What caused the housing crisis?

Skyrocketing housing costs in big cities are caused by demand for housing increasing faster than supply. The key mechanism underlying the housing crisis is the demand cascade: richer people move in and bid up the price of new homes, which pushes less-rich locals to compete for old homes, which forces the poor to take on roommates, move away, or become homeless.

Isn’t the problem a lack of affordable housing in particular?

The housing market is interconnected. When we don’t build enough new market-rate housing, we get demand cascades that bid up the price of old housing. Housing that was affordable becomes expensive. Solving the housing crisis will require building more market-rate housing and more subsidized housing; subsidized housing by itself is not enough.

Moreover, the issue isn’t only that prices are too high for current residents. We also have to think of the people who want to move into the city, but are priced out.

But new homes are not affordable, so building more will not help the people with the greatest need.

First, new homes function as a yuppie fishtank: by containing rich newcomers in glass towers, we absorb their demand and prevent a demand cascade. Hence, even if new homes are more expensive, they still help protect the stock of affordable old homes.

Second, the price of a home is not an intrinsic feature of the home. Rather, it is determined by both supply and demand. The key idea here is a multi-unit auction. There are 5 units of a product for sale, and 100 bidders. The price is the lowest winning bid. With 5 units, the top 5 richest bidders win, and the price is the bid of the 5th richest bidder.

What if there are 50 units for sale? Then the top 50 richest bidders win, and the price is the bid of the 50th richest bidder. Since the 50th richest is willing to pay less than the 5th richest, the price falls. This shows how the price depends on the level of demand relative to supply.

New homes do have higher costs than old homes, because they use new materials and modern construction practices. But when demand is high relative to supply, prices are driven far above construction costs, and lowering prices requires increasing supply.

You’re really saying that building luxury homes will solve the housing crisis?

Yes, building highrise condos is a step in the right direction. Apart from acting as yuppie fishtanks to absorb new demand, ‘luxury’ homes also free up affordable old housing through vacancy chains. When a local resident moves into a new apartment building, they free up their original unit; someone else moves into that unit, vacating their home; and so on, until homes in affordable neighborhoods are made available. Research shows that every new market-rate home added leads to 0.6 homes freed up in below-median-income neighborhoods.

The deeper issue is that highrise condos aren’t actually luxurious. True luxury is living in a big house on a quiet street with nice views, having a private yard and garage, and having easy access to big city jobs and amenities. This is what single-family zoning creates for the privileged few, at the expense of the many.

We’ve seen cities increasing housing supply, but prices keep going up. Doesn’t this disprove your supply theory?

On the contrary, this is exactly what a supply and demand model predicts would happen when demand is increasing and supply is (partially) restricted. Developers are able to build some new homes, but not enough to keep up with demand, so we still get a demand cascade, and prices of both new and old homes go up.

If more density was the solution, shouldn’t New York City be the most affordable city in the world?

Big cities are expensive because they offer amenities and jobs, so demand to live there is high. So big cities have high supply, but even higher demand. But it’s still true that increasing supply makes prices go down. If New York upzoned to allow more apartments, what would make it more affordable.

What about induced demand? Increasing supply just draws in more demand.

The idea of ‘induced demand’ is that we’re in a positive feedback loop where more people leads to more productivity, higher wages, and better amenities, which in turn leads to more people. NIMBYs use this to argue that increasing supply actually raises prices, so we need to block new apartments. But this argument is far more general than they realize.

The feedback loop is not driven by apartment buildings, but by more people. So if we build more suburbs and people move in and commute to their job downtown, they still contribute to higher productivity, driving the feedback loop. So to break out of the loop, we have to block all new housing, including in the suburbs.

And it goes even deeper. If college students study computer science and establish a tech sector, they are fuelling the feedback loop. When someone renovates an old building to open a high-end yoga studio or a fancy coffee shop, they are fuelling the feedback loop. If we’re really committed to avoiding induced demand, we need to clamp down on anything that could make the city nicer.

But this is absurd. Higher wages and nicer amenities are a good thing, and by assumption, these are net benefits, so the positives outweigh any negatives like increased congestion. Why should we turn down a net improvement?

And I suspect that NIMBYs will quickly abandon this argument once they realize that it commits them to opposing new single-family suburbs.

In any case, it’s not even clear whether the induced demand effect is big or small, or even negative. Maybe more people leads to more congestion, which induces people to move away. The effect likely varies by city, and by the size of the city.

For our purposes, induced demand is not an argument against legalizing apartment buildings.

Doesn’t upzoning increase land values? Higher land costs mean more expensive homes.

Upzoning a plot of land switches it from single-family to multi-family. From the landowner’s point of view, the price of that particular land will tend to rise, because apartments are worth more than houses. But from the developer’s point of view, the price of all multi-family land goes down, since there are now more options for land to build apartments on. The key is distinguishing between the price of the upzoned plot and the market price of all multi-family land.

And note that when the upzoning is broad enough, we increase the stock of multi-family land so much that a specific upzoned plot doesn’t increase in price. This happens when the marginal buyer is a single-family builder, who is only willing to pay single-family prices. Since the marginal buyer is what determines the market price, broad upzoning increases the option value of the land (because there are more legal uses) without increasing land prices.

Are there any upzoning success stories?

Not many. NIMBYs are politically powerful and have prevented reforms. It’s only with the housing crisis getting worse year after year that support for upzoning has started to win out.

In New Zealand, Auckland upzoned three-quarters of its residential land in 2016. The result: “six years after the Auckland Unitary Plan was enacted, rents for three-bedroom dwellings were 26–33 percent lower than they would have been, compared to rents in other urban areas in the country.”

What other factors have contributed to rising housing costs?

Some candidates for demand-side factors:

• Demographics: with longer lifespans, Boomers are staying in their homes and not downsizing, making it harder for Millennials to find housing.
• As divorce becomes more common, there are more separate households needing separate homes.
• Cities have grown and run out of space to keep sprawling, or have reached the limit for how long people are willing to commute.
• Jobs are increasingly moving to big cities.

People want to live in single-family homes, not apartments.

If so, then there’s no harm in zoning for apartments, because people will choose detached houses. Developers won’t build apartments, since they see that the market wants houses. The true test of what people want is to legalize apartments and see what happens on a level playing field.

The deeper issue here is that some people want single-family houses, and other people are willing to economize on housing and live in an apartment if it gets them a shorter commute. Why should public policy give special preference to people who want houses?

If we only have apartments, no one will have kids and the population will collapse.

Under the status quo where apartments are hardly allowed, developers economize by making units smaller. If we allowed tall apartment buildings everywhere and didn’t micromanage their dimensions, we would have large family-sized units where people would be happy to raise kids. The key: to make apartments larger on the inside, we need to make them larger on the outside.

This is an expensive city. If you can’t afford to live here, move somewhere else.

The price of housing is determined by supply and demand; it isn’t an intrinsic feature. We can choose to increase the supply of housing, making it more affordable. Whether or not a city is expensive is a policy choice, and we can choose differently.

Zoning policy should prioritize maintaining the neighborhood character for current residents.

Public policy should maximize overall social welfare, and not merely cater to one special interest group. There is a tradeoff between preserving neighborhood character for incumbent residents and providing housing so that people can live near their job and family. The YIMBY argument is that providing shelter is more important than neighborhood character, so we should sacrifice a lot of character to get more housing. NIMBYs value neighborhood character more, so they’re willing to sacrifice a lot of housing to preserve it.

If we are trying to do what’s best for society as a whole, we should legalize apartments, because (1) the number of people who would benefit from living near their job and family is much larger than the number of people who would lose their mountain view and easy street parking; and (2) the magnitude of the benefits gained by new residents from having housing is much larger than the magnitude of the losses in neighborhood character faced by incumbent residents.

Who are the winners and losers from upzoning?

A common argument is that homeowners oppose new housing to protect the financial value of their investment. This is not quite right; wouldn’t homeowners want to legalize apartments so they can sell to a developer for bags of cash? The actual pattern of financial winners and losers is more subtle.

Upzoning means replacing detached houses with apartments. Centrally-located houseowners benefit, because detached houses become scarcer and hence more valuable. In contrast, houseowners in the suburbs would lose, as new apartments in the city induce people to migrate from the suburbs to the city center, reducing demand for homes in the suburbs.

Apartment owners also lose, as the increased supply of apartments provides direct competition. Meanwhile, renters unambiguously win, with more rental options to pick from.

In the city center, housesellers gain from upzoning, because they now have the option of selling to an apartment-developer. Correspondingly, housebuyers lose, because houses are scarcer and more valuable. This is reversed in the suburbs, since detached houses are cheaper there.

So central houseowners are a clear winner from upzoning, in contrast to claims that houseowners oppose apartments in order to protect their property value. But this is for financial benefits. What about non-financial benefits?

Long-term houseowners (who aren’t looking to sell and plan on living there for decades) lose neighborhood character as apartments are built. They have less privacy, streets and sidewalks are busier, street parking is more difficult, there’s more noise, and new apartments block their views. (On the other hand, they gain from new cafes and stores, and new housing for their friends and children to live in.) So because central houseowners oppose upzoning, we infer that they care more about nonfinancial than financial benefits. (And note that suburban houseowners generally can’t vote in the city, so the fact that they lose financially is politically irrelevant.)

To make housing more affordable, do we need to make it a bad investment for current homeowners?

From above, we can see that this question is poorly framed. If we’re talking about upzoning, housing becomes more affordable by building cheaper types of homes (townhomes, apartments). This makes owning a townhome or apartment a worse investment, but makes owning a house a better investment. Suburban houses also become a worse investment as they get cheaper.

The deeper problem here is treating housing as a commodity. But it isn’t. There are different types, you can rent or buy, and the value of a home changes based on its location. Since housing is not a commodity, it doesn’t make sense for “housing” to become more affordable or for “housing” to become a worse investment. As we’ve seen, some types become more affordable, and some types become more expensive. The original question just doesn’t make sense.

(If we’re talking about improving affordability by building new subdivisions of detached houses or entire new towns, then we’d expect this new supply to reduce property values for owners living in nearby suburbs. Curiously, this is never raised as an issue.)

So how do NIMBYs explain the housing crisis?

Some NIMBYs accept supply and demand, but blame rising demand as the problem. In particular, if we just blocked immigration (and for the more extreme NIMBYs, deported landed immigrants), then there would be enough housing for native-born citizens.

Other NIMBYs think that landlords have become greedier or that “financialization” of the housing market (whatever that means) is the problem.

Do YIMBYs favor cutting immigration to reduce housing costs?

The point of housing policy is to provide shelter for people; reducing the number of people in order to make shelter cheaper is just giving up on the goal. (Notice: we could just deport everyone and trivially end the housing crisis!)

Immigration policy should not depend on housing policy. First choose an optimal immigration level, and then set your housing policy to accommodate it. Don’t restrict housing supply and then use that as an excuse to limit immigration.

There is a limit here; we can’t build enough houses for a billion immigrants in one year. But the housing market can adapt to real-world immigration targets if they announced in advance.

Do YIMBYs support developers?

It depends. Some developers fight through zoning and permits to provide us with a fundamental need: housing. Many developers shut down or do not enter in the first place, deterred by onerous regulations.

On the other hand, big developers have established close relationships with city planners, allowing them to navigate the regulatory thicket. Big Dev doesn’t want clear, simple rules that would open the industry to new competition. Instead, they support a discretionary system where you need to be friends with the director of planning to get anything built.

If YIMBY is correct, why haven’t you won yet?

The coalition of self-interested YIMBY supporters is dispersed. Young people aren’t thinking about buying a home, so they don’t follow debates about zoning. Young homebuyers do care about housing policy, but they’re looking to buy now, and any activism won’t have an effect on current prices. Recent buyers who moved to the suburbs and would have lived in an apartment in the city are now settled down and aren’t likely to uproot themselves.

We should expect the YIMBY coalition to be fractured. If it was easy to organize, housing wouldn’t be such an intractable issue.

In contrast, NIMBYs are easily organized. They are established homeowners who are already active in local politics, and it’s easy to walk down the street and find allies. New housing imposes a clear cost (noise, congestion, lost views, more difficult street parking). NIMBYs being naturally well-organized based on self-interest explains why they have been so successful.

This suggests that YIMBY success depends on forming an ideological coalition, rather than a self-interested one. To overcome the self-interest of NIMBYs, we need people to fight for justice.

Isn’t upzoning violating the property rights of homeowners?

On the contrary. Upzoning is giving homeowners a legal right they didn’t have before: the right to build apartments on their own land.

Some NIMBYs take an alternative view of property rights that includes preventing their neighbors from building apartments on their land; this is a non-standard view, to say the least.

When I moved into this neighborhood, it was zoned for single-family houses. Changing that is a violation of an implicit contract.

It would have to be an implicit contract, because it sure isn’t listed on the title deed. Yes, homeowners often expect their neighborhood to remain the same as when they bought it. But this doesn’t overrule the property right of the landowner to build an apartment.

Having this expectation is also unreasonable in many cases. If you bought a house in a growing city and expected growth to stop after you moved in, then you have poor judgment. That’s just not how cities work. If you were attracted by jobs and amenities, then you should have noticed that the economy was thriving, and other people would be similarly drawn in. If you wanted a neighborhood that wouldn’t change, you should have moved into a declining city.

But property rights aren’t absolute. The local government democratically chose single-family zoning, so it’s undemocratic for a state government to force upzoning.

The problem with this argument is that it gives no voice to citizens who currently live elsewhere but want to move in. What’s really undemocratic is how local control gives a voice only to incumbent residents. In fact, federal control over zoning is arguably a better option, because housing policy determines whether people can move across the country, and state governments are not accountable to out-of-state migrants.

Tokyo is governed by a national zoning law:

Instead of allowing the people who live in a neighborhood to prevent others from living there, Japan has shifted decision-making to the representatives of the entire population, allowing a better balance between the interests of current residents and of everyone who might live in that place.

Upzoning will destroy heritage neighborhoods

Old neighborhoods will change; whether they will be “destroyed” is up for interpretation. The key issue is the cost of preserving heritage: are we willing to accept high housing costs in order to turn some neighborhoods into a museum exhibit? This should be decided on democratically by everyone.

If people want to preserve heritage houses or neighborhoods, they’re always welcome to pay the market price and keep it as is. And if they’re not willing to pay that much, it just shows that heritage is a suboptimal use of the land (since apartment-dwellers, via developers, are willing to pay more). We shouldn’t subsidize heritage at the expense of housing affordability.