The following discussion is a summary of the article ‘Why Voters Haven’t Been Buying the Case For Building” by Rick Jacobus at Shelterforce. He describes research from economists Jerome Rothenberg and George Galster on urban housing markets. Read the full article here: https://shelterforce.org/2019/02/19/why-voters-havent-been-buying-the-case-for-building/
Why are lower-income people, and even middle-income people, unlikely to benefit from higher-end development?
Unfortunately, the simplest laws of supply and demand do not answer this question. If housing was a singular marketplace, building more expensive units would directly result in lower prices for middle and lower priced units. When supply goes up, price goes down, right? Not quite.
The housing market is segmented and many segments are not perfect substitutes. Increasing supply of one segment does not necessarily bring prices down in another. The structure of urban housing markets is a set of interrelated submarkets that move somewhat independently than as a single market. When you look for an apartment, you may have a certain neighborhood in mind, distance to school or work needed, and certain amenities that you require. By looking at only a few places, you get a clear sense of the current market price for the kind of apartment you are looking for in the kind of neighborhood where you are looking. There is a market and a market price even if it was not a single citywide market. In a segmented market, the price you pay for an apartment is still set by supply and demand, but it’s not just the overall supply and demand that matters. The rent is at least partly set by the supply of apartments like yours and the amount of demand from people like you.
Let’s consider how segmented housing markets respond to changes in supply or demand in any one segment. When new housing is added at the most expensive end of the market, there is an immediate response within that specific submarket (luxury homes). Prices drop in response to increased supply.
In the next subgroup down market, prices fall also, but not by as much. When luxury prices drop, some people will upgrade from merely high-cost housing into the luxury market. This reduces demand in the high-cost submarket, which lowers the price. But for a number of reasons, each new luxury unit is associated with less than one household stepping up. So the price reduction is less in the second tier. And for each step further down, the effect of the added supply is diminished to the point where the addition of new luxury housing makes relatively little difference to the rent for low-cost housing units.
Why wouldn’t there be a 1-1 change? For every new luxury unit, doesn’t someone vacate a less expensive unit down market? Not exactly. There are many reasons why the submarket units are imperfect substitutes. For one thing, as prices fall, households in the luxury segment of the market may consume more housing. This can happen when someone buys a second home or even when two roommates respond to lower prices by each renting their own place. But also, when higher end units are being purchased by new residents, they are not vacating current units in Raleigh. At each stage in the process, adding one unit or removing one household from one tier does not automatically mean that one additional household will step up into that tier.
Does it matter what gets built? Yes. What if it’s mostly boutique apartment buildings made up of studios and one-bedroom units? In an unsegmented view of the housing market, this should not matter because the people moving into these units will vacate units somewhere else in the city. But, if we see the market as segmented, then it matters that new buildings are serving well-to-do single people because we can expect to see the biggest price impacts on other housing that those singles would have occupied. Other well-to-do singles will get most of the benefit.
Of course, if we don’t build at all, no one benefits. Building is better than no building – if we don’t build for the well-to-do single, they will rent or purchase down-market, for example a middle or affordable unit, creating competition with households who have less financial means. But we have more options. Let’s be upfront about the limitations of the market. And let’s acknowledge that local governments can partner with private developers to deliver benefits to people who are being left out. We need to do so much more to encourage development of new buildings that are targeted for lower- and middle-income households.
Residents are concerned about removing restrictive zoning rules for the sake of more building in general, but what if it were in exchange for more affordable housing units? Local planning and zoning regulations have enormous impact on what and where it is financially feasible to build. Are we willing to trade relaxed density rules in exchange for more affordable housing units? This is a question I expect to see addressed by the next council.