We should focus on building "unaffordable" housing By Scott Sumner

Matt Yglesias has a good article on housing affordability:

When people — specifically market urbanists versus regulation fans — argue about housing affordability on the internet it seems to me that the two groups are using the concept of “affordable” in different ways. 1. In one usage, the goal of improving affordability is to make it possible for more people to share in the economic dynamism of a growing, high-income city like Seattle.

2. In the other usage, the goal of improving affordability is to reduce (or slow the rise of) average rents in an economically dynamic, high-income city like Seattle. These are both things that a reasonable person could be interested in. But since they are different things, different policies will impact them.

Thus if you allow developers to go into a low rise slum in Seattle and build lots of high-rise units in that neighborhood, then more people will be able to live there, but the rents will probably be higher. Both supply and demand will have shifted, but demand will shift even further.

In recent posts I’ve argued that efficiency is far more important than distribution, and housing provides an excellent example as to why this is the case.

Many left-wingers start with the false assumption that society needs to build more “affordable housing”. In fact, in any well functioning society the vast majority of the new housing being built would be “unaffordable”, that is, out of the price range of the median income.

To see why, consider the nature of economic progress. During the Middle Ages, most people lived in miserable hovels. Today, most people in America live in nice houses and apartments. This transition occurred because the new homes being built tended to be superior to the existing stock of homes, at any given point in time.

Moving to higher quality homes is an important part of economic progress. Because one year’s worth of new construction is only about 1% of the existing stock of homes, it’s difficult to rapidly upgrade the quality of our housing stock. But if we are to make any progress at all, it’s essential for new homes to be of much higher quality (and hence more expensive) that the average of existing homes. New houses should be unaffordable to average people.

The key point here is that by far the most effective way of providing “affordable housing” for average people is to get upper middle class people to vacate their existing homes, to free them up for middle class people to move in.

If high rise luxury buildings are built in a (low rise) gentrifying Seattle neighborhood, then it will become more difficult for lower middle class people to live in that particular neighborhood. However it will also reduce the overall price of housing at an aggregate level, and thus help working class people in aggregate.

Many non-economists make the mistake of thinking about living standards in terms of money and affordability. The correct way to think about these issues is in terms of output. If you build it they will come. We can “afford” whatever we can build. If America built 100 million McMansions, then almost all of America could afford to live in a McMansion.

[Yes, this example oversimplifies things; some would be bought by foreigners. And there are maintenance issues. But these complications do not negate the basic point I am making here.]

In a recent comment section I’ve been discussing the question of why young people in America and other developed countries are not out in the streets protesting our restrictive housing policies. There seems to be a consensus that young people do not understand that these housing regulations explain why it’s hard for them to find “affordable” houses. In the 1960s, young people marched in favor of civil rights and against the Vietnam War, because they correctly understood the issues at stake. Today the issues seem to be too complex for people to grasp. So they become apathetic, or else focus on simpler social issues such as political correctness.

As an analogy, once the “low hanging fruit” of obvious artistic possibilities was exhausted, artists turned to more “difficult” styles, which were too challenging for average people to understand. (I have a good vantage point to observe this phenomenon, as I am able to grasp difficult visual works of art, but much less so in music and poetry.)

Something similar seems to be happening in politics. In 1896, the issues at stake in monetary policy were pretty simple, and could be understood by average people such as farmers. Today monetary policy has improved so much that average people had trouble grasping what was at stake in 2008. Today’s policy mistakes are subtler.

As the obvious outrages like Jim Crow laws and the Vietnam War get removed from the agenda, issues become more complex. This may explain why young people are so apathetic about issues such as restrictive zoning rules, even though you’d expect them to be demanding that California adopt Houston-style housing regulations. They don’t even understand that there is a solution to the problems that they face.