You hear that a private developer plans to build a new apartment building across the street. What does that mean to you? Here are some typical responses:

“More traffic and less street parking!”

“Crowded classrooms!”

“My home will lose value!”

“The character of the neighborhood will change!”

Or the ever-popular-but-seldom-spoken, “The wrong kind of people will move in!”

The shorthand for this sort of reaction is not in my backyard (NIMBY)!

Resisting change and sticking to the old ways, the tried-and-true, is a very natural sentiment for most of us. We grow accustomed, attached even, to where we live, even if we often complain about it. For the most part we pretty much like the way things are. If someone proposes building something nearby, even if it promises to make our lives somehow better, we tend to resist because, well, it could also make things worse or make us adapt to a new way of doing things.

Across the country, but especially in highly productive cities such as New York and San Francisco, the cost of housing has reached alarming heights.

The policy question here, however, is whether some of us should be allowed to use the power of government against others in order to keep changes from happening that we don’t like. Is it right to use political power, the power to initiate violence, against other people who haven’t used violence against us? In particular, is it right to use political power to prevent a developer from building those apartments in our single-family neighborhood?

Keep in mind that using political power to prevent others from buying and selling property in essentially non-violent ways can lead to consequences you probably wouldn’t like. Okay, well, like what?

For starters, how about artificially high real-estate prices, especially housing?

Across the country, but especially in highly productive cities such as New York and San Francisco, the cost of housing has reached alarming heights. It’s not unusual to see monthly rents for 2-bedroom apartments of over $4,000 or $5,000 in those cities. What’s behind all that? And why would anyone want to move where it’s so expensive to live?

Rising Demand and Static Supply

For one thing, as the great urbanist Jane Jacobs explained, these cities tend to be extraordinarily productive precisely because getting a lot of diverse people together, where they can mix and share knowledge, can enhance everyone’s productivity and creativity and allow them to experiment at a lower risk than in less densely populated cities. And such cities enhance the value of whatever the resources people possess—including their knowledge and skills—as well as offer them even greater knowledge, skills, and tastes. The opportunities and connections we can find in big cities create a big demand to live and work in those cities, and that’s partly why housing prices are high.

The high demand to live in San Francisco isn’t matched by a corresponding increase in the supply of housing.

But there’s something else going on—or rather not going on. Places like the San Francisco Bay Area have some of the strictest building codes and zoning regulations in the country, which makes new construction there, especially new housing, very costly to build. As a result, the high demand to live in San Francisco isn’t matched by a corresponding increase in the supply of housing. Other things equal, that means housing prices rise faster and higher so that if you’re not already wealthy, it’s really hard to find a place to live.

Regulations that block multi-family housing, or that needlessly limit the height of new construction, or that forbid population density to rise beyond a certain level, or mandate minimum parking requirements, make housing more expensive for everyone but especially those living on low incomes. These kinds of regulations mean that the rich will usually be able to outbid the rest of us for space in a particular neighborhood. But could the rest of us ever outbid the rich?

Building Higher and Denser

If land use is flexible, the answer is “yes.”

If a developer can build taller buildings and more densely than many regulations today permit then the price per housing unit will fall even more.

Take a very simple example. Suppose a 5,000 square foot, one-family luxury home costs $4 million to build, including the cost of land. That’s $1,000 per square foot. If instead, regulations allowed someone to divide that home into ten, 500 square foot studio apartments at a total cost of, say, $25 million, the cost per square foot would rise to $5,000 per square foot. But, since each apartment is only 500 square feet, the cost per apartment would fall to $500,000. That’s not cheap, but it’s far cheaper than what you would have to pay to outbid a very rich person for that single-family home.

If a developer can build taller buildings and more densely, and if they are allowed to sell or rent units that are smaller than many regulations today permit—so-called “micro-apartments—then the price per housing unit will fall even more, and eventually even the relatively poor might be able to outbid the rich to live in a given neighborhood. This actually happens in places such as Tokyo, Japan, one of the most prosperous cities in the world, but where rents have not risen nearly as much as in New York, San Francisco, or London and where you tend to see a much wider mix of income levels sharing the same neighborhoods.

YIMBYism

Things have gotten so bad in California and elsewhere in the U.S., a new movement has been growing called YIMBY, or “Yes in my backyard!”

In April 2018, California Senate Bill 827, “which would have allowed the construction of apartment buildings up to five stories tall near every high-frequency mass transit stop in the state” was defeated in a committee hearing. Passage of the bill would have been a significant step toward liberalizing building construction in a state where regulations have contributed to soaring housing prices. So it’s unfortunate that the bill didn’t pass. But the YIMBY movement is gaining popularity, even among those on the political left, and further efforts to liberalize development where housing is expensive will hopefully continue.

So what’s blocking the spread of YIMBYism?

What’s Behind NIMBYism?

A lot of it is, as I’ve suggested, a natural resistance to change combined with political power. What does that mean, exactly?

A lot of people like to say, “Housing should be affordable!” while at the same time they believe that “Our homes should be a good investment!”

First, there is the fear that a greater supply of housing will result in lower prices for existing homes. Economics tells us that, other things equal, prices will indeed fall. So, if you’re afraid that the price of your home might fall or that it might not rise as fast as you would like it to, you might support NIMBY regulations.

There’s also a peculiar attitude that many in the United States have toward their home.

A lot of people like to say, “Housing should be affordable!” while at the same time they believe that “Our homes should be a good investment!” In general, both of these can’t be true.

We don’t think this way about other expensive assets, such as our cars. We normally don’t expect our cars to increase in value over time, even if it’s a Mercedes. Why should we expect houses to be different? In other societies, such as in Europe and Japan, the idea that houses should be a good long-term investment is, well, foreign.

NIMBYism is often a convenient excuse to use political power to preserve a neighborhood’s ethnic and cultural homogeneity.

But if we do think our home should be a good investment, and if we also think that housing should be affordable for all, well, isn’t that inconsistent? After all, affordable housing means prices stay relatively low, while we expect the price of a good investment to rise. Unfortunately, people who say these things usually mean, “Housing should be affordable to all, except in my neighborhood.” Again, not in my backyard!

But there’s also a second, usually unspoken and insidious reason people oppose building more housing, especially multi-family housing. If building more housing, especially high-density, multi-family units, really does make it possible for lower-income people to afford to live in our neighborhood, well, then it’s likely that people and families who earn lower incomes will indeed move into our neighborhood. NIMBYism is often a convenient excuse to use political power to preserve a neighborhood’s ethnic and cultural homogeneity.

But there’s also another, perhaps even worse consequence of restricting the supply of housing via government regulation, and that’s the long-term impact on the ability of a city to prosper; and a corresponding tremendous advantage of allowing flexibility in land use.

Innovation, Productivity, and People All Suffer

Now, living in a market economy has meant unprecedented prosperity for the vast majority of people around the world. Per capita incomes globally have risen on average over 30 times in the past 200 years. What’s mainly responsible for all that growing prosperity is innovation. And, of course, innovation means change.

Innovation doesn’t just happen.

That kind of creative change is what got the West out of the Middle Ages, when everyone pretty much knew what they would be doing from morning to night, from birth until the day they die, and where incomes per person were about $3 a day. So if we like what a market economy does for us—the comfort, creativity, convenience, and long life-expectancy—then a world of change is really what we have chosen to live in.

Now, innovation doesn’t just happen. Because the world is uncertain, no one knows just what’s needed and what’s possible. People have to experiment, and as Jane Jacobs explains, cities are ideally suited for that sort of trial-and-error. On the one hand, the connections we make offer unparalleled access to information and contacts with other people; and on the other hand the diverse opportunities and anonymity of a great city allows us to try different things without having to worry as much about the cost and risk of failure. But what does overly restrictive land-use regulation have to do with that?

It’s this: Other things equal, the more homogeneous a city, along any margin, the less innovative and productive it becomes.

Really high real-estate prices mean people will be less likely to afford to be entrepreneurial.

To over-simplify a bit: On the demand side, making real estate more expensive in a city selects for people with a certain income and cultural background and filters out people with unusual backgrounds and tastes. That results in a lack of diversity among people. If a new product or service is to succeed, you need people who are willing to take chances, to try wacky things, who are willing to try it out.

On the supply side, really high real-estate prices mean people will be less likely to afford to be entrepreneurial. That goes especially for young people with novel ideas or lifestyles who find expensive cities less congenial places to experiment. Consequently, you’ll find mostly businesses that are already successful, or art forms that are already well-established—chain stores, blockbuster movies, elite dance companies and symphonies—rather than fringe artists and businesses that may be how innovative industries get started. The high costs mean it’ll be very hard for them to get a foothold.

Economists have estimated that easing land-use restrictions in just New York, San Francisco, and San Jose alone would increase GDP by 9.5 percent!

Instead, those people will have to try to live in other, less-expensive places that are likely less complementary to their knowledge, skills, and tastes. Sure, they may be able to make a living and do some of the things they would like to do, even become hugely successful, but history shows that it probably won’t be to the degree they would have been able to in a more productive city.

And the decline in productivity is real. Economists have estimated that easing land-use restrictions in just New York, San Francisco, and San Jose alone would increase gross domestic product by 9.5 percent!

So, sure, there’s nothing inherently wrong with resisting change that we don’t like or want. In fact, we sometimes should—peacefully. But be careful! Mix in political power and the consequences can be, and have been, tragic.