There have been a number of recent letters and articles about the dearth of affordable housing. I wholeheartedly agree that the results of this insufficiency are creating conditions that stress social cohesion in a variety of ways. Two weeks ago, Frederick Smith presented some solutions; perhaps I can contribute something constructive to this growing forum.
In his statement that there is “a lack of affordable—heck, even available—housing,” Mr. Smith alludes to a wider economic phenomenon, what David Graeber, a professor of anthropology at the London School of Economics, might also call a market failure. Let’s say the quantity of a good is 10 units and there is a demand for 30 units. Now suppose you are able to increase supply to 20 units at no extra cost; would it lower the price? It may be counterintuitive, but the answer is no: Increasing the supply of a good does not directly correlate to a lower price. While economists dream of possessing the same gravitas as physicists, economics is more an art than a science, and its models can never match physics’ immutable exactitude of divine lawfulness.
Take another example. If Sting’s concert tour sells out and promoters add extra shows, will ticket prices drop? We know for a fact they do not. The price of a good only has the possibility of dropping when demand has been satiated; only then can we arrive at a new market clearing price. Quantifying demand is a challenging task in fluid markets, though econometric models try. And when prices are distorted by external forces and artificially lowered, demand can rise in unanticipated ways.
For example, 26,000 new housing units have been constructed in San Francisco since 2000, and currently approved projects total 48,000. In the 1950 census, the city’s population was 775,000; currently the population is 800,000. Is increasing supply a solution? Such a notion is born of a zeitgeist that assumes a great deal about many future conditions all independent of each other, unburdened by context and invariably presented as incontrovertible. Our real world is never so accommodating. Imagine doubling or tripling West Marin housing with modern and effective septic systems, off-street parking, handicap access and code-compliant units; does any reader honestly think that such a surge in supply would result in prices dropping to so-called affordable levels?
The empirical evidence is overwhelming—from New York to Shanghai to San José—that increasing the supply of housing does not result in lower prices. In fact, quite the opposite occurs.
Let’s turn to the demand side, where an honest discussion is a political third rail. Why is there so much over-consumption of real estate? Policy-makers have amplified demand in ways far too numerous to list here, with myriad programs that ignite abnormal demand. As just one example, the federal tax code affords a special deduction—some call it a “trickle up” tax break—written into the Revenue Act of 1913 as an allowance for the deductibility of consumer interest payments. Today we see it has mutated wildly and does not encourage homeownership in any meaningful way, but rather leads to people over-consuming real estate. This outdated policy intensifies sharp disparities between those who own real estate and those who do not, with those who do reaping an advantage at an enormous cost to the public treasury (estimated at $175 billion).
There are a multitude of other demand-spiraling policy elements, such as the attractive tax treatment of depreciation and capital-gains avoidance specifically carved out for real estate. Our property tax scheme accentuates the concentration of wealth, the deductibility of property tax and the unregulated application of financial innovation that leverages real estate. In addition, Proposition 13 creates an incentive in the over-consumption of real estate and inhibits supply; it has also created a framework whereby established landlords capture a wide spread between market rents and artificially low property taxes. (The elimination of Prop 13 would both reduce the price of real estate and potentially prune the availability of rentals.) Grand policy designs serve the broader objective of creating a “healthy market,” i.e., prices must always rise, subjecting markets to grotesque malinvestment.
Some nations—Japan, Switzerland, the Philippines, Indonesia, Singapore and parts of Mexico—have recognized the significance of the “buy here, be here” concept, forbidding foreigners from the real-estate market. This has stemmed some of the most odious effects of globalization, such as the warp and woof of housing markets in Vancouver, Canada, and Sydney, Australia, which are perceived as vehicles for newly wealthy foreign investors.
Locally, the EAH housing project in Point Reyes Station has come full circle. How long did it take, and what were the costs and impacts? Was it a success? If so, can it be reproduced, and if not, what was learned? Does the community remember what was promised and what was delivered? It is worth recalling how this project unfolded, and I encourage Mr. Smith to explore that part of West Marin history to more fully grasp the harsh realities we face in the pursuit of greater supply.
Jonathan Ferguson lives in North Berkeley.