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How Affordable Urban Housing Stays Affordable: Noah Smith

It seems like building more housing is worth trying, for anyone worried about the exodus of low-income residents and disadvantaged minorities from the city.

(Bloomberg View)—Living in San Francisco, it’s hard not to notice the city’s changing demographics:

San Francisco’s black population has declined, and though the city's Hispanic population has risen, it has fallen in some historically Hispanic neighborhoods like the Mission District. Meanwhile, some projections indicate that the city will have a lower percent of black and Hispanic residents in the years to come.

The obvious explanation is economic: Rents in San Francisco have gone way up. Despite measures like rent control designed to shield existing occupants, rising rents put inexorable pressure on low-income residents to move out -- they increase local prices for food and other goods, and they give landlords an incentive to evict rent-controlled tenants by any means they can find. Higher rents also discourage new low-income tenants from moving into the city.

How can rising rents be checked? One way is to evict technology companies from the city, in order to stop high-earning tech workers from moving in and bidding up rents. But that would cause an economic slump, possibly severe. A safer approach would be to build more housing. This seems to have worked in recent years -- San Francisco has been allowing the construction of a modest number of new housing units, and rents have fallen. Of course, correlation doesn’t equal causation -- the city has also seen a decline in tech startup funding during the same time period, which might be the reason rents have dropped.

But it seems like building more housing is worth trying, for anyone worried about the exodus of low-income residents and disadvantaged minorities from the city. That’s why it’s so puzzling to see progressive activists fighting tooth and nail against the idea of allowing more housing development.

A recent example is an editorial in Dissent, written by progressive activist Zelda Bronstein, criticizing a 2015 paper by economists Chang-Tai Hsieh and Enrico Moretti. Hsieh and Moretti claimed that removing legal and regulatory barriers to housing development would result in large increases in economic growth, as Americans moved from less productive cities to more productive ones. This paper, and a 2017 follow-up, have helped persuade much of the public that housing deregulation is the way to go.

But Hsieh and Moretti’s paper shouldn't be taken as a quantitative guide to the benefits of deregulated housing. Their numbers rely on a model of urban economies that contains plenty of questionable assumptions, such as the notion that a city’s productivity level doesn’t depend on who lives there. It’s more about opening people’s eyes to the possibility that urban land use could potentially affect the national economy.

But this fact does little to support Bronstein’s basic argument that deregulation doesn’t lead to affordability. Hsieh and Moretti’s paper is about national economic growth, not about local affordability. Even if the paper is complete bunk, it wouldn’t mean that allowing more housing development is bad for low-income residents.

When it comes time to actually argue the case that deregulation hurts low-income renters, Bronstein falls back on the old argument that new apartments in expensive cities are expensive:

Private developers don’t take advantage of permissive zoning or incentives to build affordable housing, because doing so doesn’t yield the profits that they and their investors demand...Because affordable housing doesn’t yield acceptable profits to real estate investors, the only way a substantial amount of it is going to get built is if it’s publicly funded.

Bronstein’s notion that housing is only affordable if government builds “affordable housing” is a common fallacy. The affordability of an apartment doesn’t depend solely on the inherent value of its roof and walls; it depends on the market. There are plenty of rentals in San Francisco that used to be affordable housing, and now are luxury units. Conversely, if prices go down, existing luxury units might morph into affordable housing. As long as new construction doesn’t attract lots more rich people to a city -- which could happen if there's a big marketing push to get more people to move there -- it will cause rents to fall.

So in order to predict the effect of housing deregulation on affordability, we shouldn’t let suspicion of developers override rational consideration of the economics of housing. But nor should we look at sweeping theoretical papers like Hsieh and Moretti’s. Instead, we need economists to produce more careful studies that are specific to the city in question.

Unfortunately, existing studies of San Francisco are either woefully out of date, or done in an informal way. More researchers need to do careful, specific studies like the one University of California-Berkeley economist Daniel McFadden did to predict Bay Area train usage in the 1970s.

In the meantime, policy makers in San Francisco and other cities need to address the rent crisis before low-income residents get squeezed even more. Building more housing -- including government-subsidized housing, but also deregulated market-rate units -- looks like the most promising thing to try.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

To contact the author of this story: Noah Smith at [email protected] To contact the editor responsible for this story: James Greiff at [email protected]

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