Rising Rents

When it comes to the housing market, there are a lot of "supply side" advocates who argue that housing is expensive because there's not enough of it. I've been skeptical of this, at least on-face. I think the issue is more complicated than simply building more houses and convincing people is even harder still. I posed this question to Matthew Yglesias earlier in the week.
If we accept the premise that density is desirable, how does building more housing units actually lower rents in practice?...  Let's say we build more housing in DC's core by removing the height limit and the average rent in the metro area decreases; but rents in the core increase (due to higher demand for density) while the rents on the fringe decrease (due to greater overall supply of housing in the market). Has the policy succeeded because some housing in the overall market is now less expensive? Or has it failed because now the only affordable housing is the housing with the highest transportation cost?
Here's his answer. I generally think it's adequate but not compelling.
I think success and failure are relative concepts... In the scenario you're spelling out, we've hardly solved all of society's problems, but we have created a situation in which more people can afford to live in the region... And even if the cheapest housing continues to be in the places with the highest transportation costs, those costs would still be lower than the current cost of even-further commutes, even-more sprawl, or simply denying people access to the strong labor market and other amenities of greater DC.
Herein lies the reason why NIMBYism is such a difficult hurdle to overcome in this debate.

Let's say I live in some neighborhood and a developer proposes to build a new luxury building. That total number of units in my neighborhood and in the region goes up. Rents stabilize in some parts of the region, and developers don't need to sprawl farther out along the fringe to get housing built. For society as a whole, this new building is probably a good thing.

BUT, this new luxury building would make my neighborhood more desirable, demand would go up in my neighborhood, and it would make my rent go up when my lease comes up for renewal. So, as a renter, it's perfectly rational that I would want to stop this new building from getting built if I think my rent is more likely to remain stable without it.

This isn't just a theoretical issue, here's what someone said on the Kojo Show earlier in the month (exact quote starts around 34:15)
[Jessica] lives on 14th Street NW near U Street NW, where there's been a huge increase in the construction of luxury condos and apartments in the past few months. She lives in an existing apartment where the rent was fairly expensive in comparison to where she used to live. She just got a request for renewal of her lease and the price will go up about $350 a month, which she cannot afford. "I would have thought that with all the new construction prices would have gone down", she says, "or at least stayed the same; why are existing rents still rising when there is so much competition?"
The point of all of this is that the supply-side advocates cannot simply go around preaching that we'd all be better off if we just built more houses. In the end, we're all going to be better off if more housing gets built to match the demand. But in the short-term we can't ignore that there will be some winners and some losers. Trying to tell a person that some poor guy is better off because he can afford to live 15 miles from his job rather than 25 miles from his job even though their rent just got jacked way up is hardly something that most people will accept at face-value.

It's one thing to roll your eyes and complain that NIMBYs are holding up progress and ask "don't they get it?" Yet if you really want more supply to come online, you've got to figure out how to satisfy these people in the short-term.

Edit: To be clear, I do think that more housing units are necessary and good. I'm just not convinced that "let's build more to lower your rent" is the proper sales pitch.

10 comments:

    On May 24, 2012 Cullen said...

    I dont't think the Kojo caller's rent did not increase because of the building going on near here. The rent increased and the building BOTH occured because the supply of housing is lower than the demand.

     

    Other countries get around this by regulating the building of luxury apartments, and by making it difficult for developments to remain empty for several years in a row.

    The developers in these countries make more money than they do here.

     
    On May 25, 2012 Lydia said...

    Interesting discussion, Rob. Are there any studies on how prices are actually impacted by luxury building on a micro level, rather than using combined data for a whole city? I'd also like to hear your take on all the mechanisms we have to lock in affordable housing even as more high-end stuff comes in - rent control, inclusionary zoning, low income housing tax credit financing etc. Those tools are supposed to allow cities to maintain diversity and equity without giving up wealthy residents who expand the tax base.


    Lydia

     
    On May 25, 2012 Alex B. said...

    There's a bit of a strawman you're attacking here, Rob - as I don't know of those who are arguing that relaxing supply restrictions alone would solve all the issues.

    However, increasing the supply is a necessary but not sufficient condition at least.

    As for the caller talking about rent increases on U St - just because there are a lot of cranes on the skyline doesn't mean those apartments have actually entered the market just yet.

    I think people severely underestimate just how in-demand this market is.

     

    Lydia, I'm not immediately aware of any studies but I'll keep you posted if I do. I'm still thinking through the potential mechanisms, so I'll have to save that for another post.

    Alex, surely we agree on the same goal (more houses). My concern is with how it's packaged and sold to the public. If the promise is that more housing = lower rents, then any perception that this promise is failing to deliver or that it's backfiring is compelling (though not necessarily valid) evidence for NIMBYs to oppose future development. For this reason I really like Ryan Avent's idea that we should focus on in-fill development and density in the suburbs, rather than putting most of the focus on the urban core. You would wind up with the same net gain in units, but spread the supply and the potential demand for this new housing over a wider geographic area.

     
    On May 25, 2012 DogBad said...

    There are a few studies out that examine the impact of rent control and inclusionary zoning ordinances. My favorite is: http://www.law.fsu.edu/journals/lawreview/downloads/332/powell.pdf

    As for the District's policy, it seems to suck. There are currently two units that have been produced in the past 3 years and neither of them have sold, even after very intense marketing efforts by various entities. Permanently resale-restricted homeownership does not serve anyone well, especially the juridisctions that force private developers to abide by this.

     
    On May 25, 2012 DogBad said...

    There are a few studies out that examine the impact of rent control and inclusionary zoning ordinances. My favorite is: http://www.law.fsu.edu/journals/lawreview/downloads/332/powell.pdf

    As for the District's policy, it seems to suck. There are currently two units that have been produced in the past 3 years and neither of them have sold, even after very intense marketing efforts by various entities. Permanently resale-restricted homeownership does not serve anyone well, especially the juridisctions that force private developers to abide by this.

     
    On May 25, 2012 Jeff said...

    Good points Rob. I think one important thing to emphasize when promoting new development is the many ways it improves the lives of current neighbors. More neighborhood customers for food and shopping => more vendors willing to open shop and sell these goods. And it's not just more, it's more variety (a benefit Matt Yglesias mentioned in his book), because a larger customer base can allow more interesting niches for food and retail to flourish.

    I think this benefit has been inadequately explained in many cases--for instance, in the arguments around the upcoming Brookland developments.

    Other benefits include more eyes on the street and more tax dollars for the local government to put to use.

    The flipside of all this is that improving a neighborhood means more demand will be induced for it, raising the cost of housing somewhat. And if the improvements are things you value less than many others bidding for your lease (say, for instance, you can't/don't walk your neighborhood much or go out to eat often or go out to bars), you could come out a net loser. I experienced a small taste of that (not from the neighborhood changing, rather from myself cahnging) when I lived in Adams Morgan right after college, and eventually realized I no longer visited the 50 bars and restaurants around the corner often enough to justify the $150-$200 rent premium that comes with them.

    Sometimes Matt Yglesias and others set up a straw man of NIMBYs saying "keep our city so undesirable that our rent falls forever" (with a sarcastic nod to Detroit as such NIMBYs' dream city). Everyone likes having nicer and safer streets. But imagine some expensive recreational activity (say, golden threaded basket-weaving) that you didn't care a whit for but was all the rage with upper-middle to upper class folks, and some developers tell you "hey! get excited! with this project there will be TONS of new golden threaded basket-weaving venues on your block!" If you're renting you'd be really bummed because your rent's about to go way up while you get little out of it; if you own, you'll either face higher property taxes or cash in on your higher home price at the cost of giving up your neighborhood to find a new one.

    So maybe I just debunked much of my own argument. Oops.

     

    Housing is only expensive if you restrict your own supply to Petworth and Dupont. Housing is not expensive if you expand your supply and look at PG County, Marshall Heights, etc.

     
    On May 25, 2012 Anonymous said...

    I think it's possible the Kojo caller's rent went up $350 because the price one will pay when moving into a complex is invariably less than the price one will stay to stay in a complex. Many people don't want to deal with the cost and hassle of moving over 10% per month in rent. Also, the first year lease is often pro-rated to include 'one month free rent'.