The NIMBY challenge

The other day I wrote a Bloomberg View post about how California is waking up to the problem of NIMBYism - development restrictions that limit economic activity and make cities less affordable. Ground Zero for this struggle is the Bay Area, San Francisco in particular. The pro-development activists known as the YIMBYs have been at the forefront of the fight. Economists have also been weighing in. Enrico Moretti & Chang-Tai Hsieh and Andrii Parkomenko have both come out with new theory papers showing negative impacts of housing development restrictions. Ed Glaeser and Joe Gyourko have a paper reaching similar conclusions after looking at data, theory, and institutional and legal details. And Richard Florida has a whole new book about the problem.

But the YIMBYs have faced a great deal of intellectual pushback from certain folks in the Bay Area. Even as I was writing my post, physicist Phil Price was writing an impassioned attack on YIMBYism over at Andrew Gelman's blog. He followed it up with a second post three days later, after getting a great deal of pushback in the comments. The commenters have made most of the points I would make in rebuttal to Price, but I think his posts are worth a close look, because they reveal a lot about the way NIMBYs think about the housing market. In order to understand and meet the YIMBY challenge, pro-housing activists should familiarize themselves with the arguments Price makes.

The first thing to note is that NIMBYs think that a house's price is defined when it's built - almost as if the price is built into the walls. Price writes:

[N]ew high-rise apartments are going in that have hundreds of apartments each, typically with a rent of $4000 – $8000 per month. If you let a developer build “market rate” apartments, that’s what they’ll build.

These numbers are a bit exaggerated, but that's not the point. What Price seems to ignore is the impact of construction on all the non-new units. Here's an example. I live in SF, in a market-rate apartment (though not one quite *that* pricey). But when my apartment was built, it didn't have the high rent it now has. It's a small, older apartment, once occupied by working-class families. The rent changed over time, turning an affordable home into a luxury home for a member of the upper middle class. In fact, when I moved into this apartment, I increased demand in this neighborhood, putting increased pressure on any working-class people who still happen to live here. What if, when I moved to SF, instead of moving into this apartment, I had moved into a nice fancy new "market-rate" unit in one of those towers that Price decries? I would not have increased demand in this neighborhood, and would not have put upward pressure on the rents of the families living nearby. 

Later, Price repeats the fixed-price idea when he writes:

Sorry, no. If the ‘market rate’ for newly developed apartments is substantially higher than the median rent of existing apartments, then building more market-rate apartments will make median rents go up, not down.

That sounds like simple math. And if the price of an apartment was somehow built into its walls and floors, it would just be simple math. In fact, though, it's wrong. Here's why. Suppose there are 2000 people in a city, living in 2000 apartments. One quarter of the people are rich, and rent apartments for $4000 apiece. Three quarters are poor, and rent apartments for $1000 apiece. The median rent is therefore $1000. Now build 400 fancy new luxury apartments that rent for $5000 each. And suppose no new people move to the city. All 500 rich people move into the fancy new $5000 places, leaving their old $4000 places vacant. The previously-$4000 apartments fall in price to $2000, and 500 poor people move into them, leaving 500 of their apartments vacant. These are used as second apartments, storage, or whatever. The rent of the 1500 apartments that used to all cost $1000 falls to $900 because of this drop in demand for low-end apartments. The median rent of the city's 2400 apartments is now $900, down from $1000 before.

So the "simple math" is not necessarily correct.

NIMBYs do seem to recognize this on some level. So they intuitively turn to a phenomenon called "induced demand" (though they may not realize it's called that). The theory is that if you build more housing in SF, you encourage people to move into SF, preventing prices from going down, or even pushing them up. Price espouses a version of this theory when he writes:

Tens of thousands of high-income people who would like to live in San Francisco are living in Oakland and Fremont and Berkeley and Orinda because of lower rents in those places. As market rate housing is built in San Francisco, those people move into it...There is a cascade: some people move from Berkeley and Oakland to San Francisco, which allows replacements to move from Richmond and El Cerrito into Berkeley and Oakland, and so on. Ultimately, rents in San Francisco go up, and rents in some outlying communities go down. Yes, the increased supply of housing lead to decreased housing prices on average but they’ve gone up, not down, in San Francisco itself.

It's perfectly possible in theory that this happens. In fact, this is even possible in the simplest, Econ 101 type supply-and-demand theory - it's just the case where supply is infinitely price-elastic.

Is this realistic, though? Price cites Manhattan as a counterexample - a very dense place where rents are still high. I'm not sure this counterexample applies - I see a lot more poor Black people living in Manhattan than in SF, for example. But anyway, a counter-counterexample is Tokyo, where construction seems to have been successful in keeping rents low.

The question is what would happen to SF. As I wrote in a Bloomberg View post last December, there's OK evidence that more housing would ease the city's affordability crisis:

In 1987, economists Lawrence Katz and Kenneth Rosen looked at San Francisco communities that put development restrictions in place. They found that housing prices were higher in these places than in communities that let developers build... 

[Recently, blogger Eric] Fischer collected more than 30 years of data on San Francisco rents. He modeled them as a function of supply -- based on the number of available housing units -- and demand, measured by total employment and average wages. His model fit the historical curve quite nicely. 

Recent experience fits right in with this prediction. In response to the housing crisis, San Francisco recently allowed a small increase in market-rate housing. Lo and behold, rents in the city dropped slightly. 

Admittedly, this data is not decisive. More SF construction might have pushed rents down a bit this year, but a big construction boom might suddenly induce a flood of rich people to decide to move to the city. It's not possible to know.

But if NIMBY theorists like Price really believe that induced demand determines SF rents, they should do the following thought experiment: Imagine destroying a bunch of luxury apartments in SF. Just find the most expensive apartment buildings you can and demolish them. 

What would happen to rents in SF if you did this? Would rents fall? Would rich people decide that SF hates them, and head for Seattle or the East Bay or Austin? Maybe. But maybe they would stay in SF, and go bid high prices for apartments currently occupied by the beleaguered working class. The landlords of those apartments, smelling profit, would find a way around anti-eviction laws, kick out the working-class people, and rent to the recently displaced rich. Those newly-displaced working-class people, having nowhere to live in SF, would move out of the city themselves, incurring all the costs and disruptions and stress of doing so. 

If you think that demolishing luxury apartments would have this latter result, then you should also think that building more luxury apartments would do the opposite. Price should think long and hard about what would happen if SF started demolishing luxury apartments. 

In any case, I think Price's posts have the following lessons for YIMBYs:

1. Econ 101 supply-and-demand theory is helpful in discussing these issues, but don't rely on it exclusively. Instead, use a mix of data, simple theory, thought experiments, and references to more complex theories.

2. Always remind people that the price of an apartment is not fixed, and doesn't come built into its walls and floors.

3. Remind NIMBYs to think about the effect of new housing on whole regions, states, and the country itself, instead of just on one city or one neighborhood. If NIMBYs say they only care about one city or neighborhood, ask them why.

4. Ask NIMBYs what they think would be the result of destroying rich people's current residences.

5. Acknowledge that induced demand is a real thing, and think seriously about how new housing supply within a city changes the location decisions of people not currently living in that city.

6. NIMBYs care about the character of a city, so it's good to be able to paint a positive, enticing picture of what a city would look and feel like with more development.

I believe the YIMBY viewpoint has the weight of evidence and theory on its side. But the NIMBY challenge is not one of simple ignorance. Nor is it purely driven by the selfishness of incumbent homeowners trying to feather their own nests, or by white people trying to exclude poor minorities from their communities while still appearing liberal (two allegations I often hear). NIMBYism is a flawed but serious package of ideas, deserving of serious argument.