Affordable housing and the price of vitality

Here is an SAT-style question that occurred to me after a recent trip to my birthplace, San Francisco.

One of these places is not like the others: San Francisco, Cleveland, Hong Kong, Sydney and Vancouver. I am going to take a wild guess and say that you have chosen Cleveland.

You are right. But why?

One of the many ways Cleveland is different is in the cost of living.

Demographia's just-released 2017 affordability study has Cleveland as one of the most affordable cities for housing, and each of the other cities in my Scholastic Assessment Test question as among the least affordable. This suggests something important about the affordability crisis that has not entered the discussion of housing affordability: The cities that we find most attractive are cities where housing is "unaffordable".

In other words, the affordable housing crisis is not just about a lack of housing supply.

In my current city, Los Angeles, one hears over and over that everyone is leaving because no one can afford to live here. This talk reminds me of the Yogi Berra homily, "Nobody goes there any more. It's too crowded".

Of course, exactly the opposite is true, and that truth is what should guide us in our housing policy.

The oft-made mistake is to suggest that housing is expensive because, as Demographia incorrectly puts it in its report, "studies do not leave the slightest doubt that unaffordable housing is almost everywhere and every time caused by the same factor: housing supply restrictions".

Well, these "studies", some of which are by very thoughtful people, leave plenty of doubt, and some of their authors ought to go back to Economics 101.

Prices are not just a supply phenomenon but are rather an interaction between supply (what is available for sale) and demand (what people want to buy).

Clearly, the people who live in San Francisco, Los Angeles and other cities on Demographia's list of cities with affordability crises could afford to live there. They just paid a larger portion of their income to do so.

They could have moved to someplace affordable, like Cleveland. So those who say that housing prices are unaffordable are saying that, at lower prices, there would be more demand than supply. Let's explore the implications of this.

Cleveland is so affordable because many people find it less desirable (think "lake effect" blizzards). Half the population of Cleveland left over the past 50 years. The housing stock is more than ample for the people who want to live there.

The reason San Francisco is different is that it is a wonderful place, with spectacular scenery, mild climate and abundant cultural amenities.

Edward Glaeser, in his towering work on urban economies Triumph Of The City, said "vitality makes people willing to pay for space".

To be sure, San Francisco is not to everyone's taste. But given the housing stock, many more people want to live in San Francisco than they can. An estimate in a 2015 paper by Berkeley economist Enrico Moretti and the University of Chicago's Hsieh Chang-tai found that more affordable housing could increase San Francisco's population by 100 per cent or more.

So there exists significant demand for San Francisco housing that a moderate change in zoning and building standards will not correct.

So what is happening in San Francisco - or Seattle or Austin, or any number of popular places where the cost of living is rising - is the market system doing its thing.

The market increases prices to ration the available land through the cost of housing. And people economise on their consumption of housing by living in smaller quarters, sharing with roommates or stacking up generations.

For some, the price is not worth the value they would receive and they leave. That is how any market rationalises differences between supply and demand.

What about those who are squeezed out of California (such as my kids, who moved to Colorado)?

The dad in me says: "That's horrible, I want them down the block from me." But the economist in me says: "They do not value what Los Angeles has, relative to their life in a small town in Colorado, enough to sacrifice other things for it."

Resources, when scarce, are appropriately allocated according to their value to those consuming them. And what about our school teachers, firemen and police who struggle to live in the high-priced cities where they work? Here is the rub.

When a place is really attractive and therefore really expensive - take Santa Barbara- many who perform valuable services live elsewhere, like in Ventura, 90 minutes away during rush hour.

Instead of wringing our hands about affordability in high-demand places and trying to build enough to meet a worldwide demand that is difficult to satiate, we should be saying, "Great, we have a really successful city, but we also want to have a city with certain professional, service and demographic characteristics", and design housing policy targeted to that.

For example, Santa Clara County built high-quality affordable housing that it rents to school teachers. It is a small programme, but it is a good start.

What does not work are overly broad measures, such as directing developers to make 20 per cent of their units affordable in exchange for building permits.

Such policies generate homes for only very few San Franciscans, while attracting evermore newcomers who want to live there.

That is not to say we should ignore affordability. But in paying attention to affordability, we must keep in mind not only whether we have enough housing supply, but also the nature of the demand in places where people want to live.

If we ignore demand, we risk creating urban nightmares - of crowding, traffic, long commutes and ill health - in pursuit of a successful and affordable city.

  • The writer is an economist at UCLA Anderson School of Management.

  • This article first appeared in Zocalo Public Square, a project of the Centre for Social Cohesion at Arizona State University.
A version of this article appeared in the print edition of The Straits Times on March 30, 2017, with the headline 'Affordable housing and the price of vitality'. Print Edition | Subscribe