What happens if building more housing doesn’t work? (opens in new tab)

"The problem is not this or that or some other thing!! The problem is there is not enough housing!"

This is what people/companies say who are deeply invested in making scads of money from sky high housing prices.

It's a ruse, a distraction, a canned answer designed to ensure the finger is not put on the real problem.

The real problem is that housing cannot be both affordable and a financial instrument.

How would it be possible for building more housing to /not/ work is the real question. The cost per square footage may have constraints with overhead and not operating at a loss but adding more housing should slow the rate of growth at very least.

Even if taken to the illogical extreme of "what if the entire population of earth was concentrated in San Francisco" adding in sufficient infastructure and housing would lower costs compared to not doing so. Even if it is higher than before it became so dense that the Sears Tower is now considered a mid-rise.

There is this disturbing trend of supply and demand denialism for housing which simply cannot end well.

Is it that building housing doesn’t work? Or is it that building housing doesn’t work unless you build enough of it quickly enough?

Doing better than SF at building housing is a pretty low bar. I see no evidence that the high-demand cities that are building more housing are building it at a rate that keeps up with demand. As it is, what housing they are building is probably helping keep rent prices rising gradually instead of spiraling out of control as they are in SF.

San Francisco has basically dug it's own grave. By refusing to construct enough housing it has created a massive shortage. Even if it starts construction today the backlog is high enough that there will "never" be enough housing. It will take decades to undo the damage. Americans are migrating away from SF, (international migration still high). People are still living with their parents or with roommates, so if you build more housing then people will move out into their own apartments. Useless NIMBY metrics like average rent don't seem to reflect the increased quality of life of those people who get to stay in SF. What counts is that the population in SF can keep growing. Because new construction serves the top end of the market first, NIMBYs attribute the increase in rent to the new construction as the primary source of high rent although the increases would happen regardless of new construction.

The answer doesn't change: if there is not enough build more of it.

There is one way that it would not solve the problem to build more housing. That way would be that most renters and homebuyers are basically irrational, or systematically overvaluing the location of their residence when better options exist. I would argue that this is actually the case in the SF Bay Area.

For example, I live in Pittsburg, almost at the very end of the yellow line (it recently got extended to Antioch). I work in SF making a decent salary. My commute is pretty long, nearly an hour one way, sometimes longer. My rent? Well, for a two bedroom, two and a half bath condo with a garage, porch, and backyard, it costs me roughly $2100/month, and we don't have rent control here. My rent has been raised only twice in the 3 years I've lived here, and only by about $50 each time. The same amount of space in San Francisco, by my best estimate, would cost somewhere between $4k and $5k a month. Also, that space would probably be in a much much older building, in a denser and more dangerous place than my town.

So, one could immediately ask, if I'm able to work in SF with an SF-commensurate salary, and pay this low in rent, why is no one else doing this? As far as I can tell, people even living in SF are very lucky to have less than a 30min commute one way. So I tack on an extra hour per day of commute, or, lets say, roughly 20-25hrs per month.

People do vary in their subjective valuation of a long commute. I probably do consider it to be less of a problem than most people. But do people really consider it to be worth nearly $2k-$3k a month? For someone making near what I am that would be more than my average hourly salary for time spent on the train. Again, people do vary in their respective valuations of time spent doing something other than optimally, but I would be surprised if it was worth that much.

Also consider that housing is continuing to be built on the other side of the mountains in the east bay, and that in Pittsburg and especially in Antioch it is possible to get a lot of space for very cheap, still. Its not unreasonable to expect transportation to get better over time, either.

Based on who you ask, Seattle is adding between 18,000 to 30,000 new people a year.

If somehow 100k new houses appeared on the market, prices would plummet. Sure the dropping prices would cause more people to move here, but not 70k more.

And even if 70k more did move here, add another 100k houses and at that point prices will go down.

Right now Seattle adds less housing per year than the # of people who move here. Of course housing prices are shooting up.

In regards to only high end housing being built, this is due to three factors:

1. The price of land, speculation has made land incredibly valuable, partially because

2. The only market being served is the high end, until that market has been saturated with housing, housing developers will continue to target it. 100k new high end housing units and that market will have been rung dry and land prices will start to come down.

3. Building regulations encourage high end housing to be built. This is starting to change, but low price housing isn't really buildable now days, though I imagine if #2 is solved, builders will start lobbying and this will get fixed. (If that is the route that is taken, society may not enjoy the long term repercussions but that isn't new! Best to have the building codes amended now in a reasonable forward thinking way)

Here in Melbourne vast numbers of skyscraper apartment towers have been built by greedy, short term developers aimed at making a quick buck.

Now we have apartment towers every full of too-tiny-to-be liveable apartments built to shoddy standards - many of them constructed using fire risk cladding which has made them effectively worthless.

That's what a house price boom buys you.

https://www.news.com.au/national/victoria/news/hundreds-of-b...

After jacking up the rent at every opportunity and ejecting one after another of my neighbors over the last ~decade, the landlord of the buildings next door (12 or 15 apartments altogether) sold the properties to an investment firm that boarded them all up and has been keeping them empty for about a year and allowing trash and demolition rubble to pile up. As the price continues to rise they are running out the clock to get permission to restructure the properties as condos and sell at a hefty profit.

Meanwhile the buildings lie empty while poor people live in tents in the park across the street. They do a much better job of keeping the little park clean than the property-rights-fetishizing assholes that are holding perfectly good housing off the market and trashing most of my block.

I'm starting to believe that a fixing inequality will help the most. A $20 minimum wage and 70% tax rates on those earning more than $50k will end a lot problems. A job in SF, NYC will not look so great. People will move back to the mid-West because it'll make financial sense. Fewer immigrants would move to these high priced cities, the demand bubble would pop, and entrepreneurs will start companies all over the world instead of the Bay Area.

Every time this comes up I just can't escape the notion that it's really just because SF, geographically and culturally, has more desirable traits than other places. Temperate climate year round, travel hub, diverse thought, tech opportunity, walkable. What else has this? More people want to live there than it can handle. Build more housing, perhaps the price drops for the people who are there, but then that price will mean more people will want to move there. Wouldn't it be better to have another high quality population mecca nearby?

It's the same with homeless policy - if you make it attractive enough, you attract more homeless, unless surrounding areas have also implemented similar homeless policies.

Building more housing is a supply-side argument - what are some positive ways to reduce demand to move to SF?

I have come to expect bad articles about housing but I have to say this one was fairly on point and succinct.

The trend towards urbanization is obviously a factor so it's not just a question of building houses, it's a matter of building up enough to soak up demand and then some.

I see three big problems:

1. Many cities incentivize building the wrong kind of housing. Look at Manhattan where most new housing below 125th street is not the least bit affordable, some exceeding $5000/sq ft.

2. Capital is essentially global. Real estate in urban centers has become the de facto way to park money. This is a problem.

3. Tax structures encourage this. I like the Swiss system that punitively taxes short term capital gains and property (and makes owning property in Switzerland reasonably restrictive). You need people to own housing units they don't live in. Who do you think you're renting that apartment from? But residential real estate has moved away from being an income-generating asset to being a speculative asset. Low capital gains tax rates encourage this. Also, for some reason, real estate assets tend to be exempt from AML type reporting like FATCA, FBAR, etc. No idea why. But this needs to end.

I think you could go a long way to fixing this by saying that if you own property in a given city you are a resident of that city, state and country and your worldwide income is taxable. This needs to be coupled with stopping the hiding of ownership through corporate shells.

For all the people talking about how of course we should increase population density: what should someone like me do? I'm neurologically over-sensitive to certain noises like subwoofers or dogs barking. So what should I do when all the housing is bulldozed and replaced by high-density apartments? Be forced to go move into the woods? And then who will provide food for my young children?

Building more housing in existing urban areas as a practical matter just means increasing the real wealth and income of the landlord class. If we _really_ wanted to solve the housing crisis, it would be through a homesteading program where new cities were created in empty land and people were encouraged to move there by being offered a plot of land for a filing fee and the promise to actually live there.

Not so convinced by this. The "evidence" he links to is an opinion piece, not an empirical paper. The anecdotal evidence of prices going up in Toronto despite supply increases is equally unconvincing. For all we know prices would have gone up much more without supply increases. And at the end of the piece he even admits that prices would go down if supply increases were truly large... Well then do it. Build a huge amount. In the case of SF, level SOMA and put up 20 story apartment blocks. What do we have to lose? It's not like SOMA is picturesque.

The article argues that more housing would increase the value of the housing already there and thus the prices would not decrease.

First, it's odd that the people who would ostensibly benefit, the NIMBY crowd, typically oppose new housing. Second, if this analysis were accurate, building more housing still seems like a good idea. It won't lower the cost of housing but would increase the value and let more people get housing.

Finally, the author also mentions that most new homes are put to their intended purpose - housing local residents. Perhaps that's true of "most" homes, but I've seen statistics that a hundred thousand Toronto homes are unoccupied [1]. Toronto homes are typically bought by Air BnB types and speculators, foreign and domestic.

In my view building houses is a good answer. Building new houses should be accompanied with taxes on unoccupied homes. If the cost doesn't go down but the value goes up, as the author suggests, that will be unintended but not bad.

1 - https://betterdwelling.com/city/toronto/toronto-has-over-990...

Building more supply may not work when you're dealing with hundreds of billions of dollars of money laundering from China

In BC, we have at least $5B of money laundering in real estate per year, and an absurd number of empty apartments / houses. They will pay obscene amounts to park their money here

We added a vacancy tax and foreign buyer tax to combat this, which has helped to an extent

The argument makes sense to me. This is a problem in Australia that is exacerbated by the tax write-offs investors get in the form of what they call Negative Gearing. My possibly flawed laymen's understanding of it is that for each property owned in addition to your primary home, any losses incurred through the ownership of these additional investment properties can be claimed as a tax write-offs. Couple this with short term interest free loans and a continual rise in prices (a trend that may be disappearing, at least temporarily) and the ability to leverage the home you already have, then you encourage speculative investment. Buy now and sell higher in a few years.

It's much harder for first home buyer's to break into the property market by the very fact they don't own property to leverage in the first place. And this isn't necessarily something only particularly wealthy people do. It's become ingrained in Australian society to treat housing as a financial asset and use it to generate wealth. The problem is if you don't already have one, or substantial means to acquire one, you are at a much greater disadvantage.

I only have my own perspective to rely upon after trying and failing to buy a home a few years ago.

The author Alex Danco’s link that supposedly proves that building housing doesn’t improve affordability is a poor review article by Michael Storper and Andres Rodríguez-Pose that is rather thoroughly debunked by their own colleagues Michael Manville, Michael Lens, and Paavo Monkkonen here: https://twitter.com/mc_lens/status/1129502980498022401 In summary, Storper badly misrepresents or misunderstands the economic literature, and attacks strawman arguments, to try to avoid admitting that supply improves affordability.

The author also says, “The third factor that somehow gets left out of a lot of armchair debates about housing and yet is an essential (possibly THE essential) element in all of this is credit.” As Kevin Erdmann explains in Shut Out (https://www.amazon.com/Shut-Out-Shortage-Recession-Universit...), the opposite is true. Credit is the factor that people jump to to the exclusion of rent (and expected rent given the low rate of homebuilding), which is directly related to supply constraints. Housing prices are high in the Bay Area because rents are high; low interest rates did not detach prices from rents.

Yes, there are a lot of factors in the housing market if you want to get deep in the weeds. But in my opinion, attempts to elevate second and third order factors to avoid dealing with the first-order factors of supply and demand are sophomoric.

This is a very thoughtful and well-reasoned piece, with the money line right at the end:

> My worry, and I hope I’m wrong here, is that on average, adding more housing units just makes this cycle spin faster. (Unless you could add SO MANY housing units that you could actually break through the wedge, that is. But that seems to me like it’d be hard to do! That would also be quite unpopular locally, as it would undermine an awful lot of locally built up wealth, and any move to do that is usually unviable politically.)

I’m strongly in the pro-building camp, but I agree that it won’t be enough unless you could build enough housing to break through the pent-up demand, and doing so would be challenging in the superstar cities.

Living in San Francisco, I suspect that if you could magically add a million new housing units this year, they’d sell. (I do think that would be enough to make a dent in prices, but with the entire state of California so deficient in housing I don’t know how big the dent would be.)

The more important point that he makes is about the self-reinforcing positive feedback loop that drives homes as a financialized investment vehicle.

There’s an easy, but politically unviable, fix for this, in the form of high taxes. The taxes strictly reduce the rate of return on your house, while conveniently paying for public services, and building in a self-interested reason to oppose ever-increasing home prices.

It’s no surprise that the housing crisis is less acute in Texas where the property tax is high, and most acute in CA where the rate is very low AND assessment are effectively static.

I think that serious discussions of how we address the housing crisis must include not only increasing supply but also breaking the positive feedback loop on housing as a high-return investment in the hot economic centers.

While the article is correct that the machinery behind turning housing into an investment does warp the market, that’s not the whole story. Something that’s often weirdly missed in these discussions is the change in housing availability versus the change in population. SF and the Bay Area are not building enough new housing to match the population growth. I suspect the same is true of Toronto and other hot spots of unaffordability.

I feel like a crux of the author's argument (and not deeply discussed), is the process where increasing population and density leads to higher wages for the highly educated.

We could imagine new companies moving to the area, with their complete team in tow. This creates a new opportunity for me to jump ship in return for a raise. My employer then has some incentive to 'steal' someone from elsewhere and may offer higher wages. The net result being little change, but higher wages for us both.

Is that enough to feed into the loop that keeps housing costs high?

Maybe the key step is the arrival of new employers, which bring the credit and wealth that soaks up the space created by any new housing. Some employers, and those employees not paid enough to keep up will choose to exit. But those spaces will be filled by the highly-motivated quickly. Meanwhile the relatively poor will continually suffer, there is nothing created that satisfies them.

So, dear leaders, build new housing but restrict employers, to make the bell curve that matches the people you want to populate your city.

The author’s argument is that creating more supply will further increase housing prices because more educated professionals will move into the city. I see two issues with this argument. One, I don’t think it’s the limit of affordable housing that’s preventing educated professionals from moving here. They’re already coming here in droves, which is the initial cause of this problem (according to the author). Who says adding more housing will further increase the influx of these people? Two, suppose the above hypothesis is correct, then wouldn’t their salaries go down? This is the entire basis of the author’s argument as to why housing prices keep climbing; because by moving to the city, these professionals are immediately increasing future earning, which they borrow against from their well-to-do families. So doesn’t increasing the flow counteract the forces driving prices up by decreasing these future earning?

Just keep building housing until people don't want it anymore. The affordability will arrive when people who don't want to live next to a high-rise decide to move out.

This author doesn't give enough deference to the market. Building more housing will not work, not if the current economic incentives exist. I would love to build housing in compact cities; I could make a fortune. It will take significantly more housing before the market will start to feel the impact, and will be forced to reduce prices due to too much supply. More housing, more affordable housing, more taxes, all of it will still be at the whim of the market.

Counterintuitive as it may seem, basically you want to prevent job growth, because that's where housing demand comes from. Instead of competing with other places to get more good-paying jobs, play to lose. Encourage companies to move away. Cooperate with the many smaller cities that could really use more jobs.

It's load-balancing, basically.

Demographically, we are almost out of the bubble. Currently the children of the Boomers have been buying houses, hence the serge in price. But most have now settled in, the market is starting to slow in most 'hot' cities, across N.American and Europe.

It's not just housing that's the issue, it's zoning. Flexible zoning laws will reduce living costs,not just by reducing house prices, but by reducing transportation costs.

Condos are miniature money machines in a low-interest-rate environment. There always will be a high demand for money machines.

When/if we cross over to a secular bear market for credit in which interest rates broadly increase reliably for a number of years, the problems with affordability largly will subside. Until then....

Well, let's try it and find out. What we doing now ain't working.

Let's try it and see.

As an analyst who works a lot with housing data. The dynamic in Melbourne is very similar to what is seen here in Toronto. I particularly agree with the comments regarding the economic leverage and wealth effect built into home ownership. It has been the classic way of building wealth in Australia for all income groups. And it is indeed powerful. The effect for home asset class is particularly high to by the Basil II (and probably Basil I) banking regulations which allow banks to lend out much higher ratio of loans to capital where the security is housing. I believe this is the primary reason why home loans charge a lower interest rate than say a loan to buy stocks or a business loan. It is indeed a powerful 'gift' to be lent money at a subsidized rate. And this has been given to all home buyers. I also feel that eventually this positive feedback loop will stop or go into reverse. My guess is a new equilibrium point of housing value will occur at about the point where the long term interest rate + turnover costs = rental yield + long term rent inflation. At that point borrowing money to invest in housing should not in the long run make or lose you any money. Unlike housing prices, rents are tied to what people can afford. Over the past 10 years in Victoria rents in metro Melbourne have increased by 3.3% p.a. This is actually lower than regional Victoria (3.6%). This is higher than inflation but quite close to income growth. Note: Metro Melbourne makes up 80% of the states 6.4 million population and the higher rates in country areas probably represents bleed over from the Melbourne into satellite commuter towns. Gross rental yield (rent/property value) is 2.5% for houses, 3.5% for flats/apartments (probably what you call condos). But this is probably on the high side. Maintenance costs are probably at least 1% for houses, and probably higher for flats due to their higher depreciation and construction costs. Call it 1.5% for houses and 2% for flats. Houses have a premium due to their ability to be developed more easily into higher density housing. Cost for selling a house is about 8-10% of value. If you sold every 20 years that would be 0.4-0.5% p.a. Current interest rates in Australia for a home loan is about 4%. So the current equation for flats would look something like 4% + 0.5% < 2%+3.3%. The right side is higher than the left, so flats might be below the long term equilibrium price, but not by much and if you need to put a 20% deposit down, then the opportunity cost of not having that 20% invested in, say, shares might mean that it is already at equilibrium price. Interest rates could drop, but currently in Australia, the banks have shown little inclination to drop their rates even if the central bank has. Back to the original post. I don't count housing affordability as property prices. I would count it in rental prices. And for this I do think that building new homes does effect housing affordability for renters. From the data I have tight supply or surging incomes = increase in rental prices. While loose supply or low income growth = stagnant rents.

Why don't we try it first?

Building more housing will not work. Unless you force builders and owners do you sell less than what the market is willing to pay, building more will only lead to more expensive housing. At some point there will be saturation, and the market will have to start reducing its prices, but that is a very far off Hope