What's really keeping urban home prices high? And how are some cities keeping prices comparatively affordable? In his new Kindle Single, The Gated City, Ryan Avent, the economics correspondent for The Economist, argues that high urban housing prices in cities like New York, San Francisco, and Washington, D.C. are the result of local regulations that place limits on new housing supply. Those limits help explain why Sun Belt cities like Houston and Phoenix are booming, and have managed to keep their housing prices comparatively low.
Associate Editor Peter Suderman interviewed Avent over email this week.
Reason: Your book talks lot about the benefits of population density. What makes density so great?
Ryan Avent: Density is one of the most effective solutions to the problem of how to realize the benefits of interaction. Larger markets facilitate trade and specialization; they provide easier access to many people and many different kinds of people, which facilitates good matches between employer and employee, as well as between friends and mates; and they serve as rich soil for the intellectual conversations that produce new ideas and innovations. Changing technology has reduced the need for density in some of these interactions in recent decades, but it has strengthened the need for density in others. All in all, dense cities remain a critical part of the world's economy and its societies.
Reason: A lot of people seem to think that a dense city is by definition an expensive city. But you argue that housing prices are artificially high in some of the densest urban areas. What's keeping prices so high?
Avent: It comes down to supply and demand. Demand for the advantages of dense cities is high, and supply is unable to adequately adjust. Dense cities are often older cities, which have accumulated piles of restrictive zoning rules over the years. And residents constantly press for new limits on supply growth: through zoning changes, opportunistic abuse of historical preservation rules, and by applying political pressure on would-be developers. Dense cities are especially vulnerable to these problems because they're older—which means more rules on the books and more old buildings subject to preservation rules—but also because there are more people around to object to new development.
Reason: Why are local residents and governments so often resistant to increasing density?
Avent: Governments are resistant because residents are resistant, and residents are resistant because they fear change and because resistance is effective. People worry about the impact of new development. They worry about the value of their homes, the quality of local schools, the possibility of new crime, less parking, and more nuisance. They worry that their neighborhood will become less aesthestically appealing. And they have little incentive to consider the benefits of density for others—for residents of the city outside their immediate neighborhood and for those who are driven out of the city by high housing costs.
Reason: You argue that density has a lot of benefits for residents. But if greater density lowers housing prices, then don't local homeowners have a pretty strong economic incentive to keep density low?
Avent: Yes—up to a point. Limits on development are somewhat like cartels or unions in this way: They allow insiders to capture rents, but only to the extent that they don't put themselves out of a job in the process. In the short run, productive agglomerations are fixed, but in the long-run they're mobile. If development rules in Silicon Valley drive enough people to other, more affordable agglomerations, then other innovators may eventually find it advantageous to follow, and the region may lose the unique factor that created the opportunity for rent-seeking in the first place. And in general, this dynamic is one reason why it's a bad idea to subsidize homeownership. Renters are happy for housing costs to stay low.
Reason: What can local governments do to help increase the housing supply and keep housing prices from skyrocketing?
Avent: One option is to create institutions to help solve the collective action problem—the city as a whole benefits from density, but it's in the interest of individual neighborhoods to fight development. Local governments can set zoning budgets, for instance, such that any new restriction on development is offset by a loosening of rules elsewhere. The government can also get local neighborhoods to internalize the broader benefits of density by using a share of the revenue gains from new development to offset neighborhood property taxes or to pay for local amenities. The city can give neighborhoods a bigger stake in new growth, in other words.
Reason: Seems like there's a political problem here. On the one hand, local politicians always say they want to foster affordable housing. On the other hand, no one really wants property values to fall. How do you balance the two? What's the message you want to send to local officials?
Avent: The politician's incentive is to hide costs—to cave to the neighborhood's demands for less development and then try to mandate affordable housing through still more new rules. I'd argue to politicians that this is all making their city less efficient and their lives more difficult. New growth will ultimately make other problems easier to solve, by supporting the local economy and increasing the tax base. That creates less demand for interventions to "focus on jobs" or dig up tax revenues through new gimmicks. And it creates more room to satisfy local demands for amenities like well-cared for parks and infrastructure. A city that can find ways to accommodate new residents with new development will have an easier time addressing other typical civic problems.
Reason: Are there ways to make local residents and politicians more aware of the explicit costs of zoning rules that artificially reduce supply? And what sort of cost increases are we actually talking about—any estimates?