Agglomeration effects might change the YIMBY calculus
devonzuegel.com
devonzuegel.com
I heard of a study some time ago that said that restrictions on urban development have cost the American economy on the order of trillions of dollars over the past few decades. When you also consider that existing property owners in cities have an incentive to maintain or increase their property values by limiting new construction, there is a powerful argument for the federal government to act on behalf of the interests of the nation as a whole in having more dense, dynamic, inclusive urban centers and prevent cities from enacting anti-development policies.
Furthermore, while developers are typically scorned by my comrades on the left, such a policy would be progressive in that it would tend to reduce the wealth of rich property owners, while decreasing costs for renters and making cities more accessible to people with fewer resources.
Speaking for myself, I only value density as a means to establishing a global “right of return”, which I believe is a moral good:
Human ecologies are healthier when children who grow up in a place have the option to remain, or to return after exploring.
Oakland, right now, is forcing out large numbers of indigenous people, young and old, perhaps never to return.
I don’t care about the density of Oakland, I just care that people who have spent part of their development here can continue to embody the geography.
As long as there is a supply of wealthy would-be immigrants (which shows no sign of slowing) then that means I am for increasing density. But it’s a means to an end.
In the context of the article, the theory of agglomeration effects cited by the author posits that increasing a city's density makes a city more attractive, and thus exerts an upward pressure on property values.
> This supply-demand model ignores something important: the value of living in a particular place is greatly determined by how many people live around it. As the number of people living in a place increases, so does the value of being there. This is often labeled the "agglomeration effect".
I'm not familiar with the empirical evidence for the agglomeration effect, but if it's real, it indicates that aside from whatever specific arguments one can make for or against dense cities, the market values density. The author suggests some plausible reasons why the market might value density, but really it's kind of besides the point why density is valued by the market (which represents the demonstrated preferences of you and I and every other economic actor). If the market values density, and there are perverse incentives which prevent cities from increasing density (the interests of existing property owners), it behooves us to intervene at the national level.
One can make a number of other orthogonal arguments for increasing density: smaller environmental footprint, increased diversity and social mobility in communities, equality of opportunity and access, and your argument for a "right of return," to name a few.
Namely, what happens to overbuilt places during periods of population decline (as maintenance of existing real estate becomes virtually impossible to afford). What happens to those living in the area should there be a major environmental or political crisis (it's much harder to evacuate manhattan than most other places). And how can we scale our infrastructure concurrently with increases to density such that transportation and other government resources are never lacking.
I also appreciate (and spend a lot of time in) dense cities and I wish that a lot of SF were much denser.
But I appreciate grass roots, local control more and I am alarmed at how quickly principles of democracy are thrown out the window when they produce "the wrong kind of results".
Local control is elitism: the people who are local to desirable places control everything that matters. Justifying that by saying the rest of us have "local control" over our Rust Belt garbage dumps and third-world hellholes is worse than the doctrine of Separate But Equal.
Democracy means it is not only the rich who vote on taxation, not only the business owners who vote on regulation, not only the defense contractors who vote on foreign policy, even though each is the primary stakeholder in their respective issue. In the same way, it should not only be the homeowners in desirable cities who vote on access to those cities.
You obviously didn't grow up anywhere near where I did. I could easily buy property where I grew up, but there's no opportunity for me there, other than as a remote worker, and I don't prefer that. I get more value out of paying 3x what I would for my 2BR apartment here than living there.
That's the thing NIMBY's completely miss: NIMBY policies cause displacement of middle class and poor people by giving them no affordable housing in the area. YIMBY policies actually increase access for people wishing to return and enable indigenous people--even those who aren't rich--to stay in the area.
>We quantify the amount of spatial misallocation of labor across US cities and its aggregate costs. Misallocation arises because high productivity cities like New York and the San Francisco Bay Area have adopted stringent re- strictions to new housing supply, effectively limiting the number of workers who have access to such high productivity. Using a spatial equilibrium model and data from 220 metropolitan areas we find that these constraints lowered aggregate US growth by 36% from 1964 to 2009
Putting aside the moral/ethical of dictating zoning laws at the national level, I'm skeptical that the national government even has Constitutional authority to intervene is such a drastic way.
I think there's two interpretations of the observation you describe.
Overall I think it's clear that growth can largely be a good thing, we just need to do a better job deploying resources in a rapid when when large numbers of people move in. A good example is Seattle, where the population is booming, and even with massive transportation projects planned and in the pipeline, it's certainly possible that by the time things get built it's insufficient.
Honestly, from my experience living there for a year, the agglomeration benefits of the bay area are pretty oversold. I met some great people there, usually too far away to meet with regularly (transit is beyond terrible), that can't work on anything with you because they're too busy working an all-consuming job so they can afford rent, lost in an endless sea of people I would never want anything to do with.
1: https://en.wikipedia.org/wiki/San_Francisco_Bay_Area#Demogra...
There has to be an end to the housing price rises, though. I think it will happen when salaries get too high for tech companies to pay. Why pay double what you would for the same person in another area? Right now the ease of finding employees makes it worth it, but there has to be a tipping point somewhere.
I keep thinking the housing policies will kill the golden goose but it hasn't yet.
Even in 2008 property values didn't decline that much in this area. There's some growth in Washington, Austin, Colorado, LA too - but that doesn't mean the Bay Area is in decline.
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From: pa...@abercrombie.Stanford.EDU (Paul Flaherty)
Subject: Re: Sillycon Valley history
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dpa...@csulb.edu (Dave Palmer) writes:
>From what I understand, the shine is rubbing off. The cost of housing is
>ludicrous, and companies are fleeing to places like Arizona. But you
>still can't throw a silicon wafer in Cupertino without hitting an Apple
>facility.
I think it's fair to say that Silicon Valley is dead. Cheap venture capital,
minimal startup cost, access to university researchers, and good inter
business communications fueled an engine which turned ideas into products.
You can now find venture capital elsewhere, with the discount rate being
what it is. The cost of housing and office space has spiraled out of
control, thanks to the environmentalists and Prop 13. The trade secrets
and intellectual property mania have pretty much destroyed open cooperation.
The universities remain, but aren't the driving force they used to be.
The place has a much different, more ossified feel to it than it did seven
years ago.
-=Paul Flaherty, N9FZX | "My boy, we are pilgrims in an unholy land."
->pa...@Stanford.EDU | -- Dr. Henry Jones Sr.
No, it has net growth, even though it has net domestic out-migration. It's getting more populated, from foreign immigration and natural growth, while losing in internal migration.
We certainly know that higher density doesn't necessarily produce lower prices - San Francisco recently passed Manhattan to become the most expensive housing market per housing unit, but Manhattan remains more expensive per square foot.
And even if it does, existing San Francisco house owners might still benefit. The structure isn't all that valuable compared to the land, at this point. So even if greater density causes housing prices per unit drop, and even if it causes prices per square foot of living space to drop (due to multiple unit apartment buildings but where a single or two story house used to exist), the value per square foot of land could increase astronomically.
And that's if per unit or per square foot prices drop. It could be that these prices would rise, which would only increase the value of land even more.
This is why I don't buy into the notion that San Franciscans are anti-development because of a desire to maximize the dollar value of their house. It could be that they haven't thought it through like this, or it could be that the have and they disagree... but I think a lot of San Franciscans are driven by a motivation to keep things from changing. They like it this way, and they don't really want it to change. They got in a while ago, they can afford it, their property taxes are low due to prop 13, and their house value has gone up to the point where they don't really need it to go up much more.
They just aren't motivated to seek more density, but it isn't necessarily because they want to maximize the value of their real estate asset (the land their house sits on). It could actually be indifference to the price of their house that motivates them to block new development.
Which is all to say, does supply drive it's own demand? Hard to say but regardless YIMBYs need to deepen their explanations of the economics behind the issue, supply and demand graphs are good for introducing undergrads to the basics, they're not good for justifying very expensive and highly redistributive policy.
[1] https://en.wikipedia.org/wiki/Say%27s_law
sidenote: draw a supply and demand graph. Now draw a second graph but make demand slightly upward sloping. Increase supply. What happens to price? Just googling around I found several articles about upward sloping demand in housing. It appears to be contentious (urban economics isn't an area I know too much about) but is something that should be considered.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2017...
https://www.ssb.no/a/publikasjoner/pdf/DP/dp618.pdf
https://ideas.repec.org/p/arz/wpaper/eres2018_267.html
https://www.sciencedirect.com/science/article/pii/S009411900...
Value creation is a different matter though - a place can become less affordable and create more value, or can become more affordable and create less value (Detroit, with its vacant subdivisions, being an obvious example).
All over the world, central urban real estate is very expensive, often because it has access to transportation infrastructure such as highways and trains that allow it to attract workers over a larger population boundary.
The Bay Area’s situation is historically mundane; only its response is unique.
New York had a significant population by the mid 19th century. Imagine if its residents had decided to preserve the character of their neighborhoods.
For example, New York City up until the mid 1970's:
https://ny.curbed.com/2015/6/2/9954250/tracking-new-york-ren...
Your point about central urban real estate is true, but that doesn't mean the entire urban metropolitan area has to be unaffordable. E.g., my friends in NYC tell me it is reasonably affordable in that although Manhattan itself is expensive, the surrounding boroughs and suburbs have plenty of affordable housing within reasonable commuting distance.
Of course, a lot of this is just generational - after WW2, there was a lot of investment in building in general, be it building up all the cities or the interstate highway system. This seemed to turn around in the 70s (at around the same time median wages became flat with inflation, and general inequality started rising).
But Economists have studied this and know the effect is very small. Which is why you have software engineers speculating about it instead.
I know no other scientific field where people so confidently ignore well established known facts as Economics. Even people who otherwise quite scientifically literate.
Lower cost housing is a means to end, not an end onto itself. That end is a higher quality of life, for more people, and more productive higher density cities provide that.
In anywhere nice to live, there will always be rich people lining up to buy up everything. Even if they don't live there. Even if they can only live in one house at a time.
At some point the rich person decides it's not worth buying 100 houses so they can collect rent on ten, and then they take a bath when they want to unload the first 90 properties which they can't rent for what they paid, to the benefit of everyone else. And when it's repeatedly demonstrated that it's possible to do this, rich people holding property they're not using will start unloading it and bring prices down without even building anything more.
This is why it can be as simple as "build more houses". Don't get bogged down in the relative affordability of each new unit, or demand that X% of any new development be set aside for low-income residents. Just build, baby. And keep building until the supply of housing meets or exceeds the demand. At some point, the value (either rental or purchase) of each unit will be forced downward to find a tenant or buyer. It doesn't matter how much it cost to build it, or how nice the place is. If there are a glut of them, the price will fall.
Real estate is different than commodities, though. I get that. Locations cannot be duplicated, the size of a geography cannot be expanded, etc. Those factors represent part of the value of each location, however. And when the density is low in areas that could support much higher density, it's not the market holding that number down.
In turn, something needs to be done to drive down the incentive to speculate on land prices. Such tools can range from rent control which makes landlordism unprofitable to land value and vacancy taxes return lost value from lack of properly developed land back to the public.
Lastly, there is a negative aspect to overbuilding housing, as it can be expensive to maintain real estate when people aren't actually using it.
But it is on the market. There are no regions where land is unavailable at any price. The price may be high, but if it is, all the more money to be made by subdividing it into twenty times as many housing units that each sell for most of the original price.
> In turn, something needs to be done to drive down the incentive to speculate on land prices.
That thing is to eliminate zoning regulations that prohibit high density construction.
> Such tools can range from rent control which makes landlordism unprofitable
Economists almost universally agree that rent control is a terrible idea.
What you end up with is ten apartment units that could be rebuilt into fifty condos, but the prerequisite to rent control functioning is that you can't kick out the tenants (and they will never want to leave), so that can never happen.
It also makes new construction in general less profitable by removing all the landlords from the purchasing market, and makes all non-rent-controlled apartments scarce and outrageously overpriced.
> land value and vacancy taxes return lost value from lack of properly developed land back to the public.
Vacancy taxes are a spectacular idea in theory. Rich people would probably find various ways to avoid them, but they seem to have almost no downside. Particularly if you have sensible exceptions like for property that was occupied for more than 24 of the last 36 months. I'm not sure why they don't exist in all urban areas.
But that only works on the vacant properties. Doesn't work when you have a bunch of occupied properties and the issue is the incumbents capturing the local government to keep rents high by preventing new construction.
> Lastly, there is a negative aspect to overbuilding housing, as it can be expensive to maintain real estate when people aren't actually using it.
This is a benefit. That cost has to be paid by the people owning but not using it, giving them the incentive to put it on the market (at any price they can get) so that someone who can use it will have it.
Rich people are especially into "knowing the best", whether its vacations, cars, and yes, places to live. Thats what I meant about them wanting to come buy stuff in your town even if they don't currently live there. And the data kind of shows this. California has an outflow of poor and and inflow of richer.
Basically, desirability is inelastic. California has better weather than a lot of places. The only people who can pay up the vertical inelastic curve are rich people. There are a bunch of them who want to move to your town from elsewhere.
That isn't a real problem though. If people are coming who actually want to live there, let them. There are zero cities in the world that are entirely covered in buildings the height of the Empire State Building. Every time you sell a housing unit for more than it cost to construct, you have that much more money to construct more housing with.
The actual problem is that the existing residents pass zoning regulations preventing high density new construction, because they know it would reduce housing costs, but once they live there their housing costs are fixed and what they're worried about is increasing their property values.
> "Or rather, the fewer poor people around tends to mean rich people find it even more desirable."
If we don't address this, it will be impossible to convince people to build more, no matter how blue in the face people get about supply and demand charts.
But why is that a problem? It's like complaining about free money appearing out of thin air. If every rich person in the entire world wants to move to your city, that's really good. It would be a wonderful tax base. And there are a countably finite number of rich people, so there comes a point when you have literally every last one of them.
Having to build enough housing for every rich person in the world is ridiculous, but the reason it's ridiculous isn't that you couldn't physically do it (if there are a hundred million rich people, that's only a single digit factor more people than live in Beijing or Shanghai). It's that they would never all move to one place like that -- especially because every other city would be competing to keep them.
And if density is actually such a wealth magnet then every city should do it. Then the outflows and inflows would net balance and there would be no net migration of rich people to any city in particular. If you somehow got more than someplace else, what are you complaining about? Build even more housing to see if you can get some more, then go spend their money on your roads and schools.
There are sufficient rich people outside of SF that want to be in SF to consume any reasonable housing growth.
Many other major cities already have most of the rich people that want to live in them (and some that really would prefer to live elsewhere, like SF.)
(I suspect this is because NIMBY policies in the face of population growth make SF housing an especially great investment, and that this advantage would disappear with zoning liberalization. Returns on the level of SF’s real estate market are hard to find in the stock market, for example. Why wouldn’t they speculate on it?)
Globally, certainly; locally in particularly attractive areas? Probably not even if that were the case.
> This thread proposes that rich people consume many more homes than they can actually live in.
Which is obviously true, 2nd through nth homes that are kept idle most of the year, or even for years at a time, are a thing, and a person can't actually live in more than one at a time.
> So why don’t they draw some of those homes from other markets?
They do. But there's enough rich people that want to draw some of their consumption from SF to eat up quite a lot of expansion, until you actually make SF unattractive to rich people.