Sorry, Progressives – Supply Matters

The discussion on housing affordability in California has taken a turn for the bizarre lately. In response to calls for allowing increased construction of new market rate housing, some progressives have argued that supply and demand doesn’t apply to urban housing. This has often been implied in the past, but recently, it has been stated explicitly and there have been ludicrous claims, such as that developers don’t want to build anything other than luxury units and that all new supply will just be purchased by the “global elite” anyway.

I’m not sure why some folks feel the need to insist that supply is irrelevant. Maybe progressives instinctively don’t trust private developers or economists. Whatever the reason, it’s just wrong. First, it’s obvious that developers will build cheaper units if they can make money doing so. This is true from the Inland Empire, where you can find new suburban housing for less than $100/SF, to Houston’s free for all, to Tokyo. Second, the global elite is only so many people and they can only buy so many housing units. As Market Urbanism will tell you, they’re a relatively small factor even in Manhattan, unless “global elite” has been redefined to mean anybody with more money than you.

It’s important to recognize that the “supply and demand doesn’t apply” argument is wrong, because if we don’t identify the right problems, we can’t develop solutions that work. And in fact, the housing markets in places like LA and SF are operating pretty much how you’d expect them to work if you accept the basic principles of supply and demand as constrained by the regulatory environment.

For example, why are developers only building markets for the high end of the market? Well, the zoning and permitting requirements make it difficult, time-consuming, and costly to build. Therefore, only a little new supply is going to get built every year – for example, in LA/OC, we’re not even permitting half the number of units we were back in the 80s.

Naturally, developers are going to build the most profitable units first, and those are the luxury units. This doesn’t show supply and demand is irrelevant; it shows the exact opposite!

As an analogy, imagine if we only allowed 7,500 cars to be built every year. Auto manufacturers would only be making Maybachs and Maseratis, and they’d all be getting bought by the likes of people who own Mittal Steel and the Burj Khalifa. Now imagine if we built 750,000 cars a year. They’d still be unaffordable to most people but your techbros and finance quants would be able to buy them. Now imagine if we built 75 million cars a year. The global elite wouldn’t buy them all because it would be a terrible investment. New cars would be affordable to a wide range of people, and we’d have a healthy market in used cars – kind of like we do in the real world.

You get the point. It is pretty obvious that supply is relevant. Once we get past that, we can have a more productive discussion.

Admitting that supply matters doesn’t mean you have to favor unrestrained urban development. You could argue for massive government construction of new housing. You could argue for some orderly amount of development, for example a system where the government would be required to issue a certain amount of permits every year and people would bid for those permits in an open market. You could argue for making it easier to build suburban apartments and for funding the transportation infrastructure necessary to let people move around the region.

Admitting that supply matters also doesn’t mean you have to favor eliminating existing rent-controlled or rent-stabilized units, and it doesn’t mean that no government intervention is necessary. In places like Los Angeles, we have dug the whole so deep that low-income and elderly people currently paying very low rents wouldn’t have a prayer in an uncontrolled market. In any case, government is always going to be needed to make sure that the very unfortunate are able to have adequate shelter, and to make sure that renters are not abused or taken advantage of.

Finally, this doesn’t mean that we don’t understand and appreciate the efforts of affordable housing advocates and planners operating within the current zoning and regulatory environment, trying to make sure that low income folks have at least some access to the opportunity of the city. As I have said previously, my goal is for Los Angeles to be affordable and accessible, and provide opportunity, for all.

What I would like is for us to acknowledge the realities of the situation, and start working on more proactive solutions rather than just reacting to loss of affordable housing units. What frustrates me about progressive policy is we have no coherent vision of what we want, and consequently no way to get there. The current progressive program, at best, offers to protect those who already live in the city from displacement. But if you happen to live in rural Appalachia or Guatemala, you get to look forward to another generation of economic desperation, because you’ll never be able to move to somewhere with more opportunity. This is not internally consistent with what our values are supposed to be, and people rightly sense and resent that hypocrisy.

I don’t know what the solutions will be – it is an enormous challenge and it is going to take a lot of hard work. It will require many different groups of people to come together, and everyone is going to have to give up something to get something. But we have to start with a realistic understanding of where we are to even have a chance.

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