Saturday, May 20, 2017

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.


  1. Is Tokyo really a counter-example to induced demand though? Something like 25% of Japan lives there (in the metro area anyway). Seems like it was exactly what the NIMBYers feared- the lower the rents, the more people will move there, almost without any upper limit.

    The US equivalent would be if almost 100 million people lived in SF. What if instead, we made an effort to smooth out the demand, and move some of those jobs to areas that aren't already built up to the point that building more density requires demolishing existing structures? There's plenty of empty space in the American West- we don't *all* need to live in one big megacity.

    1. First of all, you're comparing the Tokyo MSA to SF proper. A better comparison would be the Bay Area as a whole. Which I believe does contain a quarter of California's population. :-)

      Anyway, yes, Tokyo is dense. If you start from the assumption that dense cities suck, this debate is a bit pointless. I do not start from that assumption. :-)

    2. Tokyo is actually not that dense. It's more dense than San Francisco, but with about 40,000 per square mile in the 23 wards, it's not even in the top 50 globally. It's a far cry from Hong Kong, where the sidewalks are literally packed solid on weekends.

    3. I said the US, not California. Believe it or not, this country has other places too!

    4. Stuart10:16 PM

      Yes, please let more Americans live in the Bay area or California generally. The weather is amazing. There are mountains, oceans, and deserts all within driving distance. But mostly the weather. The winters on the east coast (above the sun belt) are awful.

    5. David J. Littleboy3:26 AM

      Brandon seems to have the Hong Kong vs. Tokyo numbers off. The 23 wards have 9 million people in 239 sq. mi. while Hong Kong has 7.3 million people in 427 sq. mi.

      There may be denser _parts_ of Hong Kong than any of the parts of the 23 wards, but by the official land area numbers, the 23 wards are roughly twice as dense as Hong Kong (or SF, for that matter).

    6. David J. Littleboy8:42 PM

      A comment of mine (in moderation or perhaps lost in space) has an error. While the 23 ward area of Tokyo's population was stable from 1970 to 2005, I missed the point that it has been growing at just under 1% per year since 2005, bringing the population as of April 1, 2017 to 9.4 million, as opposed to 8.3 or so million in 2005.

      This is why the percentage of elderly (over 65, of whom I will be one shortly) in Tokyo is falling, and why there's a horrific lack of pre-school/day care facilities, even though the total number of children being born is falling.

      The fastest growing wards are Chuo, Chiyoda, and Minato, the three central wards, two of which are two of the three lowest density wards. (Although the total population of those 3 wards is only about 470,000.)

  2. It is perfectly possible to believe new construction will increase median rents but still believe this is desirable, making for a newer, more dynamic, vibrant city, so this is not necessarily a NIMBY argument. It is also possible to believe new construction will lower rents but believe this undesirable, making for a more congested, crowded, crime ridden, polluted, and unpleasant place to live.

    1. A problem with these arguments tend to be vagueness. By lower or higher rents do they mean nominal, real, relative to local income, or relative to a counterfactual? Do they mean at the time of the addition or over longer time? How do they think growth, income, and opportunities will change in response?

      As investment goods are giffen goods, their price will be set by what people are able and willing to afford relative to other investment opportunities. People don't invest to lose money, and falling rents would mean someone is losing money which would shut down investment, so no one should expect rents to fall other than temporarily. Since new construction will enter at median or above, for being newer if nothing else, one should expect higher median rents, though with higher quality. The growth new construction provides will also mean higher income growth and higher rents over time. The most that should be expected is a temporary moderation in the rate of increase, followed by a higher rate of increase as assets and incomes rise. This is not necessarily a bad thing. Initially availability and quality improves, and over time, opportunities and incomes improve. There are distributional aspects though in whose assets and incomes improve, and who pays the taxes to cover necessary public infrastructure improvements.

    2. In practice, increasing the supply will always reduce the price when compared to not increasing the supply.

      If you force a bunch of people out of their homes by artificially holding back the supply of housing, you are going to get more crime as people become more desperate. Eventually, you will end up with civil disorder as those displaced will feel the rich people of the city have cruelly and unjustly forced them out on the street without any other form of redress.

  3. I think you're​ wrong that NIMBY arguments need to be taken seriously. Their arguments are not their motivation. Their basic belief is that they have a right to keep the things around them from changing, regardless of the consequences. Arguing from consequences is a type error, because they don't care about the consequences. You have to convince them that they don't have that right. (As that isn't going to happen, the only remaining option is to beat them politically and obviate the issue.)

    1. More simply, NIMBYs and YIMBYs agree on every single issue down to the last detail, except *where* the building should actually happen.

    2. I agree that the stated motivations are different from the actual motivations, but having a discussion on rights is not going make any difference with them. Their motivations are financial: they simply don't want their property to decline in value because they see their homes (items of consumption) as stores of value.

      I believe the better tactic is to get them to understand what is going to happen when all of the poor people, lower working class, and in the extremes, middle class, in the city are made homeless. What is going to be the response to being forced to living out on the street?

      The first and obvious issue is that an ever-growing percentage of the voters are going to be non-property owners. In time, this will change the policy platforms of representative candidates as well as executive, and placing very high taxes on property owners will become easy to acccomplish.

      The second issue is that when people can no longer provide shelter for themselves, they will become desparate, and some of those people will engage in criminal activities, starting with property crime (theft, burglaries, etc.) This will graduate into other crimes such as mugging, robbery, carjacking, etc.

      Even worse, when people feel they have been forced out of their shelter due to the activities of others, as is the case here, some people will feel the desire to violently revolt. I fear this can even lead to mass, violent protests or even general civil disorder.

      I can't imagine any property owner desires to create such a situation.

    3. Doc at the Radar Station8:27 AM

      >The second issue is that when people can no longer provide shelter for themselves, they will become desparate, and some of those people will engage in criminal activities...

      I agree with Noah and others about increasing the supply solving most of the problem, but I don't think the result of not doing so will result in the scenario you outline. I think the result will be more companies relocating to labor markets that aren't so expensive. The workers will follow. The blue collar folks in SF will continue commuting from Stockton, i.e. or they will leave as well.

  4. Thanks for this Noah, great tips.

    I would add that the induced demand point really counts in favor of a national push for zoning reform (which I believe Japan benefits from). But I'm not sure how that could gain political or legal traction in the U.S.

  5. A commenter referenced Tokyo in the first "Phil" post. Phil replied by noting recent rising apartment prices over the last few years. He didn't check a longer time series, or look for a trend break due to Abenomics. And he didn't look at valuation metrics over time compared to global trends. Instead, he seemed to search for a convenient article, and then stop thinking. Hopefully, you are correct about his intellectual honesty, AND that such honesty reflects a larger NIMBY group. But I do think that a dishonest NIMBY, with roving goal posts, could generate similar articles.

  6. The Lord made the earth and He's not making any more. The whole world is going to look like Tokyo or Manhattan someday. Better get used to the idea or half of everybody's income is going end up in landlord's bank accounts. (Easy to say for a native New Yorker.)

    1. You could fit all of the humans on Earth right now into a small corner of Texas filled with high-rises.

  7. I'm not sure Manhattan is actually a good example. After housing construction boom in 2016 median rent in Manhattan fell about 9-10% year over year.

    Scroll to the bottom for the median rent trend graph

  8. It's also worth pointing out that if people move into San Francisco from Oakland in response to lower rents in SF (which seems totally plausible to me), this will lower rents in Oakland, which is the next best thing to lowering them in SF.

    1. People have begun to appreciate Oakland on its own terms, as opposed to a second-best option. Weather is one reason why. (Mass BART thefts is not.)

  9. Regarding the "induced demand" argument, the action of induced demand secretly depends on construction raising real wages for auxiliary workers who service affluent new arrivals. For example, Phil says:

    "Serving those extra 10,000 high-income households will require tens of thousands more waiters and shop clerks and car mechanics and plumbers etc etc etc….that is, there will be more jobs for the kinds of people who already have trouble affording a place in San Francisco. Those additional people will need to live somewhere, so there will be increased competition at the lower end of the market, which means higher rents. Most of these people will end up commuting from other cities."

    Building more housing does not create additional service workers, so it must fill those jobs by attracting extant service workers. What would induce additional people to accept jobs in San Francisco? Higher wages. An increase in demand does not immaculately match an employer with an employee.

    From there, the argument would have to go that since service workers are earning higher wages, rents in the city would rise so that more service workers don't try to rent apartments in SF than there are apartments available. That is where the rent increase comes from. Moreover, if you model this with curves, it's obvious that the resulting increase in rents cannot be as large as the increase in wages.

    Phil, additionally, says that building more housing in SF would lower rents in outlying areas like Oakland and Richmond, so in his own model commuting service workers are earning more money and paying lower rent.

    So it seems there are two possible effects from building more housing in san francisco: lower rents or higher real wages. I am okay with higher rents if they are caused by higher real wages. What would the alternative position be like? You might as well say "I hope janet yellen causes a recession so we can get lower rents."

  10. One NIMBY but that kind of works but shows limited thinking by region is the thought that SF can't fix it alone.

    Basically NIMBYs say what's an extra 10,000 luxury apartments now compared to the whole housing crisis? You'll just get 10,000 rich people from Fremont or elsewhere moving in.

    While that's actually true, that SF alone can't build enough for the entire Bay Area, I think it's at this point we need to counter that we need housing in every area. A lot everywhere, and you shouldn't be allowed to shirk your duty on houses any more than a country shouldn't care or concern itself with global warming and carbon. We need the whole team on this.

    The second point I think is good to mention is that all rent controlled units eventually flip. Who will they flip to? What will these "luxury" apartments be in 30 years? Will they still be "luxury" in 2050?

    I think it helps to help NIMBYs think of the longer term, that they are guaranteeing a hamptons situation over time without building. Luxury apartments become generic apartments in a generation or two, and more units means less displacement of middle class when those rent controlled units do come on the market later. And yes, we really do need more than houses in SF, we need them in Berkeley and everywhere else too. Unless you want to sacrifice 1-2 generations of POC and working class and middle class to increasing economic uncertainty, poor wealth growth, and repeated displacement. The medicine doesn't taste great maybe, but in this case the cure is not worse than what this disease will do long term.

  11. Another point I would make is that the NIMBY position of "induced demand" is at odds with the way developers, who have experience and skin in the game, talk about supply. Do a google news search on "rents apartment supply" and you'll get a bunch of business press articles in which developers talk about the impact of apartment completions on rents.

    "These factors, combined with an increased supply of property in the market, have caused landlords to respond by reducing rental prices, said Quane.
    Read more at"

    "Apartment REITs Feeling Pinch of Rising Urban Supply, Declining Rents"


    So what I wonder is why people like Phil think they understand markets better than the people who actually work in them?

  12. I think NIMBYs aren't wrong when they say something like "10,000 more luxury units in SF won't matter", then talk of the rich around the Bay that would move over for them.

    Because look at how myopic that view is. They don't care about the relief of pressure in the Bay Area, or Fremont, or Berkeley, their view is just SF. Or let's be clear, just themselves and their block and their park access, etc. SF alone probably can't build enough for the Bay Area, but that's not the point of building in SF. It's a team effort for housing the same as carbon reduction, you can't claim SF can opt out any more than saying the US should just opt out of trying to limit carbon production.

    Another thing is lengthening the timeline. NIMBYs tend to keep the timeline short as well as geographically limited. More units won't reverse the rent increase that have occurred over decades, that's true too. But where will we be in 2040 without new units (which get less high end over time). Rent controlled units eventually turn over, eventually all will. Unless you can change who can afford it you're going to end up in the same place. And what the NIMBYs road map leads to is turning SF into a techie Hamptons.

    1. Anonymous1:45 PM

      I grew up in the Hamptons and lived (briefly) in San Francisco. No way SF is going to turn into East Hampton. Not even Westhampton. Not gonna happen.

  13. I think there are also a slightly different set of issues for the outer neighborhoods and contiguous cities subject to gentrification. In these places the induced demand is really big so when there isn't enough new housing closer to the city core that's when the formerly working and middle class housing gets bid up. In particular minority majority neighborhoods can be totally flipped and anyone who didn't own or get rent control protection could be forced out. The big issue is the relative power of people in the middle or upper middle class neighborhoods NIMBYism, so that SF doesn't build enough new housing in the SOMA, the upper Mission and all of the historic Victorians and instead middle class white people displace minorities in convenient parts of the outer Mission or Oakland.

    Around Boston there are very similar stories except that there are way more small cities contiguous to the city so Somerville is getting gentrified very quickly and the question for the city is if a) they can build enough new units to keep the current population while family size shrinks and b) they can create or preserve enough affordable units that residents renting don't have to leave the city. To that end anybody have a good model on the overall effects of change affordable housing set aside requirements? Somerville is trying to force developers to go from 1 out of 8 to 1 out of 5, but I haven't seen any decent models about it. I know there's also anecdotal cases of developers in SF allowing current rent controlled tenants to basically keep their leases with new much bigger buildings. There ought to be reasonable ways for cities to allow rental residents to capture more of the benefits of gentrification. Limiting development doesn't do that and rent control is way too badly targeted.

  14. Denis,

    No, the whole world is not going to look like Manhattan or Tokyo. World population growth has been decelerating for the last 40 years and has started to go negative in some countries, initially in Japan a decade ago, as a matter of fact. We are now at 7 and 1/2 billion, but aggregate world population will probably reach a peak and then start declining sometime in the next century, with that peak likely to be between 9 and 10 billion. That is a good deal more than we have now, but not all that much more. Heck, world population was only 3 billion when I was young. It has increased more in my lifetime than it will probably increase ever in the future.

    We can easily fit 10 billion people on the earth without having it all look like Manhattan or Tokyo, although some more places might indeed look like them, but that will be a matter of people moving to certain urban areas, not due to some absolute massive increase in world population.

  15. "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)."

    Hi Noah, could you explain why you think this? From what I've seen so far NIMBYism does seem like a combination of selfishness and ignorance of basic economics, so I'd be interested to see counterevidence.

    1. MaxUtil1:23 PM

      Pure anecdote...but I live next to a neighborhood that is gentrifying rapidly. It's a heavily Hispanic, working class area and many locals are suffering from fast rent increases, aggressive tactics by landlords to push out rent controlled tenants, etc.

      I can tell you that many of the "nimbys" that show up to fight approvals on developments in that area are minorities and renters trying to stop the forces of gentrification from displacing them.

      I think this dynamic is common in a lot of cities that are seeing rapid growth right now. Residents are seeing a burst of development and are seeing rapid rent/price increases tied in with gentrification. While these two trends are not completely separate, people often assume the former drives the later.

    2. Indeed. I saw a poor elderly black tenant in my building given the boot last year. Of course a trans woman moved in so it's not necessarily a loss for the forces of enlightenment.

  16. What about the thought experiment where the most expensive residences are taxed to the extreme and as a result become museums which are then:

    1. not a source of tax income
    2. out of the housing market
    3. employing fewer people as docents than were domestic help (and these are different people)
    4. attracting some tourists.

    This is another awkward thought experiment for which there might be some data.

  17. Jobs create demand to live here. San Francisco added 120,000 jobs from 2010 to 2014 and only 4,800 homes.

    It's about to get worse with Planning pushing through the Central SoMa Plan, which adds space for another 50,000 jobs through 2040 but only 7,500 homes. You did a good job debunking the NIMBY logic in this piece — next, how about calling out Planning's rationalizations for why those numbers are okay?

    As a rule of thumb, 1 gross square foot of office requires 6 gsf of residential space to house the workers. That means 6 times the building mass and 6 times the pissed-off NIMBYs. So our business community and our singularly jobs-focused Planning Department take the path of least resistance and don't plan seriously for the housing component. We need to hold them accountable as well. They shouldn't be making planning "compromises" that include abundant office space but skimp on the associated housing need.

  18. I think NIMBYs may be best understood as an emotional movement rather than a fully thought through intellectual school of thought. People intuitively understand what they don't like (undesirable neighbours) and generalise a bigger idea from that view. It's like satisficing or bounded rationality for your politics - I think as far as I need to, in order to defend my pre existing viewpoint. Thought experiments, fancy examples, economic theories are all just abstractions from the intuitive position I've already reached, and which I'm already heavily incentivised to keep unchanged.

  19. I live in Vancouver, BC. On a back-of-the-envelope calculation, in the past fifteen or twenty years Vancouver has built about six times as many housing units, per capita, as San Francisco. But we still have some of the world's highest housing prices, and an acute rental shortage.
    We are an "open door" global city, and many international investors buy units as a store of value and leave them empty. The city is now trying to introduce a tax on vacant units. But just building is not enough to make housing affordable for local people on modest incomes.
    Like the Bay Area, Vancouver is a magnet city and there are plenty of other cities in Canada where prices are modest and the housing market is in balance.

    1. I'll bet that this (PD at 3:08) is the right answer. Were I way richer and were interested in leaving Tokyo, I'd like to move back to Boston or go to SF. There's a zillion Boston area college grads who'd move there in an instant, were there work and cheap housing, and if the housing were cheap enough, the work wouldn't matter. Boston's wonderful.

      Toss the 120,000 new jobs in SF mentioned above into the mix, and there's now a near infinite supply of new SF residents. The only thing keeping them out is the average wage of those jobs limiting the rents they can afford. So the price can't go up, but at a fixed price, you can sell/rent as many units as you make.

      Dunno how to describe this phenomenon in Econ 101 terms, but I saw something similar in Tokyo back when I was renting (30 years ago): If you had 1500 bucks (150,000 yen) a month to spend on rent, there were gobs of small but decent apartments. You couldn't find something noticeably nicer for, say, 2100 bucks. Anything cheaper was yucky. And anything nicer was either waaaaaaaaaaaay out of town or 5000 bucks a month.

      The Tokyo 23 wards area population peaked around 1970 and is now a tad lower than that. Sure, there's lots of new condo construction, but that's relative to a 9 million population, and thus not statistically significant.

      Here's the Japanese wiki article on the 23 wards. Scroll down about 1/3 of the way to the colorful chart that crashes from 1940 to 1945 (US bombing'll do that to you) to see the 23 ward population from 1920 to present.

    2. Anonymous1:52 PM

      Something similar is happening in the Seattle Metro area right now. There are maybe 100,000 people who have been pre-approved for a $200,000 mortgage, and if anything in that price range (withing commuting range) comes on the market, there is a scrum of people bidding on the house.

      Meanwhile, there is a pretty good inventory at the $600,000 and above price point.

      Interestingly, the niceness of the house dramatically increases once you get above the "first time buyer" price level. Some people call this "the cliff".

  20. It's truly bizarre to argue that new housing will attract too many affluent people, who in turn will use their affluence to create too many low-skill jobs, benefiting low-skill workers so much that they'll be able to bid up low-end rents. Even if that made any sense (it doesn't) is that inherently bad?

  21. A local supply/demand analysis is difficult in the globalized economy. It's quite possible that increasing supply will attract more foreign buyers and lead to price increases. Look at Toronto, Canada for example.

  22. Sniffnoy1:48 AM

    I think there's a bigger problem with Phil's argument than anything that's been mentioned here.

    Let's suppose we grant Phil's premise that building new housing won't affect the price of existing housing; that these prices are fixed for all time when it's built.

    If we assume that, then, as he argues, building new market-rate housing will increase the median rent.

    The problem is that this is irrelevant. "Increased median rent" does not mean that things have gotten less affordable! One has to make sure that the statistics one uses are actually relevant to what we care about here!

    When you're trying to rent an apartment, what's relevant is not the median rent, but the rent of the particular apartment you can find. Even if we grant Phil's premises, building new housing will not cause anyone's rent to go up, even if it does cause the median rent to go up.

    As a simple way of seeing this, just imagine that the newly-available apartments previously had rents of infinity, and when we build them, it goes down to some finite value. Clearly, this is an improvement. It increases the median rent only because these infinities were not included in the median calculation before.

  23. Good analysis. One counter-intuitive point I'd like to emphasize is seems like it's not that adding new apartments will lower rents "even if" they're market rate or above, it might be the case that they'll lower rents "only if" they're market rate or above. Building "affordable housing" - where rents are below market rates, and tenants and/or landlords are subsidized - may actually be counter-productive.

  24. "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). "

    I know you've turned s**tting all over Econ 101 into a hobby-horse, but here the basic partial equilibrium framework is really illuminating. In understanding induced demand, we can simply differentiate between a (relatively speaking) inelastic short-run demand curve and a (relatively speaking) elastic long-run demand curve. People moving into a neighborhood that has increased housing supply can shift the short run demand curve, but it is simply a movement along the long-run demand curve. In both cases, if we realistically assume that the demand curve for housing is downward sloping, increasing the supply of housing by easing restrictions on housing supply will certainly reduce the price of housing.

    Equivalently, NIMBYs would have to bravely assume that the long run demand curve for housing is perfectly elastic.

  25. Please, guys, stop characterizing my argument as if I think building more housing doesn't afforestation the price of existing housing. I said in my initial post and in many subsequent comments that building more housing causes average housing prices to go down, even if the new housing is hig-end. What we are talking about is the spatial distribution of housing prices.

    1. Spatial distribution is that there's a new apartment in the next neighborhood over that is built in order to keep my apartment here affordable.

  26. Instead of picking on SF NIMBY's go down peninsula and pick on Atherton/Menlo Park/Palo Alto.

  27. This NIMBY post reminded me of a time back in the 70's at NASA when a guy came to talk to use about a proposal to build a STOL port in NYC. His group set up meetings in areas that could be affected by the proposal. HaHaHaHa. You haven't seen nothing yet till you come up against New Yorkers. They told the group that nothing they could say would make them accept the proposal. They had been lied to so often that No was their ans to any city proposal.

  28. Anonymous2:23 AM

    Why not just use force against the NIMBYs and redistribute their land? You're never going to overcome the privilege they gained by being born around the middle of the 20th century by working within the rigged governmental and judicial systems of the US or the California. America is in desperate need of economic growth. Enough talk. Expropriate by any means necessary.

    1. Anonymous1:56 PM

      Hilarious. How do you think the current owners got the land?
      We are (mostly) talking about Americans here. . .

  29. Thanks. This makes a lot of sense. Additionally, housing prices have two very different components -- privately-created building value and publicly-created land value. Property taxes contribute to high housing prices because we over-tax privately-created building values and under-tax publicly-created land values.

    Most property taxes are between 1% and 2% of value. This doesn't seem like much. But (unlike a sales tax that is paid once), property taxes are paid each and every year that an improvement adds value to a property. Over time, the economic impact of a 1% to 2% property tax on a long-lived asset (like a house) can be equivalent to a one-time sales tax of 10% to 20% on construction labor and material. That's a huge barrier to affordability.

    On the other hand, when better schools or better transportation increase land value, 80% to 90% of this publicly-created land value ends up as windfall gain to private landowners. This encourages land speculation -- a parasitic activity that produces nothing of value but which inflates land prices. Furthermore, land speculation creates real estate price bubbles which, upon bursting, can send the entire economy into a recession or depression.

    Reducing the tax on buildings would make buildings cheaper to construct, improve and maintain. Surprisingly, a higher tax on publicly-created land values (by discouraging land speculation) helps keep land prices lower as well. Thus, by shifting the property tax off of building values and onto land values, a community can make housing less expensive without any new expenditure or any loss of revenue.