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Housing supply

Sam Bowman, Ben Southwood, John Myers

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Why does housing supply matter?

Housing is the number one good in most developed economies: most people’s biggest expenditure item after taxes. So housing supply matters in part just because the supply and demand, and hence the price and quality, of people’s most important consumption good matters to their wellbeing and budgets.

But housing has many other indirect effects that make it particularly important relative to other goods. If food is expensive people eat less. But in a developed country this just makes their lives worse and less enjoyable than they could otherwise be. By contrast, housing is not just the value of a nicer, bigger, better house, but an important factor in pretty much everything else people do, too.

First and foremost, most people’s homes need to be near their job. The supply of housing determines how many people can move somewhere to work, and, if supply is constrained, how much of the benefits of higher wages go to workers versus to landowners through higher rents and house prices. A city with more people can also have a more specialised division of labour, which raises overall productivity, and more innovation, as people with different ideas can productively collaborate with one another more.

Even as technologies like Zoom and Slack have made remote work more viable, the benefits of ‘agglomeration’ – the gains to productivity when a worker can collaborate with many others in the same room, or city – are not going away.

This demand, combined with a tightly restricted supply of housing, is one reason that San Francisco and Bay Area rents and house prices have risen so high over the past twenty years.

But the value of housing, and effects of restricted housing supply, go much further than our jobs and wages. Bigger, cheaper homes mean more rooms for children and relatives to live in, so people can have larger families that they can afford to start earlier on in life. Spare rooms can reduce homelessness by giving family members and friends a place to stay to recover from mental health crises or drug abuse problems, when they would otherwise be forced onto the streets. Restrictions on density near job markets mean more spread out urban patterns, meaning a dependence on cars, and thus both lower physical activity and more obesity, and more carbon emissions.

Fixing constrained housing supply is simultaneously easy and difficult. In one sense, to fix it normally requires only rewriting rules around what you can build – rather than any new technology, big tax-funded spending, or social information campaign. High prices will give developers the incentives they need to increase supply, if we let them. But making this happen has proven to be remarkably difficult, because of the externalities that new homes often impose on the people who live near them. Any solution to constrained housing supply that is going to be politically viable has to reckon with these externalities.

Syllabus

In ~5 hours

Note: Quite a few of these links are to Works in Progress, the magazine that two of us run. This is because we have been trying to consciously build up a syllabus on our website for the last four years, to specifically fill in the gaps of documents like this.

  1. Housing is subject to supply and demand, just like anything else
    1. House prices are high in many parts of the world because new supply is low relative to new demand, which drives up prices. While house prices are also affected by interest rates (which affect demand) and can be subject to bubble dynamics like other assets, the underlying supply of and demand for housing is normally the most important determinant of house prices, even when prices are very high. Going further, Open NY has a thread compiling many of the academic references showing that supply and demand are just as relevant to housing as they are to other markets.
    2. Like other markets, you don’t have to specifically target the housing you build to those who can least afford housing to make it cheaper – when people buy market-rate housing they free up cheaper homes. This has been shown empirically several times: houses for the top of the market make all homes cheaper.
    3. Housing density and transport links are key determinants of how useful a given house in or around a city is to people. The time it takes to travel from your home to a workplace determines what jobs you’ll be willing to take, and the number of people concentrated around a potential transit stop determines whether it is viable to build mass transit to that place.
  2. Housing supply has indirect effects on our lives, especially on our economic lives
    1. The Housing Theory of Everything explains the theory of agglomeration – how people being near one another allows a deeper division of labour that makes them all more productive – and how housing shortages make cities less productive and innovative, worse for the environment, and worse for our health and family lives . It’s full of links to the deeper academic treatments of each of those areas for those who are interested.
    2. Housing shortages correlate with higher rates of homelessness, but the underlying mechanism is less clear than it might seem at first. The most relevant shortage may be of spare bedrooms, which people would use to shelter their loved ones having mental health or drug crises. When spare bedrooms are scarce, these vulnerable people may have to turn to worse alternatives, including sleeping on the streets, that could make their crises permanent.
  3. Housing is tough to fix
    1. The NIMBY Problem (open-access earlier pdf) explains why building housing is controversial (it’s very readable). Building new homes can impose negative externalities on people who live near them, and those people object. Often the benefits of the new homes are larger than these costs, meaning it should be possible to pay off the objectors. Most people would be OK with that – but a small number of hardcore opponents use legal and regulatory obstacles to add so much cost and hassle to the approvals process that there is no longer enough profit left over to compensate the bulk of persuadable local residents.
    2. A thread from Chris Elmendorf (and an associated academic paper) explains a related problem in California right now: despite many YIMBY bills having been passed, their passage has not yet fixed the problem, in part because they have had to be designed to buy off too many interest groups in order to pass.
    3. California is not alone. Practically every developed country has underbuilt in the last seventy years, because reforms have not been designed to take account of the NIMBY problem. Generally, this is because attempts to build housing have not been designed to be popular.
      1. Why Britain Doesn’t Build explains why the UK has done worse than almost every other country, and why attempts to fix planning have failed.
      2. A Place in the Sun explains how Sydney and New South Wales in Australia successfully increased housing supply there but were defeated by backlash.
      3. Upzoning New Zealand explains why New Zealand’s flagship upzoning policy was defeated by backlash. (And here is an update, two years on.)
      4. Why Ireland’s Housing Bubble Burst explains why flawed regulations and crazy incentives created housing boom-bust in the Celtic Tiger era.
  4. But there are some encouraging successes in releasing more types of development – both tiny cases and broader successes.
    1. Seoul Searching. From 1980 to 2015, South Korea built so much that they increased the amount of housing floor space per person by over two and a half times.
    2. How Israel turned homeowners into YIMBYs.
    3. Vancouver’s Squamish Nation have opted into using their ancestral land for a new development called Senakw on the edge of the city – with their power to avoid bylaws that usually apply, and decide for themselves whether to densify.
    4. Learning from History. How the Haredi Jews of North London created a new density permission to add space for their large families.
    5. Cunning Plans to Fix the World Can Win. How awarding New York property owners with tradable development rights for the air above their building turned the Catholic church into a hardcore YIMBY organisation.
    6. Houston, We Have a Solution. Giving Houston neighbourhoods the right to opt out of densification schemes removed opposition to such schemes, allowing it to become the YIMBYest city in the USA.
    7. How DC densified. Unlocking transit-oriented development (new homes around public transport stations/stops) by giving local communities a stake in it.

With more time

  1. The political economy of housing illustrates many important features of political economy
    1. The Importance of Alienability explains how much better things could be (across many domains of society) if we allowed win-win deals to go ahead.
    2. Leading auction theorist and mechanism design theorist Ken Binmore argues that more areas of policy should be explicitly designed in The Rules of the Game. Nobelist mechanism design theorist Roger Myerson’s Nobel Prize lecture explains just how many areas could be improved by applying these principles.
    3. Why Do We Struggle to Densify Suburbia? is a short early version of an upcoming project explaining ‘The Great Downzoning’ – a trend that reduced the permissible built densities of nearly all residential areas across the world between 1900 and 1950, and which has only been revoked in a tiny fraction of places worldwide. (A full article is upcoming in Works in Progress.)
    4. Why Aren’t We Building Enough Attractive Homes? is superficially an article focused on the specifics of UK zoning and planning policy, but in tackling these with especially clear eyes, elucidates most of the core principles of housing political economy in passing.
  2. People find modern buildings to be uglier than old ones – this helps explain why they oppose new buildings
    1. In Praise of Pastiche – the case for building any beautiful building styles, from any time period, rather than feeling obliged to invent a new style of building every generation.
    2. Against the Survival of the Prettiest – an empirical study showing that the popular ‘survivorship bias’ story for why older buildings seem prettier is wrong.
    3. Making Architecture Easy – architecture is a public art, so it should usually be designed so that normal people can appreciate it.
    4. The Beauty of Concrete – buildings did not become drab, austere, and boring because of rising labour costs. Before the 1900s, rising wages led to more, not less, ornament.
    5. Cheap Ornament and Status Games – but nor did excessive affordability kill off ornament: modernism hit all arts at approximately the same time, but there were no cost changes in any of the other arts.
    6. Machines for Living In – why functionalism (‘form follows function’) does not mean that buildings should be plain utilitarian boxes. One legitimate function, that affects how much we enjoy a building, is what sort of building it is and what role it fulfils.
  3. Property taxes and local incentives for development are important, but land value taxes – Georgism – are overrated as a solution
    1. Where places have built enough overall, it has largely been low-density car-dependent ‘sprawl’ suburban development. This is vastly better economically and socially than building nothing, and depends on financial incentives to local government. Growing the Growth Coalition explains how local incentives ‘buy in’ local communities to development.
    2. Fixing Retail With Land Value Capture explains how spillovers lead to dying high streets (and shopping malls).
    3. Zoning Restrictions Work Like Tariffs: David Ricardo’s solution to high land prices in 19th-Century Britain – reducing tariffs – was better than the alternative solution of taxing land and sharing the money around. The same is true for land taxes vs relieving restrictions today.
    4. What did Henry George Think About Cities? He wanted to abolish them.
  4. How crime and cars affect urban form
    1. How Transportation Technologies Shape Cities
    2. The Nimby tax on Britain and America – in particular how much distance one can travel in different cities as a measure of infrastructure quality
    3. How Crime Worsens Sprawl and How Crime Stops Upzoning and Densification.
    4. Why ‘Gentle Density’ can help with regional inequality – in many cities in countries like the UK, infrastructure is a bigger constraint on agglomeration benefits than a lack of housing.
  5. Proposals for fixing these problems around the world
    1. Strong Suburbs makes the case for the proposals that became ‘street votes’ in Britain. The law enabling such votes was passed with cross-party support but they await implementing regulations (called ‘secondary legislation’ in the UK), without which they cannot proceed. The beginnings of similar schemes have been developed for the USA, partly based on Donald Shoup’s idea for ‘graduated density zoning’.
    2. The Niskanen Center’s agenda for abundant housing proposes an approach that appears to be contradictory, but can actually be complementary: moving many zoning decisions to a higher administrative level than the locality..
    3. The Better Planning Alliance and Progress Ireland have both developed proposals to bring American-style accessory dwelling units (ADUs) over there.
    4. Developing Palo Alto is Worth $1 Trillion. Trying to escape ‘the NIMBY problem’ by using direct democracy and spreading the benefits with every affected household.
    5. Estate regeneration ballots allow the residents of public housing in London to vote for upzoning their estate. A developer replaces the existing housing, which is often very old and in need of renewal, with denser developments including many new private units and . The private units pay for the whole project, and existing residents get newer, nicer homes.
  6. Britain is a Developing Country and Foundations: Why Britain Has Stagnated explain how constraints on developing houses (and other buildings like factories, laboratories, offices, and more) can cause a leading economy to completely stagnate.
  7. There are a lot of myths about housing – learning why they are misguided helps clarify understanding of how everything works
    1. Gentrification as a housing problem shows why cures to gentrification other than building more homes are worse than the disease.
    2. Some argue that the potential upside of liberalising planning/zoning rules are pretty small, since the income gaps between cities are mainly down to skill gaps. Even on the most careful analysis, this is wrong.
    3. Many of the other claims that housing is expensive for reasons other than supply and demand are based on misconceptions about things like the reason developers line up plots of land to be built on (“land banking”) or the way interest rates affect prices in different parts of a country.

Misc