I don't think it is unreasonable to claim that there exist feedback loops +ve or -ve in a neighborhood between the price of new housing being built, the kinds of employers opening new firms, the kinds of services & hospitality moving into storefronts, the price of childcare... the list goes on...
The comparison to umbrellas and rain - two variables with obviously no causal dependency - feels like a big stretch no matter what side of this argument you fall on.
> I don't think it is unreasonable to claim that there exist feedback loops +ve or -ve in a neighborhood between the price of new housing being built
Per the article:
> The alternative to induced demand is called “filtering” — or as I like to call it, the “yuppie fishtank theory”.[1] Basically, this says that when you build a big glass tower full of nice new apartments, it draws high-earning people away from working-class neigborhoods. Yuppies would probably rather go live in a nice new tower with other yuppies than go around bidding up the price of 40-year-old apartments in working-class neighborhoods. So if you build those “luxury” apartments, they’ll draw the yuppies away and stop them from pricing out the working class.
The article [1] in question:
> In 2018, I wrote a post[2] about why building market-rate housing in gentrifying cities helps relieve rent pressure on long-time working-class residents. I dubbed this kind of housing “yuppie fishtanks”, and I tried to explain why they help without resorting to the theory of supply and demand. Later, someone made a TikTok video about the concept. Anyway, with people moving back to the big cities after Covid, and housing construction still lagging, I thought it would be a good time to re-up my original post.
Going back to this article, increasing housing stock in general is generally good:
> What you should notice here is that Gopal and Clark only briefly mention the “growing body of research” that supports the filtering effect, choosing only to specifically name the 2019 paper by Asquith et al. They do not mention Li (2019), who finds that “for every 10% increase in the housing stock, rents decrease 1% and sales prices also decrease within 500 feet.”
I'm always impressed at the mental gymnastics around disproving supply and demand.
Especially around housing, there seems to be a thousand models that don't work to solve the housing crisis, while there's only one that's been proven again and again to work: build more.
It’s unreasonable because increased supply reduces price almost always. That it may increase price by increasing the value of the local economy is an edge case that generally speaking you should be very happy to have happen.
It's not necessarily increasing supply though. When my neighborhood got new fancy apartments, surrounding apartments were converted to please the same price insensitive tenants that apparently wanted to afford 4k+ living alone.
There are far less total tenants now. Rooms are twice as big, in some cases apartments are twice as big, halving the number of units. These people probably would have stayed outside of the downtown if large units weren't created.
> It’s unreasonable because increased supply reduces price almost always.
Except that it doesn't because of the nature of the financing agreements on these kinds of apartment complexes.
"Missing rent" can be tacked onto the end of the financial agreement. "Lower rent" requires you to recapitalize your financing--which is absolutely NEVER going to happen with the interest rates having gone up.
Therefore, apartments will sit empty for years rather than allow rent to go down. That benefits nobody.
Lots of various places would need to implement a "lack of occupancy tax" in order to force the rents to come down.
In a situation where there is already too little affordable housing and relatively finite construction infrastructure or land, then it seems plausible that an increase in the construction of luxury housing will result in a decrease in the construction of affordable housing.
The wealthy people demanding luxury housing are the ones driving housing prices up. They’re going to buy a house no matter what - would you rather they “overpay” for an existing house in an established neighborhood and drive gentrification, or move into new construction?
If you meet their demand with new housing, the demand and price pressure on existing housing inventory will decrease, even if you don’t build any new “affordable” housing.
The Bay Area is a perfect example. NIMBYs don't want new construction of anything. They might look the other way if it were luxury construction away from them, but cannot have affordable homes anywhere. The rich from all over the world will continue to be attracted to the area, compete with less well-off people already there who are priced out of the market. This is why there are so many homeless and people living vehicles who cannot afford housing. I make $300k but cannot afford to buy my grandparents' home that is $2.5M now but was $30k in 1968 ($260k in today's money, an order-of-magnitude increase in price. $50k is the average income today but it was $74.5k ($8.6k) in today's money then. That's 3.5x housing/income to 50x.).
> would you rather they “overpay” for an existing house in an established neighborhood and drive gentrification, or move into new construction?
How are those the two options?
Aren't you forgetting about new construction in established neighbourhoods? I.e. buying up two or three low-density lots, or a older/decrepit low-land-value condo building, to replace these lot(s) with a modern, high-density mixed-use condo building, composed mostly of high-sqft condos that cost more than most SFHs?
There are more units on the new lot than there were on the old lot(s), so the people buying these units are definitely "moving into new construction"; but at the same time, the creation of these units displaced previous low-cost rentals.
This is 99% of what people in my city (Vancouver) are complaining about when they talk about gentrification through "luxury construction": being priced out of a neighbourhood they previously rented in, as buildings containing low-price rental units are torn down and replaced by buildings containing only high-price rental units.
I didn't demand luxury housing! In fact, I was planning to buy something 3x cheaper, but a "nice" sales girl has convinced me that the alternative that I was considering is not good enough - "that's just an apartment in a 20-story house, and look what's around there, no school, no Italian restaurant (and I know you like Italian food), no nothing, and we have it all here, and also this nice shadowed alley".
If there is too little housing, then resolving that requires building more housing.
You are correct, that it would be possible to build new luxury housing and then lower the cost of old luxury housing until it becomes affordable. However, that seems unlikely to actually happen since the owners of the old luxury housing are likely to resist losing money. In some cases, luxury housing may have features (size, density, amenities, etc.) that make is economically unviable to price it as affordable housing.
That wasn't my experience at all, feels like a theoretical discussion. Let's take something like SoCal, "luxury" housing built 30-50 years ago is not considered luxury. Even if those still advertise as "luxury", they definitely can't ask for the same prices despite companies having monopolies on certain regions.
Reality is that it's too expensive to stay a "luxury" housing, all the labor costs and major renovations just don't make sense from a financial perspective.
The fundamental issue that people miss is that the cost of building a "luxury" housing and "affordable" is not that different. Throwing quartz countertops and a tiny gym with outdated cheap equipment for a few extra k is nothing when the place costs 500k+. Sizes are also not relevant, since newer apartments are smaller than older ones. We can't just build an old affordable house, that's it. We need to start building as much as we can and impact the demand by evaluating the impact of new businesses coming to the area.
It doesn't have to be new, but adding more housing generally requires you to build buildings, and when a building is built where there used to be no building, it is generally referred to as new construction and thus new (or newly added) housing.
You could evict a bunch of people from existing houses and then re-sell those within the constraints of affordable housing parameters, but I doubt that is a feasible method of significantly scaled up expansion the pool of available affordable housing.
Because the inventory of it shrinks and shrinks more. What little existing inventory of AH there is will not suddenly reduce in price because castles appear.
Gradually? That's roughly what's happening in Denver right now - nobody's been building anything but luxury castles for years, but we saw our average rent drop last quarter for the first time since the recession.
Reason? There were 11,000 more units available than there were this time last year and there are 40k more on the way, so apartment managers are having to think about vacancy rates instead of myopically focusing on profit per unit for the first time since... probably the recession again.
Because building construction standards change, the cost of continuous maintenance can exceed the cost of building something new, and people move around. Would you like to live in an expensive new house or is cheap old house?
It's the other way around. In a situation where there is finite construction infrastructure or land it doesn't matter what you build, affordable housing will decrease because pricing power allows price raises for all building types.
The good news is there is basically no place in North America where there is a finite construction infrastructure or land causing housing shortages, except for maybe very low population remote areas and maybe Manhattan. The vast majority of shortage is driven by bad government zoning and approvals policy (looking especially hard at you San Francisco). If you fix the policy in a way that developers will be reasonably sure it won't revert back and be used to punish them for what they did under new policy, your shortage problem would sort itself out in a decade or two as the massive building boom led to a glut and lower prices.
Let's refine this statement, there's plenty of land and housing, but not enough near the jobs or attractions that middle and upper class desire or that the lower class can afford, who provide support for the middle and upper class.
Especially all these new 5-over-1 complexes that are marketed as "luxury" these days. They're hardly luxury, and in 20 years time, they're just going to be mid-class apartments.
It's a bit more complicated because markets are not perfectly rational, but also because of rational expectations and speculative movements.
When there is an expectation that zoning laws will be changed to allow higher density, or when there's an expectation that there will be a growing market for high-end real estate, the ask price from land owners usually rises.
The markets are not 100% efficient in the real world, outside of the simplest economic models.
I’ve been saying this for years: Build housing; any housing. Low income, medium income, high income—it doesn’t matter. If there becomes an over supply the price of housing will eventually go down.
Somehow we have to complicate it or abstract it to make it an issue it isn’t.
If you want more "affordable housing" build more housing in general:
> Now, if you cornered Gopal and Clark — or the “small group of academics” they cite — you could probably get them to admit that if we built 10 market-rate (“luxury”) apartments for every resident of Austin, most of them wouldn’t get filled, and landlords would be forced to slash prices, and regular folks would have cheap apartments to live in. An apartment’s price is not built into its walls and floors; “luxury” is just a marketing buzzword, and most of the apartments that are affordable today went for market rate when they were built.
More housing in general is generally good:
> What you should notice here is that Gopal and Clark only briefly mention the “growing body of research” that supports the filtering effect, choosing only to specifically name the 2019 paper by Asquith et al. They do not mention Li (2019), who finds that “for every 10% increase in the housing stock, rents decrease 1% and sales prices also decrease within 500 feet.”
Want rents to decrease? Have vacancy rate of 10%. Renters can jump ship at any point and have an option available, which will incentivize landlords to not be assholes.
If vacancy rates are ~0%, then landlords can do whatever they want, and renters have to to take it.
The comparison to umbrellas and rain - two variables with obviously no causal dependency - feels like a big stretch no matter what side of this argument you fall on.