Are the rents being too damn high more a function of limited supply or strong demand? In my last post, I considered the empirical analysis of supply side economic theory. This generic perspective doesn’t mean that what failed to materialize in a labor market would similarly fail in a housing market. However, the contention that upzoning would encourage more housing supply and thus make housing costs more affordable is a theory, not an empirical reality. Pushing policy based on a positive correlation (however robust it may be) between greater supply restrictions and higher housing prices is specious. Federal Reserve Bank of Cleveland on why it is specious:
As for what is causing [Owners’ Equivalent Rent] to rise, a number of factors have been proposed. Some suggest that a shortage of rental housing is responsible, though not everyone agrees that such a shortage exists. Proponents of the rental-housing-shortage view point to historically low ratios of completed privately-owned housing units to population and a low ratio of private construction investment to GDP. However, if rental housing were in short supply, one would expect to see historically low rental vacancy rates. Yet these rates are not far from their levels in 1995, before the run-up in housing prices. Still, it is possible that declining vacancy rates could prompt some rent inflation. It is also possible that some cities could be experiencing historically low vacancy rates, though this is not true of the five cities we examine below.
The five cities examined below are Cleveland, Los Angeles, Miami, New York, and Philadelphia. Meaning, the vacancy rates in New York City today are about the same as they were in 1995. The vacancy rates for those cities are not historically low. The supply side of the rental market equation hasn’t changed in 20 years. Then why are rents rising?
Part of the problem concerns how we define the market geography. The Greater New York rental market is a fiction, much like a market at the state level is a fiction. The bulk of vacancies could be where there is little demand for housing. Obviously, the rent isn’t too damn high everywhere in any given New York borough. Supply only matters where demand is strong. “Gentrification: White People Following White People“:
Gentrification depends on a host of factors, including an influx of professional-class white residents, but also business investment and pro-growth public policy. The unequal apportionment of these last two resources has been strongly implicated in urban segregation for a long time, and Sampson and Hwang conclude gentrification doesn’t really change that—money and advantageous policies tend to flow to areas that already have a critical mass of white people. As a result, gentrification may be remaking cities, but only along the social contours that already exist.
The squawking about greater density and housing supply allows more white people to follow other white people into the city, thereby exacerbating racial segregation. YIMBYism comes across as a sinister form of urban colonization. Build us housing where we want to live. “The point of greater density is to make a hot residential neighborhood affordable, not an entire metro area.”
I’ve been down this road before (here and here): “In places that are desirable but have low rates of new housing construction, families with high incomes or strong preferences for that location outbid lower willingness-to-pay families for scarce housing, driving up the price of the underlying land” (PDF). If a place isn’t desirable, then all bets are off in terms of the analysis. The actionable variable is, in fact, demand (not supply). If a place (i.e. neighborhood) becomes desirable, then supply comes into play. Newcomers eat up the high vacancy rates. Elsewhere in African-American New York City, vacancies rise. The result is the geography described by Sampson and Hwang. Some neighborhoods are too black to be desirable.
