Slowly, the rhetorical battle is being won, as affordable housing advocates acknowledge more supply matters

There’s been a war of words about what kind of housing policies are needed to address the nation’s affordability problems. Economists (from the White House to academe) argue that increasing housing supply is essential. Low income housing advocates of many stripes push for efforts to pay via taxes or require via regulations that more units be built specifically for low and moderate income households.

Everyone agrees that much of the affordability problem is due to national policies that provide massive subsidies to homeownership by the wealthy (mostly through the tax code) and parsimonious and chronically underfunded programs that provide subsidies for the poor (which reach less than a quarter of those technically eligible), a fair share of responsibility lies in the hand of local governments.  Is the key relaxing zoning limits to allow more market rate housing, or does it require regulating or subsidizing more affordable units into existence.

The battle cry of the low income housing advocates is “you can’t build your way to affordability.” As Bloomberg’s Noah Smith put it, among these advocates:

 . .  it has become an article of faith that building market-rate housing raises rents, rather than lowers them.  The logic of Econ 101 — that an increase in supply lowers price — is alien to many progressives, both in the Bay Area and around the country.

Sightline Institute has tackled that notion directly. Not only can  you build your way to affordable housing, in fact, building more supply may be the only effective way to reduce the pressure that is driving up rents and producing displacement. There’s ample evidence for this position, but there’s still the strong sense that addressing our housing problem by building more high end housing is a cynical and ineffective kind of “trickle down” economics.”

Building more market rate housing isn’t so much about “trickle down” as it is building enough new housing to keep higher income households from moving down-market and bidding up the price of older housing that would otherwise be affordable to moderate and lower income households. When there isn’t enough supply, demand from higher income households floods down to older housing stock, driving up rents and reducing housing options for those with lesser means. Which, as why, as we’ve observed, in some markets, modest 1950’s-era ranch homes are a mainstay of affordability, while in others, they cost more than a million bucks.

When supply does catch up to demand, rents tend to fall across the market. Last month, we showed how the completion of thousands of new, market rate apartments in Portland was having the knock-on effect of creating a growing number of vacancies and a flood of “FOR RENT” signs in the city’s older apartment stock. Rent increases, which were measured in the double digits eighteen months ago, have gone negative.

As Sightline Institute’s clever musical chairs metaphor makes clear, it doesn’t matter whether you add fancy overstuffed arm-chairs or or simple folding metal chairs to the game, both make it equally likely at the end of the day that there will be a closer match between chairs and hind-ends than otherwise.

What about “filtering up?”

The latest salvo in the rhetorical battles over the merits of expanding market rate housing supply comes from Miriam Axel-Lute, writing for Shelterforce.  Her latest article “Trickle Up Housing: Filtering does go both ways” makes the case that building new market rate housing does somewhat ameliorate displacement and affordability issues, that building more new low and moderate income is a more direct and powerful solution. The argument here is that if we build more housing for the poorest among us, that will free up some units for other perhaps slightly less poor households.

She buttresses the case for “trickle-up” housing by citing a study from U. C. Berkeley’s Karen Chapple and Miriam Zuk, that claims that building affordable units is twice as effective in reducing displacement as building more market rate housing. The exact claim, quoted from Chapple and Zuk is:

“At the regional level, both market-rate and subsidized housing reduce displacement pressures, but subsidized housing has over double the impact of market-rate units”

“Double the impact” sounds more like a pitch for a new and improved laundry detergent than a calculated analysis of housing policy options, but it did pique our curiosity.  How did Chapple and Zuk determine the relative effectiveness of these two policies?

As it turns out, their work is a response to a widely cited analysis developed by the California Legislative Analyst’s Office (LAO), which looked at the connection between displacement and housing construction in the Golden State.  The LAO’s conclusion was that building more market rate housing reduced displacement. Chapple and Zuk questioned the LAO report for omitting the possible positive effects of building more subsidized housing. They ran a regression analysis looking at both market rate and subsidized housing and controlling for the impact of a number of other factors, including age of the housing stock, racial/ethnic composition of the population, and education. They find that building more market rate units decreases measured displacement, as they put it:

Consistent with the LAO Report, we find that new market-rate units built from 2000 to 2013 significantly predict a reduction in the displacement indicator . . .

They also find that the construction of more subsidized housing also results in a reduction of the displacement indicator.  The claim of “twice the impact” comes from comparing the coefficients of the two variables, the coefficient on market rate housing is -.002; the coefficient for subsidized housing is -.005.  So it is literally the case that the coefficient of one is more than twice as large as the other.

Two market rate houses reduce displacement as much as one affordable house

But let’s step back and consider what that means in practice. What is measured in each case is the number of new market rate homes and the number of new subsidized homes built in a community over a decade. Put another way, the construction of one, new market rate home has almost half as much impact on measured displacement as building a subsidized home. What this means in practice is that two or three new $600,000 single family homes or condominiums built in the Bay Area in the last decade or so reduced displacement in the region by as much as building a new subsidized unit. On its face, this study puts to rest the old saw that building more market rate housing leads to more displacement: it doesn’t. In fact, building more market rate housing is an effective anti-displacement strategy.

In addition to effectiveness, we also have to consider cost. If government’s faced a costless choice between so many market rate units and and equal number of subsidized units, and the only policy objective were reducing displacement, the answer would be clear. But building subsidizing housing is hugely expensive for the public sector. As we pointed out last month, in the Bay Area, new subsidized housing in San Francisco, and in the East Bay costs as much as $700,000 per unit.

There’s a further point to be made here:  one of the key reasons that “affordable” housing is so expensive to build in places like San Francisco is that land prices are very high because of zoning restrictions. As a result, the same policies that facilitate market rate housing–more density, fewer parking requirements, clear and certain approval processes–would also make it less expensive to build affordable housing.

So it is literally true that building more subsidized units for the lower income households is more powerful in reducing displacement. But its tremendously expensive as well. What the data here confirm, is what economists–and musical chairs aficionados–have long maintained: increasing supply is critical to solving the housing affordability problem.