An Affordable Housing Parable

Housing and development are such emotional issues that it’s often hard to have a reasonable discussion. So let’s talk about something we all like instead: riding bikes.

Suppose that everybody who wants to ride a bike already owns one. For whatever reason, the city has enacted rules that make the production of new bikes very difficult, but since all would-be riders already have a bike no one notices. Now, suppose the city becomes such a great place to bike that more and more people decide they want to ride. At first, the new riders can get cheap bikes, from existing riders fixing up and selling old bikes and the limited supply of new bikes. However, as more and more people decide they want to ride, the price of a bike will start to rise quickly.

The rapid increase in the cost of bikes leads to a public outcry – low-income people can no longer afford a bike. And so affordable biking advocates organize and insist that (a) a bike that was affordable at the time of previous sale cannot be sold now for more than the previous purchase price plus inflation and (b) a portion of the new bikes that are produced must be reserved for low-income people. Also, whenever someone proposes to produce new bikes, they insist on reducing the number and quality of bikes produced, because producing large numbers of high-quality bikes will drive up the price of all bikes.

Despite the enactment of these policies, things keep getting worse. The number of cheap bikes reserved by the policies is not enough to meet demand, so low-income people are forced to enter a lottery to win one of those bikes. People who win a cheap bike are extremely reluctant to ever give it up, even if it’s not the best bike for them. Low-income people who do not win cheap bikes must either pay market prices for one of the expensive bikes or move to another city where bikes are in greater supply. Worse still, because some bikes are reserved for the cheap bike lottery, the prices for the bikes not in the lottery are driven up more. So everyone who does not win the cheap bike lottery, from the poor to the wealthy, pays more for bikes. In addition, the high prices commanded by bikes results in every available bike being pressed into use – even unsafe rust heaps that would normally be taken off the market and recycled.

The response of the biking advocates is to reserve an even greater number of bikes for the lottery, which because of the further price increases now extends to middle-income people, require an even greater number of new bikes to be reserved for low-income people, and fiercely oppose the recycling of old bikes. The end game is obvious: eventually, all bikes will either be in the lottery or so expensive that only the very wealthy can afford them.

Now that probably sounds like a pretty insane system for trying to manage the increase in demand for bikes. Well, yeah. But it’s how the demand for housing is managed in just about every major American city. And if the solution in the bike allegory is painfully obvious – build more bikes – the solution to unaffordable housing in American cities is equally obvious – build more houses.

Look at any major, prosperous US city, and you will see all of the perverse outcomes of the bike metaphor in action:

bedstuy

Affordable housing advocates began organizing on a small scale, and the policies they developed were logical from the perspective of defending oneself against change. However, from a macroeconomic perspective, these policies were probably doomed to fail from the start. There is not a single US city where housing has grown more affordable as a result of these policies being enacted. More stringent versions of these policies are also doomed to fail from the same inherent contradictions. It is time to admit that our affordable housing policy does not work and try something else.

Every problem in the bike metaphor could be largely resolved by allowing the production of more bikes, and I think most of our housing problems could be largely resolved by allowing the production of more housing. It would be hard for any policy to not be an improvement over current outcomes.

Of course, allowing more bicycle or housing production by the private sector isn’t the only possible solution. Other equilibriums would include:

  • Reduce the quality of biking in the city by making infrastructure worse. That will reduce the desire to bike and therefore reduce bike prices. Again, this sounds ridiculous when posed as a solution for demand for biking, but it is not uncommon to see people argue against infrastructure improvements in their neighborhoods for this reason. The opposite extreme exists in places like Detroit, where the infrastructure and economy are so bad that despite the destruction of housing units, the city remains very affordable.
  • Have the prices of all housing units set by the government, and have a lottery for all units. Anyone who doesn’t win a unit has to leave the city. This is the equilibrium that current policy is trending towards.
  • Start a government housing construction program to increase supply. Personally I see no reason to do this if the private sector is willing to build housing. We don’t need the government to start producing bikes to meet the demand for cycling; existing bike manufacturers would be happy to increase output.

The usual economic argument against reducing control on private development is that new construction causes all prices to rise, but that doesn’t make sense. There are only so many people on the planet, and not all of them want to live in Los Angeles. If we keep building houses, at some point, they will become more affordable. Fortunately for us, the private sector is willing to build housing, just like it is willing to build bikes. All the government has to do is get out of the way.

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4 thoughts on “An Affordable Housing Parable

  1. keaswaran

    One hard part is that the amount of housing is so far short of demand at the moment that it will take a while before prices actually come down as a result of construction. This intermediate period is what turns a lot of people against this sensible idea, and makes them think it will fail.

    Reply
    1. letsgola Post author

      Thanks for the comment. That is definitely true, and as a consequence, when people see prices rising at the same time new construction is going in, they blame the price increases on the tangible (construction) rather than the intangible (the social and economic factors making the neighborhood a desirable place to live). Of course, the causation is going the other way… the construction is chasing neighborhoods where prices are rising.

      Reply
  2. av2ts

    I understand your mental exercise, but it simply does not hold – at least here in LA. The City simply does not do the things you suggest – limiting the re-sale price of for-sale housing or requiring a portion of new housing be for low-income. Yes, the City restricts rent increases on pre-1978 housing, but this should in no way affect housing production, since new construction is exempt from Rent Stabilization. Additionally, the people demanding fewer units and less density are not housing advocates, but neighborhood council and homeowners folks. I agree that the City needs to encourage housing production – but its seems pretty clear to me that the market unbalance exists because there is a lack of supply at certain levels, more than an overall lack of supply. We’ve actually produced enough market rate housing to keep pace with population growth since 1990, but the problem of affordability has only gotten worse (granted we inherited a huge deficit for housing in the 1980s, when it was incidentally a lot easier to build housing. Again the problem is that we are not building enough affordable housing and the trickle-down effects simply take too long as they are compounded by a loss of affordable units. For example, form 2000-2011 the City of LA has “lost” about 140,000 units affordable for those below $44k to rent and price increases, demolitions and conversions. A gain of about 50,000 new housing units in that time simply can not make up for the losses. Also, it is very easy to say “the City needs to get out of the way and everything will be ok.” Sure the City can do more to upzone and make the entitlement process easier (which they are doing) but a wholesale upzoning across the City is simply not feasible in today’s environment given the power of neighborhood councils and NIMBYs.

    Reply
    1. letsgola Post author

      Thanks for the comment. LA may not have official requirements for affordable units, but they are frequently included to smooth the process. For example, see the proposed Wyvernwood, where in order to try to win support, the developer offered to let any current resident get an affordable unit in the proposed development. You are correct that usually it is the neighborhood councils and homeowners opposing new construction; however, there is sometimes overlap. Again in the case of Wyvernwood, much of the opposition is from people protesting the loss of affordable units. As you point out, there are two ways to get affordable housing: one is to build it outright, and the other is through filtering, where upper and middle class people move into new housing units and old housing units become more affordable. In my opinion, neither is happening fast enough: we aren’t building enough cheap bikes, and we aren’t building enough luxury bikes to allow existing bikes to get cheaper. The segment of the population that cannot be accommodated in market rate housing is pretty small, if the market it working. But it’s not just low-income people spending a huge portion of their income on housing, it’s many middle-income people too. To me, that suggests lack of supply at many levels, not just low-income levels.

      Of course, it is an oversimplification to say the city should just get out of the way, given the neighborhood council and NIMBY opposition. But since they are the primary obstacles, part of my project here is to try to change that, however inconsequential this blog seems in light of that Sisyphean task. Maybe it’s just ADUs or duplexes/quadplexes at first, but we have to try to start somewhere! Hopefully the upcoming rewrite of the LA’s zoning code will provide an opportunity.

      Reply

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