers, going so far as to explain why the ones that concluded the opposite were mistaken or what they failed to include. I think you can start with his post and its links, and go as deep as you like to satisfy yourself about how it all works.
The key is that no city is a closed system: people move to different neighborhoods within a metro area, and new arrivals to the metro area have a choice as to which neighborhood they go to. Building new housing in one of them causes average rents to go up there because (A) you just built new housing, which is probably priced above median itself, and (B) the signaling that this is a good yuppie neighborhood causes follow-on moving. However, that construction and those moves *prevent* gentrification elsewhere in the metro area, because the people moving to the desirable city are able to buy new-construction housing rather than apartments in an older locals neighborhood. And the yuppies don't *really* want a 100-year-old apartment anyway (they'd rather the new construction), they'll just take it if that's all that's available in the neighborhood they want to live in, and they can afford to outbid others.
It sounds like this is the same argument I'm making, but on the neighborhood-by-neighborhood level instead of the city-by-city level.
I've re-read both, and I don't think it is. Dunno if this reply is worth the effort, but here you go:
Firstly, to start with the same anecdotes you did, it's true, nobody moves to New York for the harbor. But *originally*, they did! NYC is the best deep-water harbor on the eastern seaboard, much like how SF is the best one on the west coast, and as a location to serve as a transportation break (cf. Kenneth T. Jackson's work), it thus was a natural location for the development of a great city. Its Dutch cultural roots, predating the English takeover by 50 years, made it a place of greater relative tolerance and mercantile focus, and thus it rose to be a great city and America's leading one in the post-WW2 world.
And I start there because it is that rise, that demand to be a part of that community - long predating any lack of available land to build on - which is the exogenous factor here. People want to live in cities, because that's where the jobs are. For hundreds of years, prior to the creation of good urban sewage management, the life expectancy of non-rich people moving to London was only a couple of years (!), because plague or fire or whatever would get them, and soon. But because that's where the jobs were, people kept moving there from the countryside in numbers equaling or exceeding the staggering urban death rate. If your city has a growing industry and money to be made, people will move there (even, in London's case, if it is likely to kill them swiftly). If it doesn't, people will slowly leave, or hover around replacement rate. We all understand this, it's documented beyond question, etc.
Oakland building 10x the housing is obviously silly, but if it were to build 10% new housing stock every year for a decade, you'd see a rapid influx of people who want to live in the bay area, who can afford market rate apartments and are willing to accept the BART or Bay Bridge as the lifestyle price to accomplish that. The demand is to live in the Bay Area, and whatever community can serve that demand gets the new people. At some point, Oakland would tap out that market, but in the meantime its population, average income, city budgets etc would balloon. It's possible the median rent paid in Oakland (all of it) would rise, but here are the two points that such a statistic ignores:
(1) The prices for pre-existing housing in Oakland would rise by far less (think of it like how retailers measure same-store sales, to control for the variable of new or closed stores)
(2) The housing in other parts of the Bay Area that didn't absorb lots of newcomers would remain much closer to where they had been, i.e. a lot of price hikes that would have happened there would thus not happen or be more muted (this is demonstrated by a lot of the papers Smith cites)
Moreover, (3) Had that construction not happened, the people who wanted to move to the Bay Area still would have done so, they just would have bid up the prices on what little housing remains, creating much higher rent hikes than the alternative.
Basically, a context-free statement of "rents will rise!" misses the forest for the trees. Building new-construction market-rate housing prevents or minimizes the rent rises that would have happened otherwise. Neighborhoods, whether they built or didn't build, benefit by not having huge rent hikes visited upon the middle-class communities who've been there for generations. You can't just look at what happens to rents in a vacuum, you can reasonably predict what would have happened to existing housing if you *didn't* build, and by that measure, rents will rise by LESS.
So it's misleading to characterize these dynamics by saying "building housing makes rents rise". If you are having a net increase in metro area population, rents are definitely going to rise, by a lot, if you do nothing. It's *that influx* that is the causal factor here. That is the demand, and the only question is whether supply can meet it (at a metro-area level) or whether supply shortages result in much higher price increases. Your choices are, build a lot (and decide where it's going, probably at a metro-area-level planning board) and have fewer residents displaced and fewer neighborhoods gentrified, or build less and have rents rise by more and have more displacement. There is not an option for "don't have rents rise", barring self-sabotaging your successful industries.
Are new builds like old builds? What's the elasticity of demand?
For example, in Pittsburgh's recent revitalization many of the new apartments are swankier and more upscale than lots of the old construction. A good deal of the renovation notably increases amenities. So yes there's more housing capacity but all the new capacity is more expensive for real reasons. So if you build new housing that's more expensive than average and people move in, you can raise the local price even as the movement of people decreases demand elsewhere. (And in fact, this is exactly what you see in Pittsburgh. Sure the new stuff is cheaper than LA/SF/NYC emigrants are used to, but now all the other prices have room and pressure to grow.)
If you build housing that resembles an average or a typical spread, you'd imagine it would decrease or at least not increase the price. You could make an elasticity argument a la Malthus, and argue that the price will fall, then some new marginal people might move in and the price would stabilized where it was previously because there was some reason it was that price in the first place.
To expect the local price to go down purely on the weight of new builds, you'd have to build so much housing that you overwhelm the elasticity of demand. In a place like Pittsburgh whose big appeal is "a cheaper silicon valley", there's probably significant elasticity! The cheaper you make it, the better that appeal! That could be an unrealistic amount of housing! If your goal is to lower prices you're better off making a structural change like WFH or public transit.
I feel like there should be a solution here where we let new development pay off renters in the area. For instance, maybe we give renters in any zone that approves new building in a year a share in future increases in overall property tax. It probably wouldn't have to be a very large amount before it convinced them it was worth allowing building (even if they may have to move away they keep that income stream).
We shouldn't need to pay off the renters. If building more housing increases housing prices because so many more people want to move to the place, that's because it becomes a better place *even after taking the increased rents into account*.
Alternative hypothesis: New York City and San Francisco (and maybe also LA) are weird exceptions because they control the commanding heights of the culture, and therefore are viewed as uniquely desirable places to live. They are desirable not because they are high density, but because they control the News Media / Social Media / Entertainment Industry respectively, and thus occupy a disproportionate amount of mindspace, making a lot of people willing to overpay to live in them.
Chicago / Houston etc don't occupy this kind of privileged position in the culture, and see much lower housing prices.
How does building attracts more people to the place if the marginal effect is raising housing costs?
Like, if your city has a market settled at 100 housings going for $100, that means at that price there's only 100 people that want housing there. If there were more than 100 people willing to pay $100, the price would go up until the market cleared.
If you build 1 housing and that makes the price go up to $101, now there's less people that want to live there than before! Building houses would make cities shrink in population.
The demand curve always slopes up.
I hope this shows that you are wrong to your satisfaction, but it still leaves us to explain the housing cost x density correlation.
Thing is housing cost is both construction and land costs. To the extent that land is necessary to access the gains from agglomeration it will eat them up as rent. In the Us this correlation between density and rent is caused by land being the binding constrain. Adding houses in a way that makes land less binding, like putting them on top of each other, eases on this constrain. Making land more important through regulation makes land eat up more of the gains of aglomeration.
How about this? Your town has 100 houses worth $100 each. You build one more house and sell it to an outsider for $99. But now your town is a slightly bigger, more happenin' place with a larger share of the area's economic activity, and all the people who would turn up their noses at living in a town of one hundred people are suddenly attracted to your bustling pop-101 town.
It doesn't make sense at this scale I admit, but can you see that building more houses might give a short-term price dip until they're all filled up, followed by an increase once they are?
If you built 10 houses on a North Dakotan plain and no one bought them, wouldn’t the price go down?….until such time that at least 1 or 2 people bought in…at which point the smallest sight of demand might at least plateau prices at a new (but below initial) level?
It seems to depend on (at least) an ill-defined balance of land availability vs scarcity, location desirability, and hence the result supply vs demand, to even begin to speculate on an answer. My suspicion is the relationship will not be linear. Adding 8 million people in Oakland doesn’t automatically bring with it Manhattan prices, unless you have with it manhattan amenities, and Manhattan geography.
Hold on; if this argument holds it is _exactly_ an argument against YIMBYism: YIMBYs harm themselves and those around them. (In housing prices. Maybe the better quality is worth it.)
Yes, it's better if everyone agrees to enforce YIMBYism globally in this model, but that's not how it works, and it does mean that people who oppose YIMBYism in their own location are acting economically rationally.
*Certainly* better quality is worth it if it results in higher housing prices. If it results in higher housing prices, that means more people want to live in the place in question than before, so much that the increased housing supply doesn't make up for it. If more people want to live there, that's because it becomes more desirable, even after taking the increased housing cost into account.
seems a silly argument that density is the relevant variable. Demand is multifactorial and is the relevant metric.
I think what's missing here is the type of housing being built: is it single family or apartment AND is that dense apartment market housing? Non-market housing isn't affected by the market as much and can be cheaper. It's also not profitable so isn't common.
If building houses raised prices, the upper-right quadrant of these two graphs wouldn't be empty:
https://twitter.com/JeremiahDJohns/status/1616082065455468547/photo/1
Interesting graphs but the implication seems mixed to me
Mixed? How so?
It looks like if you build at least 20 units per 1000 per year, you're going to get low housing prices, no matter how attractive or dense your city is.
Would you disagree that it's good evidence for that question, or are you thinking about a different question?
Aren't these graphs just showing that houses are mostly built in the empty, politically-unorganized areas where prices are low, rather than in big cities full of NIMBYs where prices are high?
The Atlanta metro area has 6 million people.
If the above chart *isn't* evidence against your thesis, what prediction are you making?
A possible counterexample here is Seattle. Like SF, Seattle's seen a massive amount of immigration over the last few decades, to a large extent of high-earning tech workers (in fact, proportionally more people have moved to Seattle than moved to SF in the last 30 years, both to the city itself & to the metro area). However, unlike SF, Seattle & the surrounding area also allowed a ton of construction, nearly all of which involved/involves large density increases on already-occupied land. The near-complete reconstruction of South Lake Union is the most striking instance, but you can see this happening all over the city (f.e. the ongoing transformations of Roosevelt & Northgate resulting from the opening of the most recent Link extension). Notably, Seattle's median rent also hasn't risen nearly as much; said median rent is far closer to the national average (possibly even slightly below at the moment, if Zillow's rent numbers are to be believed).
One important thing to note here is that Seattle's recent increases in housing supply have been mostly driven by large local increases in density. In some ways, the area faces the same kinds of geographical problems SF does (if not to the same extent), being quite hilly & hemmed in by water. In this, it's unlike the sunbelt cities that frequently get cited as evidence for "building housing to accommodate immigration keeps housing costs down", since there's little in the way of land to build on that doesn't already have something on it.
Possibly contributing is that the upzoning in the area hasn't been limited to one municipality. Several of Seattle's suburbs have also gotten in on the act, with cities like Redmond & Bellevue also seeing enough apartment-type housing construction to radically reshape (or, in the former case, practically create from whole cloth) their downtown cores. To the point about this being a coordination problem, perhaps part of Seattle's success is that the city & its suburbs managed to at least somewhat coordinate here.
Think of China's ghost cities / apartment blocks. Prices surely can't be that high there. Maybe the answer is that developers are good at their job, and build supply where theres demand for it?
I'm sceptical of the Chinese "ghost city" phenomenon. I haven't explored the issue rigorously but my impression is that in areas that were previously dismissed as "ghost cities" like Ordos Kangbashi, the population is now large and growing.
I think we in the west are so used to infrastructure bottlenecks and short sightedness and anti-construction policies that the idea of it being possible to build the housing and infrastructure to accomodate expected demand ten years in the future is completely foreign to us. Perhaps building brand new cities before they are even needed is what the YIMBY utopia looks like.
As of 2020, about 65 million "housing properties" (mostly apartments) in China were vacant. That's more than enough residences to house the population of Germany.
The current total seems to be less, though I'm reading descriptions of whether it's a lot less or a little. There doesn't seem to be any widely-accepted running account or total. The Chinese government does not estimate (or at least does not release) any official numbers on things like vacant home units. There definitely are examples of places formerly known as ghost cities which have come to life, and of others that have not. They aren't all the same physical size either which adds to the murkiness.
But the new context is that China's total national population during 2022 declined (according to official figures) for the first time since 2003. And it is projected to keep declining for at least a generation. Just four years ago the UN was projecting China's population to peak in 2033; they were off by a full decade.
COVID appears to have helped speed up that milestone but it is primarily rooted in ongoing trends. China's fertility rate didn't stop dropping despite the 2015 end of the "one-child" policy and is now only 1.15 children born to the average woman during her lifetime. That's lower than Italy's, Japan's, etc; no other large nation today has a fertility rate as low as China's. Meanwhile China remains a xenophobic society and few people resettle there from elsewhere who aren't ethnically Chinese.
Hence the UN now projects that India will supplant China as the world's most populous nation later this year. Though population figures for China before the mid-20th century were rough estimates, it is probable that no one living was alive the last time China was not the world's most populous nation.
All of which means: however ever many "ghost cities" it is that are still standing empty in China, they're likely staying that way now.
I don't think that follows at all. China experiences a lot of internal migration. Just because the overall population is declining does not mean that any given area will not have growth. See: Tokyo.
65 million vacant apartments sounds like a lot, but China is really really really big. A quick google tells me that China has a 12.1% vacancy rate as compared to 11.1% in the US. Doesn't seem like a difference worth getting excited about.
China _had_ a lot of internal migration. It has slowed down dramatically, and also no longer all flows into the cities.
No official vacancy rates are published in China and no specific definition of it exists there. Various think tanks and researchers both within that country and elsewhere have published estimates ranging from as low as 11 percent to as high as 24 percent. Those estimates have been for varying samples of Chinese cities, have used various definitions of housing vacancy rate, etc.
The best (as in most systematic) estimate yet produced has come from researchers at a university in Liaoning. They used night-time urban lightsheds captured by a new (2018 launch) Chinese satellite having a new level of light sensing technology which allows separating out light from parks and plazas. They covered a large sample (49 cities), and made their sample representative of city type, city size, regions within China, etc. They also crossed-referenced with local housing data to ensure accurate balancing of their sample and to confirm that the satellite was successfully identifying light coming from housing blocks.
They found vacancy rates of just under 20 percent in China's Tier 1 cities, and found rates above 20 percent in 40 of the 49 cities. They found the highest vacancy rates in western and northeastern cities, which are also the newest ones; that finding is consistent with the hypothesis of significant numbers of recently-built ghost cities.
https://www.researchgate.net/publication/345092218_Housing_Vacancy_Rate_in_Major_Cities_in_China_Perspectives_from_Nighttime_Light_Data
A possibly helpful analogy:
English is the language with the most worldwide speakers. English is also the language with the most second-language teachers.
Does that mean that adding more teachers is an important way to increase the attractiveness of a second language?
Maybe, in extreme cases, but not really.
Convenient teaching is helpful, but not decisive, for people choosing their second language. Plentiful city-center housing is helpful, but not decisive, for people choosing their metro area.
In both cases the teaching/housing is a lagging variable that responds to, but only at less than 1-for-1 contributes to, the underlying desirability.
(BTW, Scott, I keep feeling that I haven't quite grasped your actual uncertainty, and I'm wasting both our time on things you already get. That's frustrating for me, and I bet for you too.
Maybe you can restate your thoughts more precisely in a week, after you've read everyone's responses?)
The problem is price and quantity are jointly determined by demand and supply. The exercise that Yglesias is proposing is akin to saying “imagine supply increases then price must decrease to a new equilibrium where more quantity (housing) is traded.”
This is nothing more than the standard Econ101 law of demand applied to housing markets.
The correlations that you show are a big no-no in econometrics. You don’t just regress quantity on prices (or viceversa) and give that anything close to a causal interpretation. Why? Because demand and supply jointly determine prices and quantities. Large traded quantities might be associated with high prices if demand is high relative to supply, low prices if supply is high relative to demand, or anything in between.
The most reasonable explanation for the correlation we see is that places in where supply is large demand extra large (NYC), so prices are high. In contrast, in places with low supply of housing demand is non-existent (North Dakota countryside), and therefore prices are be low. If you run a regression of prices on quantities you’ll get a positive coefficient, but the effect has nothing to do with quantities and prices and everything to do with the fact that in places where supply is high demand is even higher, and in places with low supply demand is close to zero.
If we go meta and ask why is demand so much larger than supply in NYC, this argument naturally ties to YIMBYism. The reason is that supply is artificially constrained in NYC through red tape and regulation. Removing this red tape and regulation will increase supply and drive prices down.
Please read the paragraph starting with "Could this be reverse causation?"
I think that paragraph shows the problem of thinking in terms of quantities and prices rather than demand and supply. NY isn’t more dense because of its high prices. If you liberate supply by eliminate building restrictions we should expect higher density and lower prices! The extreme correlation we see is largely an artifact of the regulation.
Would you agree that if we partly liberate supply, by (for example) building 100,000 extra units in NYC once, but otherwise keeping the same regime, NYC might get more expensive?
That's not what you would expect from standard supply and demand (i.e. upward sloping supply curve and downward sloping demand curve), which Calcifer is appealing to.
There are of course known examples of goods that don't follow normal supply and demand rules. E.g. Veblen goods where the price is a part of the appeal - think Louis Vuitton bags or Lamborghini cars. People who buy them do so in large part to show off their wealth. So higher prices make them more desirable.
But AFAIK all the economic research shows that housing follows normal supply and demand.
I have an extremely strong prior against it. Downward slopping demand is sacred mantra in economics. Virtually 100% of economic research finds downward slopping demand, and if demand is downward slopping increasing supply will reduce prices.
Even in the minimum wage literature, a large part of the debate centers around whether the effect of minimum wage on employment is large or small (i.e., whether raising prices leads to a large or small decrease in demand for labor). Recent new research looking at monopsony power in labor markets claims that increases in minimum wage might lead to an increase in employment. This story, however, is 100% consistent with downward slopping demand.
For your story to work out, you'd need super strong network externalities, where, for a given price, each person that moves to NY induces more than one additional person move. This seems highly unlikely.
The key fact your missing is if you wave a magic wand and 10x San Francisco you wouldn't 10x all jobs. You would 10x the # of waiters, and garbage men but you wouldn't 10x the # of 500k/yr Google site reliability engineers. And it's the latter not the former that are driving up prices.
I mean, yes, by basic rules of supply and demand. But only in our world.
Most of America is very, very sparsely developed. There is just a plain huge amount of land with no one living in it, and another vast amount of land with very few people living in it. While on the other hand, there are very few Manhattans. There are more, but still very few, medium dense places somewhere in-between.
Some people want to live in more dense places, because they get the benefits of being near others packed more densely. While on the other hand, some people would prefer to live in less dense places, because they get the benefit of more land and space to themselves. And some prefer something in between.
Empirically, the demand for dense spaces is very high compared to the supply. And the demand slopes upwards with density, while supply slopes downwards. You can tell this is true because of the high prices of housing per sq ft in dense regions.
Whereas empirically, we are vastly oversupplied with distant rural zones where you can live far away from anyone else. You can tell this is true because of the low price of housing per sq ft in less dense regions.
This seems so natural to us that it's hard to imagine it being any other way. But that's just an artifact of having lots and lots and lots of land that is mostly empty.
Imagine living in a world where most of the land is super dense mega-packed city, far more than anyone can use, but where apartments are still plentiful as water. Where MegaManhattan goes on for miles and miles and miles and has so much housing that even though it's incredibly dense, there's still plenty of apartments vacant to move into.
And also imagine that relative to our world, there is a very small amount of empty land. Only a few places in this world where there is vast open space. Only 10,000 total homes exist, in this low density region.
Which is more expensive now: high density, or low density? Obviously in this other world the answer is low density. The demand for such low density housing would vastly outstrip the supply, whereas the plentiful apartments throughout MegaManhattan would ensure prices stay low.
There is nothing intrinsically expensive about high density regions, or low density regions. We just chronically underbuild high density by making it illegal to construct more, so prices stay high. If you make it impossible to build in a desirable low density region, you get sky high prices also (see: Aspen, CO, which is incredibly expensive vs its density).
"There is nothing intrinsically expensive about high density regions" except building the highrises necessary to make the region high-density. See also: Chinese ghost cities.
Highrises can actually be cheaper per square foot to construct than most suburban tract housing, because of all the shared infrastructure. But they're certainly not more expensive. If it was fundamental construction costs, cities would be cheaper than rural.
Of course building housing in the middle of nowhere without people in it is a bad deal, but that's v different from building housing in a city where millions already live nearby.
I am not an economist, but I made an observation that got me thinking, and I came to a plausible explanation.
The observation: there are quite a few leftie environmentalists who insist that adding extra lanes to congested roads is pointless - the added supply will only induce more demand, so the road will stay just as congested.
Then they change the topic and demand that new, affordable housing is built in crowded cities. Hmmmmm.
So here's my simplified picture: smart, ambitious people move to big cities not because they want to, but because they have to, to find suitable jobs both for them and their equally highly-qualified spouse.
Big companies move to big cities because only there do they have a sufficient pool of smart, talented employees. Also, wealthy cities can offer good infrastucture and other incentives, and the wealthy bosses can shrug off the high costs of living and enjoy the cultural amenities.
Small companies move to big cities because that's where their clients are - the big companies and their well-paid employees.
Employees of small companies move there because it's still better to pay outrageously high rents than to be unemployed in a dead town.
All of this works the better, the more densely the city is packed (mostly in terms of "how many people can you reach with a 45-min ride in whatever means of transportation").
Nowhere in this argument did "it's fun to live in big, densely packed cities" enter the picture, except for the privileged few.
So as long as there are smallish cities and villages that the moloch monopoly city can suck dry, all that happens when you build another block of affordable housing in a big city is that the ratchet is cranked another notch toward "everyone lives in overcrowded, expensive urban hellscapes where only the richest few actually enjoy living".
How about we try to make smaller, less expensive cities more attractive to companies instead?
"there are quite a few leftie environmentalists who insist that adding extra lanes to congested roads is pointless - the added supply will only induce more demand, so the road will stay just as congested."
Isn't this one of the claims with the best empirical back-up in all of traffic management? I read a lot of interviews with various experts (mostly from various European countries), and I don't think I have ever seen someone doubting this as the main trend. And those were not lefties.
That may very well be, and in many cases the lefties may be correct (I have seen some cases where traffic indeed got better after adding a lane, but that may be the exception).
My point is that the people who make this argument never seem to consider the obvious extension to building housing in crowded cities - the cities are crowded because people feel compelled to move to where many people already are, and adding more only makes it worse.
I hate the "induced demand" argument about roads. It's as if the purpose of roads is to not be driven on.
Yes, if you build more roads people can drive more. That's why you do it. They aren't driving because they enjoy sitting in traffic, they are doing it because they have things they want to go and do, and adding road capacity allows them to do take more of those valuable journeys.
It's such a ridiculous argument. You might as well go to Coca Cola and tell them "Our research says that if you produce more cans of soft drink they will just get bought and drunk, so no point doing it."
This sounds like a giant argument for a Land Value Tax. It is the only option which would increase building everywhere therefor decreasing home prices everywhere.
One option to increase building everywhere is to have a higher level of government (national, state) force all cities to permit more building.
If a higher level of government imposes a land value tax instead, the tax revenue goes to the higher level of government, and building more housing would increase land values (if not necessarily home values), then the tax *reduces* a city's incentive to permit more building, because the resulting increase in land value is taken away by the higher level of government.
If a land value tax goes to the city government, it would result in spiralling land values and taxes. Land rent is a mechanism that caps the number of people who want and can afford to live in the city to the number of people there is space for in the city. The city government would presumably pay out the tax to the residents in the form of services, or possibly cash, effectively returning (part of) the land rent to the tenants. This would increase the desirability and affordability of living in the city, which would result in even higher rents, which would result in even higher land value taxes and payouts to the residents, and so on.
A 100% LVT going to the city government would effectively act as a form of rent control, capping land rents at 0, which is typically well below market clearing levels, resulting in all sorts of anomalies. A less than 100% LVT would result in land prices inflating to the point where land rent after tax is as much as land rent would be without the tax.
It should be very easy to convince you this is wrong:
So I don’t understand why Matt believes that building a few new apartments in some city - a very small move along that spectrum - would do anything other than make local prices go up
You are treating your model as though R2 is one. Your own data show its not. If there are cities both well above and well below trend line AND studies show small increases in supply controlled for other factors can reduce prices, then maybe take those results at face value. Or at least find data that show otherwise.
Theres no reason SD cant look at miamis dot and think, maybe we could get there with different policy decisions. It doesnt require a wierd divot in the curve.
If you want to be concerned that the larger scale relation cannot be improved, that is at least supported by your data. But movement along this curve is a long term change and multi factored and not strictly a function of how much upzoning happens in a given year
I think you’re conflating housing prices with amenities. Look at prices in Dallas vs Seattle. Seattle prices are higher than Dallas despite having fewer houses, because there is more demand, because there are more amenities such as restaurants, cultural activities, events, and high-paying jobs. This holds true even in small, expensive cities like Boulder, where there are popular amenities (beautiful outdoor activities, quaint downtown, etc), but not much housing. Large cities, by virtue of having more people, generally have more amenities. So there is a correlation, not causation.
To be clear, you may think that having more houses causes more people which cause more amenities, and it can be messy, but if that we’re purely the case we’d see no cities shrink while others grow, but we see that all the time.
Is induced demand is based more on the rank-order size of the city or the absolute size? I suspect the former is a big factor because there are dozens of large cities that don't even cross the mind of the sort of people who "would be happy to live in Seattle, or NYC, or the Bay". I count 56 metro areas above 1 million, and 15 metro areas above 4 million on this list: https://en.wikipedia.org/wiki/Metropolitan_statistical_area
There’s clearly a positive feedback loop causing urbanization. This is why cities exist in the first place and get larger and denser. (Contrast with farmers.)
The strength of the feedback loop varies by city and neighborhood. Some cities pull more people in and others don’t. We should expect higher-priced neighborhoods to have more of a draw for some reason.
Positive feedback loops can go on for quite a while but don’t necessarily go on forever. For example, demand for student housing from a university is limited depending on the growth rate of the university, and it might not be growing at all.
So I think this can’t be answered from first principles. You need to look at what’s driving demand locally. Will it continue?
I have long thought that dense California cities should be encouraging large employers to move, or at least expand more elsewhere. When an employer from a high-priced city moves to a city that needs more jobs, both places benefit.
"Both places benefit" - I totally agree in principle. Of course, to answer the question "why doesn't anyone do it, then?", we need to look in more detail at WHO benefits. A mayor who declares "nah, we're full, take your well-paid jobs elsewhere" probably wouldn't benefit. Neither do the businessmen who donate to his electoral campaign.
"But Manhattan and London have the highest house prices in their respective countries, primarily because of their density and the opportunities density provides" implies a commutative relation that does not actually exist.
Yes, at the macro level, greater density -> more specialization -> more jobs/opportunities. But with transportation tech and cultural assumptions that commute time is the employee's problem, we have managed to severe the connection the other direction, such that we can create lots of opportunities/jobs/industry without also creating the resulting density.
I don't have the data handy to make plots, but there's a "natural" density of housing to match a given density of jobs within a metro area. A lot of our currently prosperous cities have made policy choices to prevent the housing density to grow to match the opportunity density. At that point, building more houses does *not* correspondingly increase the opportunities/make the city more desirable. It just enables the people in the existing jobs to be closer to them on average. If you built enough to actually start increasing opportunities again, then sure, prices will rise, but until then you aren't actually moving up that size/cost curve you started with.
I don't think you have justified excluding non-US metros, like Tokyo, or Auckland. Doesn't this lead to the natural conclusion that there is a sufficient level of housing to build, and that the problem is that the USA's many metros are structured to prevent housing? It seems like you're just arguing that US metros are bad at building housing, which is also what Matt Yglesias is arguing.
Your argument relies heavily on cherry-picked examples (New York City, San Francisco, North Dakota) and does not account for the broader housing market in the United States. This selective approach fails to consider the variety of factors that contribute to housing prices in different cities, and makes your argument less credible.
The assumption that density is the primary driver of high housing prices in cities like New York and San Francisco is simplistic and ignores the myriad of factors that contribute to their housing costs. Factors such as land scarcity, regulatory barriers, and high demand due to economic opportunities should not be overlooked.
The hypothetical scenario of Oakland becoming ten times denser is an extreme and unrealistic example. It fails to consider the gradual changes and adjustments that would occur in the housing market over time. Your argument does not account for the possibility that increased housing supply could eventually outpace demand, leading to stable or even lower housing prices.
Your claim that there is an inherent "coordination problem" between cities when it comes to upzoning and housing supply is unsubstantiated. You do not provide any evidence or examples to support this assertion, and it appears to be conjecture rather than grounded in economic theory or empirical evidence.
You fail to address the role of elasticities in the supply and demand relationship within housing markets. By not considering how elastic the demand for housing might be, your argument misses a key component in the analysis. If demand is relatively elastic, even small increases in housing supply could lead to lower housing prices.
Any way to analyze housing markets without considering the blatant and heavy handed manipulation of the real estate markets (either for gdp or property taxes) seems..... mildly optimistic about the price mechanism.
Mortgages are 30 year things and there's always some government program, theres going to be massive lag with unclear data at minimum.
Prices work best when the value of money is effectively linear, there are repeat costumers and products are interchangeable; which simply isn't the case for housing. You shouldn't assume that real estate has sane prices, and from deducing how a sane system would react to a change, conclude which effect.
My guess is there's a short term and a long term effect. In the short term building housing lowers house prices, as you'd expect.
In the long term more people move in to those houses, agglomeration effects kick in, and the city becomes more desirable. This raises house prices.
I think you are using ill-fitting metrics and it confuses you.
Prices are high where the supply is less than the demand. Absolute values of supply and demand are not relevant. So the prices/density graph is not helpful. Most of the causality there is reversed and the second order effects depend on variables for which density is itself a proxy: amount of amenities and opportunities.
If the amount of amenities and opportunities in a place is increased, demand for houses will rise, thus housing prices also rise, and until possible new houses are build, increasing density. If you just increase density without creating new jobs, nighclubs, museums and other places of interests that will motivate more people to want to live there, the prices will fall.
Let me rephrase the argument: positive network externalities to building densely in cities are so large that building more housing actually causes existing units to be so much more desirable that its price goes up, despite the additional supply.
This might be true (it's certainly logically possible), but I suspect it's false on the current margin in most housing markets, even really weird ones like Oakland or Manhattan. This seems to be what the empirical evidence says, as far as I know.
Notably, if this were true the cost of overly restrictive zoning is significantly greater than the consensus view.
The stats I see are that 3.1M people work in Manhattan and 1.6m live there. Clearly Oakland is different - probably the flow is into SF. Anyway if any large proportion of the people who work in manhattan would prefer to live there there’s a lot of housing to be built before prices stabilise.
One example of where building a huge amount likely lowered price is Chicago's far northern lakefront just south of Evanston, where a huge number of ~30 story apartment buildings were built along Lake Michigan in, I'm guessing, the 1960s. By the 1990s, condos in them seemed pretty cheap.
In general, though, the U.S. doesn't have that many places where developers were allowed to run hog wild building high rises. In contrast, Sao Paulo, Brazil struck me as having an immense number of residential high rises by American standards.
Southern California, for example, has only a tiny number of high rises along the Pacific.
Someone on here, or another Substack comment section, said that the recent revealed American preferences in housing outside NY, and maybe SF, was a house with 3-4 beds and a yard or garden. Cities with those kinds of housing stock are expanding, the rest (excluding the two I mentioned) are declining or static. Looking at population flows in the last few years that seems to be true. California has lost 500k people to outward migration in two years. Surely you would expect house prices to fall given those statistics particularly if the trend continues - 2.5M in a decade would be a major decline.
Given that new reality Scott is probably wrong about Oakland and SF. Oakland seems to be an overflow city, the place to be if you can’t afford SF. Building new housing there now into a population decline would see prices fall. SF on the other hand may take up some slack.
Is the SF population declining? This link seems to say that the population is stable:
https://www.macrotrends.net/cities/23130/san-francisco/population
California losing people doesn't necessarily mean that any particular city is losing people.
Well I did say that SF might take up some slack. SF like Manhattan probably has high demand regardless. However a drop of 2.5M will be felt everywhere. Who knows if that continues, though.
It's not necessarily true that a drop of 2.5 million will be felt everywhere. Japan's population has declined by about 5 million from its peak, but Tokyo continues to grow.
My understanding is that in California people are largely fleeing the cities.
However, I don’t think that the population of SF will decline. Not least because a lot of people living in Oakland and the south bay would prefer to live there if they could. Particularly new arrivals.
Only if you ignore Seattle, which is also growing like crazy & has built basically exclusively apartment-type housing over the last ~30 years.
What percentage of the earth's surface within, say 50 miles of the Dallas city hall could be developed for housing? I'm guessing somewhere around 95%, leaving out some lakes and the like. In contrast, what percentage within 50 miles of the San Francisco city hall could be developed? I don't know, maybe 50%? Maybe less. A huge fraction is saltwater and quite a bit more is rugged mountains.
Not surprisingly, land costs more near San Francisco than near Dallas.
This makes sense if you assume that "proximity to city hall" is a key driver of demand.
Kind of an odd thing to assume though.
Oh for goodness sake it's obviously a loose rhetorical proxy for the weighted centroid of the economic catchment zone or whatever the technically proper way to do it would be. I hate to side with Steve Sailer in anything but there is nothing more telling in these discussions like this than people who complain about using back-of-the-envelope and order-of-magnitude methods that rely on a fair bit of contextual knowledge. It's absolutely just the midwit meme.
You have 2 assumptions:
1. density is desirable. This means that people mostly want to live and get higher amenities from a higher density city. I think this makes a lot of assumption on development that comes together with density - for example on public transportation, etc. But let's assume we get them with density.
2. There is a fixed amount of people willing to move to a metro in the US.
If you build more houses -> desirability increases -> each person in the city gets more from the city -> it attracts more people -> prices increase in the city, but reduce in the rest of the US metros.
Even if this is true, each person in the city gets more, so this is reasonable. Also, if this is done in all the cities (NY + Austin + SF + Boston + Auckland + Atlanta, etc) this will reduce the prices in all the US.
I spill 3 facts I know about urban economics and interesting top notch academic papers. I hope it helps.
(1) All else being the same, housing prices decrease when you build more (assuming same number of people, same wages, ...)
(2) Urban development increases productivity, wages and GDP/capita increases. (economies of agglomeration) As a consequence, wages increase and there are more jobs. More people move into cities. Commute times determine the limits of growths.
(3) Housing market equilibrium, and city growth is determined by multiple factors. Eventually negative externalizes will limit the growth. In the US housing markets, low density and bad public transport create negative externalities earlier than elsewhere. US economy would be much bigger if Urban planning and zoning would be better.
Two top notch relatively recent academic papers on the subject:
Hsieh, Chang-Tai, and Enrico Moretti. 2019. "Housing Constraints and Spatial Misallocation." American Economic Journal: Macroeconomics, 11 (2): 1-39. DOI: 10.1257/mac.20170388
Richard Hornbeck, Enrico Moretti; Estimating Who Benefits from Productivity Growth: Local and Distant Effects of City Productivity Growth on Wages, Rents, and Inequality. The Review of Economics and Statistics 2022; doi: https://doi.org/10.1162/rest_a_01208
I don't think the primary driver of demand is "wanting to live in a big city". I think the primary driver of demand is new york city wages. So if NYC built more housing the prices would drop as demand is met for all those who can achieve wages commensurate to the housing prices. Similarly if Oakland built 5 million houses they wouldn't see NYC style demand since there isn't NYC style wages
Maybe the relation between new housing construction and rent price go like this:
1) new housing -> rent price goes down (classic offer and demand)
2) more house -> new opportunity for services and shops, i.e. increase the productivity per m² of the place
3) increased productivity per m² -> more demand for housing ->rent price goes up (classic rent price depending on the place average salary)
So the apparent paradox is simply a 2 different effects with a time delay. New construction drive rents down in the short term, then up after some delay (if the city is succesfull, if not, it's a housing bubble crash)
Scott, I think you are missing the elephant in the room, which is jobs. If density is highly correlated (like the R^2 of 0.77 in your graph), Palo Alto should be cheaper than most US cities. The reason why it is not is because it is in close proximity to high quality, high paying jobs. On the other side, the reason why Detroit is doing bad for such a large city is due to the lack of jobs.
The causality is clearly: Jobs -> housing demand -> building. Yes, there are jobs that are created due to agglomeration effects, but for the most part, this agglomeration takes a long time. (Even Silicon Valley is built on top of 70 years of investments in tech). On the other hand, when oil is found in North Dakota, prices for small town housing rocket up.
Your thought experiment of Oakland was really weird, as you picked just a single city in a 10 million people metro area. There are enough jobs in the Bay Area that are already established for the area to absorb 4.5 million new residents. Applying your thought process to other cities shows the brokenness of the logic. If you magically turned Portland or Detroit into a 6.5 million person city overnight, there is no doubt that the price of housing would crater in Portland's case, and Detroit will definitely not become a new Manhattan.
If you accept that jobs create housing demand, then the solution is to keep increases in housing supply above increases in jobs. There are many ways of achieving this, some good, some bad. One would be to disallow cities from creating new office and industrial space without a corresponding increase in built housing.
If this is correct, then the intuition that Silicon Valley folks are increasing rent for everyone in SF is clear and logical, as they represent new jobs without the corresponding increase in housing.
> But it can’t do this forever - at some point, it will exhaust the pool of Americans who want to move to big cities (you’ll know this has happened when housing prices are no higher in big cities than anywhere else).
This is obviously wrong; most things are more expensive in cities than they are outside of cities for the very simple reason that people in cities have more money than other people do. It doesn't mean the urbanites want those things more; in many cases they want them less.
But even worse, you're treating a complex function of several variables, the price of housing... somewhere... as an indicator for a single variable, the size of "the pool of Americans who want to move to big cities". In the first place, that quantity is not a coherent concept: the number of people who want to move to cities is going to be affected by local conditions in the cities. If housing there gets cheap enough, more people will want to move than previously did. And in the second place, the general conceptual approach of judging the value of one variable by watching what happens to a complex composite figure that includes that variable is complete nonsense.
You are confusing density of houses with density of people.
If Oakland built 50,000 houses, that wouldn't make it attractive since people don't want to live in a town with 50,000 empty houses.
If Oakland built 50,000 houses and managed to fill 49,000 of them than that would make the remaining 1,000 more attractive since now Oakland is a bigger town with more amenities and culture. Although it takes time for amenities and culture to happen but yes, I would guess that if they built 50,000 new houses, managed to fill up 49,000 of them and promoted culture or waited for culture to happen naturally then the remaining 1,000 would be more attractive.
In terms of an "economic perpetual motion machine" this is not a big deal. I mean, any company that generates revenue and uses that to reinvest in the business is kind of like an "economic perpetual motion machine"
You could also do something like build 50,000 apartment units with great amenities, rent them out super cheaply for 5 years to make sure they get filled up and then once people moved in and culture and society is created jack up the prices. Don't know that anyone has ever tried this though since it sounds really risky. Building 50,000 apartment units is really expensive and you don't know if it will work. But the fact that "maybe there exist risky investment opportunities that if executed properly might yield massive returns over the course of a long period of time" doesn't seem to violate any kind of economic law does it?
Actually, when you think about it, the assumption that "building 100 more houses" leads to "100 more families moving in" (which in turn leads to more amenities, culture and therefore higher housing prices) is based on implicitly on the assumption that in the short term, increased supply, reduces prices.
Otherwise, why would building 100 houses, lead to more people? It's not the case that there are no houses for sale in all of Oakland. But 100 extra houses would increase supply, thus lowering prices thus leading to more people, thus more amenities and culture and thus higher prices long term. Except that if the 100 extra houses don't result in lower house prices (because maybe there is already plenty of supply) you've actually now made the city less desirable because no one wants to live in a place with lots of empty houses. And even if these houses get full, if people move into them from other parts of the city they will lead to more empty houses in the city as a whole.
I don't know the relevant geography, but can Oakland survive (and thrive) as a small town on its own, or is it stuck as a suburb/commuter town of San Francisco?
I think there's a big difference between "moving here because there's a decent job and the smaller city is better quality of life" and "moving here because it's a place to sleep and eat while I travel X miles to my work and social life in the big city".
The demographics would need to be drastically changed. Attractive amenities in Oakland include things like armed guards.
Commuting to San Francisco is responsible for more than 100% of the value of a large portion of the property in Oakland.
Didn't Dutch originally settle in the area exactly because of the harbor? Wikipedia says
> The mouth of the Hudson River was selected as the ideal place for initial settlement as it had easy access to the ocean while also securing an ice-free lifeline to the beaver trading post near present-day Albany. Here, Indigenous hunters supplied them with pelts in exchange for European-made trade goods and wampum, which was soon being made by the Dutch on Long Island. In 1621, the Dutch West India Company was founded.
Surely geography helped New York later become a national capital and in any case a center of finance even after the establishment of DC.
Absolutely, but the typical New Yorker now doesn't move there for the Harbour.
My hometown was founded where it is because it was at a fork in a river, thus making it a good place to access much of the surrounding countryside before roads were a major method of transportation on the continent, when most stuff had to be transported by boat.
No one travels that river by boat now except recreational, so no one moves there for the river location anymore.
While New York's Harbour is probably still valuable, few think of NYC as a port town now, and I suspect that most dockworkers there have difficulty affording a good quality of life nowadays.
I think you're overly focused on the direct jobs involved in working on the docks, and not on the actual value created by the sea trade that the port enables.
The point of a port is not to employ dockworkers. That's part of the cost. The benefit is that you can cheaply trade with other places a long way away.
How much actual trade gets shipped through New York these days? I would assume relatively little, because there are other East coast harbours with lower land prices and cost of living where it's cheaper to offload goods, no?
Dockworkers in NYC would have to be paid a premium these days compared to say, dockworkers in Norfolk, or your NYC dockworkers would move to Norfolk for a better pay to cost of living ratio.
It's the busiest port in the United States. https://www.cnbc.com/2022/09/24/new-york-now-no-1-port-in-us-as-sea-change-in-trade-hits-west-coast.html
Edit: Slightly older data but if you're looking for a dollar figure, according to the report on this page over $200 billion of trade went through the port in 2019: https://www.panynj.gov/port/en/our-port/facts-and-figures.html
I find that absolutely shocking. I would have expected it's port to be nearly abandoned these days and mostly converted to other uses.
I'm surprised by your surprise. International trade is a really really big deal and it mostly happens by sea. Why do you think all the world's biggest cities are coastal?
You would obviously be wrong for any city in which demand is limited. If you found a city where nobody wanted to live, and put a lot of housing there, you would crash the price of houses in that city. You could use this idea to regulate housing prices in those kinds of cities - just build enough housing to lower prices to the level you desire, rather than crashing it. China has tried building cities from nothing, and many large buildings were later torn down having never been occupied. Even with as many people as China has, there are lots of places with existing housing available and nobody trying to live there.
The problem you seem to be identifying is that there are some cities where demand far outstrips supply, due to their nationwide pull. Lots of people want to live in NYC or SF who are unable to do so. This is coupled with the reality that developers are going to want to take advantage of that by building denser and more expensive housing, not cheaper and less dense housing. Because land is geographically isolated (you can't move the underlying land or the land next to it), there's only so much land available within a certain distance of whatever people want to be near. For SF it's likely tech jobs. Living a three hour drive away isn't useful if you want to work in tech on site. It's also not useful if you want to be a teacher or service employee in SF. Those could be great jobs, but you have to live close enough not to turn all your free time into a miserable commute.
That was a problem when I was working in social housing; there were houses available but nobody wanted them, because they were miles out in the country and unless you had a car, you were isolated because there's no bus service. People also want to live beside their families or neighbours they know, or they want to live in a 'desirable' area.
So you end up with waiting lists for houses in Area A, while there are vacant houses not being taken up in Area B. And you can't really blame people for "I have no way of getting to a doctor, the shops, etc. because I don't have access to a car and I'm not walking five miles to town and back pushing a buggy".
Right. And it may be that opening up new housing in city centers mostly just takes people from the greater metro region and puts them in the city, because they can now eliminate their commute. This clearly wouldn't reduce housing costs at all, and may increase it. They likely can sell their previous housing as well, to someone else who can commute or someone who actually wants to live in the greater metro area instead of somewhere else. This may reduce the housing costs in the greater metro area, even if the effect where the housing is built is to raise prices.
This would be like SF building 50,000 units and seeing no change in prices locally, but surrounding towns and cities with 1-2 hour commutes dropping in price. SF policymakers and renters would not identify that as an improvement, even though it likely is for the region.
I'm not sure if it's a counterexample or evidence for your theory, but Tokyo is notorious for being rather cheap for such a big, densely populated city. Their prices for houses in the 23 wards are about half of what you'd pay in the suburbs of Toronto (and Toronto in turn barely compares to Vancouver or SF).
On the one hand this could be explained away by the overall demand in Japan being capped. Tokyo is still the most expensive city in that country, and there's relatively few global migrants choosing between US cities and Japan ones.
On the other hand, Tokyo still has about 3x the population density of New York, so if they'd stuck to New York-style zoning, prices could have risen to absolutely insane levels (in the city itself and in whichever places people priced out chose instead). Conversely, New York moving to the density of Tokyo's metropolitan area (which is about the same size as New York itself), would support about 10,000,000 extra people. How big do you think the "any big city" pool of migrants is?
On the gripping hand, since the zoning rules are set nationally, it's not an example of "one city upzones drastically, but its neighbors don't". Maybe there would be significant extra demand if little-to-no housing supply could be built in Yokohama/Osaka/etc.
Find one of those little islands in Maine, then rebuild all of New York City on that isalnd in Maine. Are the new apartments in the new city worth as much as an apartment in NYC? Probably not because none of the people, businesses, institutions, etc in the original NYC that make it such a desirable place to live in are in Maine. There is a difference between population density and housing density. Population density makes housing prices go up. Additional housing make prices go down. Housing cost is the ratio of population density to housing density, ie the ratio of supply to demand like in any other market. So building additional housing shoud make prices go down in the short term, while long term you may have to deal with Jeavon's paradox whereby the increasing livability of the city makes it even more desirable to live in, causing an increase in prices, but that's not a given.
"No; I think the missing insight is that there’s some pool of geographically mobile Americans1 who are looking for new housing (or who might start looking if the right situation presented itself). These people have various combinations of preferences and requirements. One common pattern is to prefer any big city - they would be happy to live in Seattle, or NYC, or the Bay, if the opportunity came up."
Another common pattern is to want to live where you're from. In 1990 NYC had 7.3M people, compared to 8.8M now. How many of those 8.8M have lived here that entire time, or were born here during the interim? I was born and raised here, I like it here, and most of my friends and family are here. I'm definitely a big-city-simp, but Oakland would have a hard time getting me to move there by building 10X the housing for many of the same reasons that I don't currently move to Tokyo.
In the absence of zoning laws, housing costs will equal the cost of construction. If you get extremely dense like NYC and run out of land you'll need to build way up, which is very costly.
But most places in America can get 10x denser without having to build more than 3 stories high. If the area has housing prices higher than the cost of construction, eliminating zoning laws will lower housing prices even while inducing demand; you can just keep building to accommodate new arrivals!
As an analogy, we induced demand for cars by building lots of cars and roads. But cars didn't get more expensive, since we can scale up production to meet demand. Car prices will only increase if the cost of construction increases (albeit with short term fluctuations from sudden spike in demand).
Cities in the past were not this expensive for that reason. Chicago grew from 4,000 to 3.4M in less than a century, but managed to accommodate everyone.
"If the area has housing prices higher than the cost of construction, eliminating zoning laws will lower housing prices even while inducing demand; you can just keep building to accommodate new arrivals!"
Sure, but you also need amenities along with the houses. If you just build houseshouseshouses (or apartment blocks) and nothing else, you run into the same kind of problems as Ballymun, for instance:
https://en.wikipedia.org/wiki/Ballymun
https://en.wikipedia.org/wiki/Ballymun_Flats
That's why property taxes exist! And of course there will be more commercial businesses, since density definitely induces more stores, restaurants, offices, etc.
I think more housing increases prices because it's limited. Looking at San Francisco, the city proper isn't even a million in population (the metro area is 7.7 million).
I have no idea how many people want to move to San Francisco, but let's say that it's 100,000 out of the entire world (because you'll get the best jobs in Silicon Valley and get rich).
If SF builds 90,000 new housing units, that means 90,000 more people can move there. So it's not going to bring down prices for those already living there, who might like to move out of a houseshare and get their own place, since the demand is continuing at the same level. And the price won't come down, because the housing supply isn't at the same level as housing demand - there are still more people who want to live in SF than there is housing available.
So increasing density won't bring down prices in that case. Unless you can say "In 2028 the projected population will be 2 million and by then, with old and new housing stock, we will have 3 million units available", then the price will come down. But so long as more people want to/need to move there, so that new housing is being snapped up as soon as it becomes available, then prices will remain high.
Same for the metro area - so you can't afford to pay rent to live in SF proper, then you move to the nearest city/town where you can pay rent. Soon everyone is taking that as their second choice, and demand is pushing up prices. Then people switch to their third choice, and so on, until you get to the places where the distance in travel time is so far, and there aren't commuter trains, that it's not in demand and so prices are lower.
I’m not entirely sure I disagree, but this also seems like an unnecessary addition that doesn’t explain much--particularly as it is contradicting by empirical studies.
Here’s what I see happening:
1) Land prices increase when an area is unusually productive or desirable.
2) This then incentivizes more housing units to be built to take advantage of that additional productivity/desirability.
3) Reactionaries (not necessarily a bad term here) oppose further construction, leading to continued increases in price.
There are two additional effects, one of which you posited
A) As density increases, the desirability of the city for urbanophiles increases.
B) As density increases, productivity increases because there are more talented people in a smaller radius and because you can tailor your local business to a smaller niche of people while having the same number of customers.
Your argument that ‘A’ is a main factor in driving prices up is fairly unconvincing to me. Plenty of people, if not most people, seem to prefer the suburbs to cities, at least aesthetically. On the other hand, ‘B’ seems fairly likely.
But what I want to specifically point out is that your argument rests on the claim that the cost increases from section 1 and 3 are smaller than the cost increases from section A (and B, if you include that).
Urban desirability and increased productivity (A and B) are positive feedback loops whereby increased housing leads to increased demand and therefore increased prices. However, ordinary supply and demand is a negative feedback loop whereby increased housing leads to increased supply and therefore decreased prices.
One important difference between these two models is that, if B is driving the increase, local wages should be expected to actually grow faster than local housing prices even if said housing prices increase, because the attracting of productive talent and productive companies (combined with Baumol’s cost-disease) will cause wage gains across the spectrum.
The only losers in this scenario are individuals wealthy enough that they would have preferred constant wages/salaries in exchange for continued suburbia.
The simple version of the argument is:
a) relaxed housing restrictions increases supply which decreases prices and rents
b) increased density creates more valuable urban agglomeration effects
c) urban agglomeration value is capitalised into valuation of dwellings, increasing demand and increasing prices
d) c) is bigger than a), so the net impact is that prices and rents rise.
The problem is that part d) cannot be inferred from the data (that would be) behind the imaginary chart because each of the cities on it have restrictions on dwellings that we aren't controlling for (and would have a hard time trying to work out exactly how to control for in any real-world study).
It's also not quite the right framing to think of a reduction in zoning restrictions as in increase in the supply of housing. It is really an increase in the elasticity of the supply of housing - by reducing absolute legal restrictions as well as the implicit (though sometimes more restrictive) barriers from the approvals process, the supply of housing becomes more responsive to changes in prices/rents.
The simple conclusion in theory (for instance In the Rosen-Roback model of spatial equilibrium) is that, whether urban agglomeration (which is effectively a kind of productivity) winds up in prices and rents depends on the elasticity of housing supply. Where the housing supply is perfectly inelastic (i.e. no price increase can induce the supply additional housing) all productivity increases go to house prices. Where the housing supply is perfectly elastic (i.e. an infinite amount of housing can be supplied at the going price) all productivity increases go to wages and population growth.
The imaginary graph (from the article) could be explained by the following stylised set of facts: historically freer planning, but urban development commencing at different times (and at different rates for random "natural" reasons) followed by much uniformly strict restrictions on redevelopment everywhere. The initial level of density (and thus urban agglomeration) is different in different places, but with similar levels of restrictions on new development (and additional densification) housing supply is similarly inelastic everywhere and so prices today are largely determined by density levels. This stylised history is consistent with frequent observations that, much of the development in big cities would be illegal today (e.g. https://www.nytimes.com/interactive/2016/05/19/upshot/forty-percent-of-manhattans-buildings-could-not-be-built-today.html)
The reality is likely a messy version of this (because restrictions are different in different cities and have been implemented at different times). But the important lens is that the relationship between prices and productivity (and thus density) depends on a relatively inelastic supply of houses - exactly what is being alleviated by zoning reform and relaxation.
The other insight that I think is missing from Yglesias' (and your) analysis here is that growth is multifaceted. Density doesn't increase for no reason; it increases as a knock-on result of growth in jobs, and amenities, and clubs, and service organizations, and sports teams, and etc. These things are really, really heavily coupled.
When cities go through periods of "growth" meaning the broad definition above, housing demand tends to grow faster than housing supply, which leads to things like above-market bidding wars and spiraling rents. *That* leads to density. Building stuff takes time; the density follows many months to multiple years *after* the increase in demand.
So, I disagree with "density increases local prices" per se; *growth* increases local prices, which prompts denser development. Where my YIMBYism comes in here is not that you can make a desirable city cheap with lots of new housing - sorry, not gonna happen - but rather that policies which restrict density should be avoided precisely because they guarantee that the price shocks that come with growth will be sharper and take longer to resolve.
Part of why this is all so important is that when price shocks do settle, they don't resolve into big price drops - price increases in housing are very, very sticky. Homeowners *hate* selling at a loss, and will avoid it like the plague. Landlords won't cut rents until vacancy rates become extreme. Policy has to be designed to keep the price jumps under control, because once they occur there's no path down that isn't super painful.
It sounds like this is just a matter of accounting for covariates. Housing density isn't the only thing that makes an urban environment valuable to live in. There need to be jobs, transportation options, food availability, basic services like plumbing and trash collection, a lack of crime, weatherproofing, public spaces, amenities, and so on, all of which we might lump into the attractiveness of a location.
If you look along the vector between the random plain in North Dakota and NYC, both the attractiveness and the housing supply increase, and the difference in price indicates that the attractiveness increases more than the housing supply does. But when it comes to discussing changes to housing policy in isolation, you're operating on a different vector that keeps the attractiveness more or less constant.
A simple graph might help, which I can describe in words: Put attractiveness on the vertical axis, and housing supply on the horizontal. Price is highest in the upper left, lowest in the lower right. NYC is above and to the right of ND, but it's more above than it is to the right, so along that diagonal, price increases as you go up and to the right. Housing policy debate is about approximately horizontal changes, and on that axis, price decreases as you go from left to right, i.e. increase the housing supply.
Scott, I'm tempted to say that you're not even wrong, but in an interesting way.
Your theory is that increasing housing density in places where people want to live increases prices, but that it does so in increasing the value of living in the city as a whole. If you're right, and I think maybe you are, then it doesn't make sense to say "We shouldn't build housing because although it will increase supply, allowing more people to live here and lowering prices, it will also make almost everyone in the city better off, therefore increasing demand to live in the city and increasing prices!" If you're right, we should build more housing both because it allows more people to live in the city and because it improves the lives of nearly everyone in the city - there's more housing AND each unit of housing is more valuable to the people living in it than it was before.
Quibble one: I don't see anything in your essay that suggests that the increased value effect would raise overall housing prices more than the increased supply effect would lower them. Do you think this is inevitable or even likely, and if so why?
Quibble two: Of course, you might still oppose YIMBYism because you were concerned that increased density would change the character of a city in undesirable ways, or you might be concerned that particular groups would lose out on the increase in value provided by more housing.
Land value tax would solve this.
Solve what? And how?
The corollary would be that if you demolish housing in big cities, prices would fall. This doesn't seem quite right?
Adding housing only increases density if the land area is fixed. If new land is annexed for the new housing, available housing can increase with no change to density.
And the units in the first graph, density per unit area, make no sense to me.
There is a difference between house prices (which include the land under them and so dramatically increase as density increases) and housing rental prices (apartments/condos can be stacked to make use of the pricey land). That being said building up is harder than building on a flat plane, so I would expect the rental prices to increase relative to a flat plane (if somehow building a 20 story building was cheaper we’d see them built in the middle of nowhere more). So density does inherently raise rental prices somewhat because it requires building up, but artificial restrictions on building density will increase prices even more than they would be without them. I think it’s also right that density can increase demand for a particular city as some people want to live in with the extra amenities of density (and tolerate/enjoy the density itself) vs people who want to live in open country or more suburban areas. Japan allows more density and construction everywhere (plus falling population) so their housing is just a whole lot cheaper overall, but still should be more in Tokyo than in the country due to the height. As with many things in Japan, I suspect they are probably more at an overall equilibrium with regard to people distributing throughout the country and having the interior/exterior space, and density/amenities for their income vs the US which is much more dynamic, has a great many more building restrictions and inefficiencies, and has eye popping income increases from the tech and oil industries.
We also do things like requiring double stairs and have worse fire rescue capabilities, which increase the cost of building up vs building flat in the US relative to many other places. Property taxes/Georgism can significantly affect this as well, not sure how that differs between the US and Japan. There are also significant cultural differences in how income is used and wealth is saved, with the US using housing as the way to build a typical household’s wealth.
Also I just realized that most of the Japanese “countryside” is a within a 4-5 hour ground transit ride to Tokyo (even less by air), while most of the US is certainly not a 4-5 hour train ride from New York. So in some sense maybe almost all of Japan is a lot more urban/connected to agglomerated amenities than the US is, which would further cut down on the price differential between city and “countryside”
Didn't Robert Lucas point this out in simple terms like a hundred years ago when he noted that cities are valuable because of the social connections and the more people/housing units, adjusted for proximity, the more social connections, and therefore the more valuable the housing unit or the restaurant table.
I wrote a post trying to change Scott's mind about housing:
https://perpetualcall.substack.com/p/a-simple-model-of-housing-prices
I don't think your graph of price vs. density is as ridiculous as it looks at first glance.
You can very well make a model where each single added house decreases local prices by a small amount while having an overall positive correlation between houses and price in aggregate.
You just need some event that is more likely to happen with many houses that increases the price by a disproportionate amount, like a school, supermarket or public transport being built or a high profile business moving to the area. Or, simplyfying the model, an event that happens once a certain threshold of houses have been met. The resulting graph would go down with each single house but would also jump up at certain points, thus increasing the price in the long run.
Of course, this is a very YIMBY-favoring interpretation. Ignoring other factors, it would favor YIMBYism even on a geographically local scale from a community perspective: Prices (mostly) go down because there is more supply of equal quality and prices (mostly) go up because there's more quality of equal supply.
For inhabitants of big cities, who can actually afford it now, it is undesirable to decrease housing costs in big cities, because that leads to an increase of poorer people in their vicinity.
Considering cities, I think its not a function of big cities attract people. No, its jobs and amenities.
100K city no airport. no art museum. few high paying jobs
500k city - has airport, has art museum, has ethnic food, has a high tech business
NYC level - has stock exchange and banking industry able to support top class amenity, also other jobs, that attract other amenities. OOOH, HAKKA FOOD. OOH, AN OPERA AND A SPORTS TEAM.
You're not adding houses to a generic city with no special amenities. As the city gets bigger based on industry it also gets more amenities and becomes more attractive. OOH BALLET, OOOOH, ARTISAN PICKLES.
I haven't even considered cachet or prestige!!!!
But basically this will vault certain cities very high up for high high demand.
Adding a few more houses might not be able to satiate the pent up demand that is so high, these urban locations have people commuting for an hour on a train to work there.
> NYC level - has stock exchange and banking industry able to support top class amenity, also other jobs, that attract other amenities. OOOH, HAKKA FOOD. OOH, AN OPERA AND A SPORTS TEAM.
The Hakka food is surely a result of Hakka refugees ending up in New York and not a result of existing demand in New York eventually attracting Hakka chefs to fulfill the demand.
Probably some interplay. Because you open restaurants based on demand. And Momofuku is Chinese food, but its demand is rich people.
And the larger the city, the better shot you have at "authentic" food, or like Vegas you have it because of clients.
I'm gonna eat some amazing Chinese food (better than anything in Taiwan, for example) in Davis, CA, because tons of chinese people live in the area who are scientists and have the money to pay for top shelf Chinese food.
I can also ask you why there is a Ruth Chris steakhouse in Taichung Taiwan?
Is that because of American refugees?
TGIF is there too - it serves the locals not expats.
So I agree some of this is demand from movement of peoples.
But some of that is because big cities have crazy job scenes.
And for NYC these reinforce each other. Its a spiral.
> I can also ask you why there is a Ruth Chris steakhouse in Taichung Taiwan?
Ruth's Chris is a brand that has expanded. Name a Hakka restaurant chain with a store in New York.
Note that Ruth's Chris deciding to see if it can sell the food it already makes in a new market is virtually the same process as a refugee thinking "Well, nobody here knows who the Hakka are or has any desire to eat their food. But that's what I know how to make, so let's see if people will eat it."
> I'm gonna eat some amazing Chinese food (better than anything in Taiwan, for example) in Davis, CA
This is not plausible.
> because tons of chinese people live in the area who are scientists and have the money to pay for top shelf Chinese food.
For example, you've failed to distinguish Davis (population: 67,000) from Taipei (population: 9,000,000).
If we assume that every faculty member at UC Davis is a Chinese scientist, Davis would contain "2500+" Chinese scientists. (see https://www.ucdavis.edu/academics/our-faculty ) If we make the much more reasonable assumption that each university in Taipei has, on average, at least 100 scientists on staff, Taipei would already be well ahead of Davis in local Chinese scientists.
I think you're onto something. But you should check out this paper by Ed Glaeser and Joseph Gyourko: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.1.3. From Figure 3, housing prices in most cities are pretty close to the costs of construction in those cities. Deviations from this rule are cities where people want to move but there are natural or artificial barriers to housing construction.
Your story is based on the idea that density carries attractive amenities. Anecdotally, I think the amenity value of city density has been enhanced by recent technology. For example, technology has greatly eliminated the need to wait in stupid lines (at the bank, at the post office, etc.). And when you do have to wait in lines, it's not nearly so bad because your phone allows you to still be productive and/or entertained. Technology has also made it easier to navigate a dense city and to find all those niche little shops or clubs or farmers markets or whatever that make a dense city so cool.
The basis for your examination is flawed.
Strictly speaking - density is irrelevant. What matters is demand vs. supply.
The housing building advocates use this incorrectly: they presume perfectly matching demand vs. supply - thus increasing supply reduces demand effects. Wrong.
First of all, no city is standalone. San Francisco has the entire Bay Area as a suburb; New York has its other, non-Manhattan boroughs as well as New Jersey, Washington DC has Maryland and Virginia, etc etc. These suburbs/adjacent areas constitute both latent and unmet demand - while not everyone in those suburbs wants to live in the city, the reverse is not true at all: few people in the city want to live in the suburbs. The net demand effect of these suburbs is clearly skewed towards the city. In this respect: Yglesias is completely correct in that building 1 or a dozen apartment complexes will do nothing to materially affect the supply/demand curve.
The second problem is that there are material effects from social mores and government policy. Both San Francisco and New York City have property tax caps, for example. These caps serve to reduce turnover because anyone who has owned a property in those areas has a material tax benefit that increases over time - they only sell if they have to and/or are moving out forever. There are numerous properties in Pacific Heights in SF which are $4M to $7M in value but are paying under $3000 a year in property tax (use Redfin to look around); the identical properties, if purchased today, would be paying at least $40K to $80K a year in property taxes. New York city has only had the tax cap since 2011 but the effects are similar, if smaller. Social mores - Tokyo is a prime example. People simply live in smaller places. San Francisco and New York city also have rent control - another market distorting mechanism on top of (and directly related to) the property tax increase limits.
Lastly, cities are where rich people live. Yes, some live on huge ranches in Montana or in a "regular" house in Omaha, but the majority of rich people live in cities and/or have one or more properties in a city. Rich people = more expensive property.
I find Scott's argument compelling, but to me many of the comments seem to be arguing about tangential points. So I wanted to try to reiterate what I thought was the core of the argument, for what it's worth. Less eloquently than Scott, alas. And then I'll try to offer a slight extension.
In this simplified thought experiment, imagine all housing units are identical, so we abstract away from the effect of changing housing quality. And imagine employers' location choice and employees' location choice are governed by the same factors, so we can think of a representative person's preference.
The core assertion: suppose you build 1,000 new housing units in San Francisco. This will probably cause _more than_ 1,000 people to move to San Francisco (specifically, people who would not have moved to SF in the absence of this new construction), and so housing prices will probably go up.
I know it seems weird, but I actually find the assertion pretty compelling, because the value of the network is proportional to the number of nodes in the network. If you build 1,000 new housing units, and fill them with 1,000 new entrants, doing whatever cool things those new entrants are doing, does that make the city more or less attractive to the marginal new 1,001st person deciding between SF or LA? "More" does seem like it has to be the right answer, most of the time. So if someone was indifferent between SF and LA given (old population, old prices), then they must prefer SF with (new population, old prices), since it now has a superior network. And hence equilibrium demands that prices go up until indifference is again achieved.
If I had to think about what might be missing from this picture, the only thing that comes to mind is that the intertemporal behavior of the system might be important. Rather than building 1000 new units, consider what happens when you build the _first_ unit. The 1st new entrant, in the old steady state, did not come to SF. At (old pop., old price), they chose LA. And while you now have a new unit, you still have the old population. So to change the first person's mind, you have to offer a lower price.
So this suggests we should expect, if a lump of new housing appears, it should have a short term negative effect on prices, and a medium-to-long term positive effect on prices. Which also makes sense because new entrants to a city don't immediately start contributing to its network effects; they have to be integrated into the network first (i.e., the famous celebrity chef entrant has to open their restaurant, the wealthy angel investor has to become known to the entrepreneurial ecosystem, the artist has to open their gallery, and so on.)
One last generalization. If the short-term and medium-term effects of a new housing unit on house prices have opposite signs, then in a continuous system, the relationship between prices and building rates will probably be non-monotonic. Think of a differential equation where changes in prices are a function of (new entrants - new units), and where new entrants' rate of entry is a function of current prices and _lagged_ population (where the lag is proportional to the amount of time it takes for the average person debating between SF and LA to update their decision model to include the network value of recent new entrants.)
So you can have one steady state with no new units, no new entrants, and no price changes. Or another steady state with very slow building of new units and increasing prices (because the rate at which new entrants are integrated into the network exceeds the rate at which new units are built). Or a third steady state with fast building, where units are built faster than new entrants are integrated, and we observe decreasing prices.
This could conceivably make sense of both SF and Tokyo.
Plot price change since 2000, say, against population growth over that same period. It will be immediately clear that there are no shortage of slow-growing cities. Control for average wages and it will be immediate.
I live in Whitehorse, Yukon. The average home here costs 50% more than the average home in Houston Texas. Yukon is about as sparse as you can be. It's got more land than Germany and the whole population wouldn't sell out the stadium where the little league world series is played. Density we ain't got. NIMBYs and city planners we got in spades.
The curse of living in a special place.
it is at that. ain't no place I'd rather be.
I feel like this is a function of a higher cost of construction in remote areas due to a scarcity of materials and labour