Yes, New Construction Can Raise Housing Prices (And Rents)

What triggered this post was a tweet by Noah Smith:

And another one by Brendan Nyhan:

I don’t mean to pick on Smith or Nyhan, as that’s a common statement made by lots of people about urban housing. But I think that’s wrong in many urban areas: an increase in housing does yield higher housing and rental prices. Before everyone’s head gets all explodey and they shut down, I want to be clear: what could lessen or prevent the run up in prices is not the same as what could stop the run up (or even lower prices) once the housing/rental price increase has already occurred. In other words, housing solutions in a gentrified neighborhood are different from those in an ungentrified or early-stage gentrifying neighborhood.

Consider D.C.’s Logan Circle and Shaw neighborhoods (which the D.C. government provides lots of data for–I’ll refer to it as Logan/Shaw for brevity). These are neighborhoods which had a massive population loss from 1960 to 1980: Shaw dropped from almost 26,000 people to under 16,000, while Logan Circle dropped from 8,200 to 5,400 (as a historical note, this was largely black middle and upper-middle class flight, not white flight, especially in Shaw which was historically the heart of black D.C.). In addition, the area had been hit hard by the 1968 riots, and there were a lot of open lots and abandoned properties.

In Shaw/Logan, since 1980 there has been a huge construction boom, with a 54 percent increase in the number of occupied housing units, including new buildings. By comparison, the adjacent Dupont Circle neighborhood, which in terms of income and housing prices, is similar to Shaw/Logan has only added six percent more housing. So Shaw did what should be done–BUILD MOAR!–yet housing prices are still skyrocketed. It’s also worth noting that vacancies in Shaw/Logan are higher than Dupont Circle (4.7% to 3.1%). While 4.7% isn’t high, it’s within the range which is supposed to keep housing prices in check. One more thing: there are fewer residents than in 1960 in Logan/Shaw, especially in Shaw.

So how did this come to be? Here’s what happened:

Even though prices are comparable between the two cities, there’s a lot more gentrification happening in D.C. When we look at wealthy neighborhoods in Boston (e.g., Back Bay), what’s interesting is that the population has remained relative stable for decades. Meanwhile, in neighborhoods like D.C.’s Shaw/U Street or Logan Circle, there was a massive depopulation in the 1970s and 1980s…and only have begun to recover in the last decade (and are still below their 1960s levels–though some of that could be lower household size).

In Boston’s relatively stable, but gradually growing neighborhoods, housing prices appear to be a result from bidding over a limited resource. But in places like Shaw or Logan Circle, there’s room. …the massive emigration from these neighborhoods made these neighborhoods–which still had ‘good bones’, such as mass transit and nice-looking houses–amenable to developers. They bought up and renovated these properties, and that renovation increased prices, and property taxes, in the entire neighborhood. At some point, lower-income people can’t afford rents or property taxes–even though these neighborhoods are still not crowded….

Put simply, in Boston’s Back Bay, there is little room to put more people, while Shaw and Logan Circle are still ‘filling in’, yet prices are comparable. This suggests a very different dynamic, and probably requires a different policy response than in already-crowded locations.

Renovations incur a cost to the developer, and the best way to recover that cost is to target high-end buyers and renters–provided there are enough high-end buyers, which, with rising income inequality, there are. That drives up the rental and selling prices of less desirable units in the same neighborhood. At some point, middle class and working class people are priced out. This pattern also occurred in Manhattan in the 1980s and Brooklyn in the 1990s and 2000s.

But once a neighborhood is slouching towards gentrification, does preventing the building of more housing help? Probably not, and it probably hurts. That said, BUILD MOAR is only one of several things to do (though it does need to happen). First, stabilization policies like D.C.’s DOPA and TOPA programs need to be enacted and funded. These enable working class and middle class people to remain in their current neighborhoods. Second, and this is beyond the control of municipalities, we have to realize you can’t have gentrification without a gentry. In D.C., one micro-unit development (what used to be called efficiencies) is targeting under-35 year olds who make at least $125,000 per year. That’s insane. People will pay $3,000 for a one bedroom apartment because there are enough who can afford it. While that sounds like something Yogi Berra would say, income inequality is not only an initial driver of gentrification, but it sustains it (every place I’ve lived, whenever there’s a downturn, rent increases stall out).

So, in many neighborhoods, we do need to BUILD MOAR, especially once gentrification is far along. But activists worried about the working class and middle class (in the real sense of the term, not the ‘I make $300,000/yr and I’m middle class’ sense) aren’t necessarily wrong about how new building can displace middle and working class residents. It has.

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3 Responses to Yes, New Construction Can Raise Housing Prices (And Rents)

  1. Buildmore B. Housingbubble says:

    “But once a neighborhood is slouching towards gentrification, does preventing the building of more housing help? Probably not, and it probably hurts.”
    Hurts who? For how long? How does this hurt compare to the hurt effected in other scenarios (e.g. ongoing gentrification)?

    And most of all: where’s the data that makes you conclude so?

  2. Ruthmarie Hicks says:

    It depends on how much more and what you build. If you build enough of anything, eventually you will hit a wall where the supply will outstrip demand and put pressure on purchasing prices or rental rates.

    But here’s the tricky part, if you build luxury homes/condos/apartments, they do tend to have the perverse effect of raising the price of everything surrounding it. So what seems to happen is that overbuilding of luxury real estate creates a temporary glut. Once the market is glutted, builders stop building. Then new owners/tenants fill the building, pushing prices back up. This starts another round of building, but since its all luxury, the trajectory is always toward gentrification.

    The only way to stop that trend is to continuously overbuild all the time. An exhausting process which will also eventually hit a brick wall.

  3. kaleberg says:

    I remember NYC in the 1940s through 1960s when lower and middle class housing were heavily subsidized. You can say what you will about the aesthetics of Coop City or Stuyvesant Town, but there were lots of new apartments being added, but they were aimed at folks with more modest incomes. Their competition was with the suburbs which were also being heavily subsidized. The government threw money at housing and it worked.

    There was a recognition that the post World War I baby boom of the Roaring 20s needed housing and that the government would have to make it happen. Maybe it was because the Great Depression and World War II convinced people that the government could come through. it was an unusual era.

    The post World War II baby boom of the Go Go 60s also needed housing, but this was left to the tender mercies of the free market so there was an irreversible phase shift in housing prices in the early 80s that pushed women into the work force and kept them there. (Home ownership went from about 600 hours to over 800 hours of labor annually.) It also led to the rise of gentrification in which earlier low price housing was renovated and moved upmarket. I remember people in shock when their kids moved into the East Village – “That’s the Lower East Side. My parents couldn’t wait to move us out of there.”

    If the population were stable, one could imagine stable housing prices, but when population rises, housing prices go up. Europe has a well documented thousand year history of this. The only countervailing force is the government creating new housing opportunities by means of subsidy or conquest.

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