Why market-rate housing makes the crisis worse

If you require less than about 40 percent affordable housing, the net impact of high-end construction is to make the housing market worse.

How is that possible? How could building more housing (at any level) be a net problem for the housing market? Doesn't more housing trickle down and make things better for everyone? It's not that complicated: When you build a new luxury housing complex, new resident move into it. For the most part, they result in net additions to the number of people in the city: If the person who buys a new condo moves out of a rental unit, someone else will move into that rental. Quickly.

The people with high disposable incomes who fill those condos or luxury rentals will spend money in town, creating a demand for jobs -- restaurant workers, grocery clerks, cops and firefighters, bank tellers ... and those people will also need a place to live. [...]

So according to the study, by Keyser Marston Associates, every time the city allows 100 new high-end housing units, it needs to build between 20 and 43 new affordable units -- just to keep the housing balance the way it is now. Put the affordable units in the main complex and the impact is lower (because fewer millionaires move in). Built them, as is common, somewhere else and the impact is greater. [...]

If the city demands 15 percent affordable set-asides, then every market-rate building adds more demand for affordable housing than it supplies. That means every new building makes the housing crisis worse.

Again: This isn't me and some crazy leftists saying that. It's the city's own studies, done by a respecting economic consulting firm.

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21 Responses:

  1. Jim Sweeney says:

    ^all of that.

    When your min. wage barista has to live 50 miles away from work, suddenly they aren't your barista anymore. Not to mention all the cops and teachers and firefighters and everyone else.

    I guess the luxury condo crowd can't quite do that math... Or they think the people who clean their streets and serve them their artisan muffins all live in secret tunnels under the city.

    • Julian Calaby says:

      They can do the math just fine: higher value housing means more money in their pocket. They don't care about anything but that as this is a purely for-profit venture. If building affordable housing put more money in their pockets, they'd do it.

    • flodadolf says:

      On the outside, looking in:

      Why is the price of a coffee not already compensating for this problem?

      Why are the artisan muffins priced such that the folks who make them are impoverished by doing so?

      • Tim says:

        A guess: because coffee is massively overpriced, and there's plenty of margin to eat into.

        Talking to a coffee shop owner (not in SF), his main concern was shop rent (up 80%), not wages. Talking to baristas, they commute much further than you might think -- maybe not 50 miles, but 15-30.

  2. Other Jamie says:

    In between my first stint in San Francisco and my current one, I lived in Brooklyn and did a lot of work for clients in Manhattan.

    One guy I talked to at a client, when discussing housing, announced that he had no idea what people were complaining about costs over. I explained that not everyone living in the five boroughs made over 100k, and he replied that he knew that, but making 60k at Starbucks was enough if you had a housemate. I tried to explain that baristas didn't make 60k, and he refused to believe it.

    It isn't even an empathy gap. It is a reality gap.

  3. Geoff Smith says:

    Wait, you mean it's... not normal... for me to live under the streets baking muffins for the morning crowd?

  4. So if 60% or more of the available housing stock in San Francisco is left to the free market, then the housing market gets worse; not because trickle-down economics doesn't work, but because it does.

    Therefore, in order to have a properly-functioning free market, we can't really have a free market.

    That means that we need to leave this problem in the capable hands of the San Francisco City Council and the plethora of citizen activist groups who are sure to wisely and judiciously settle this matter in a rational and snort *cough* BAAAAAHAHAHAHAHAAAAAAAAA!

    And that, folks, is why we call economics "the dismal science."

    • Leonardo Herrera says:

      As soon as services become scarce because there is not enough workforce, rich people will move out and those former luxury condos will become available for less money.

      This has happened before, you know.

      • And how many lives will be uprooted until then? As recent history has shown, bubbles tend to last longer than most people expect.

        Rationality takes a back seat in this. San Francisco is Disneyland for well-off kidults. That one fact explains so much about the politics and economics of the place. The cachet of living in the city by the Bay will make it a badge of honor to deal with all of the headaches. In fact, it already does. This will delay the popping of the bubble and guarantee that the few remaining ordinary people (and everyone else) take it in the shorts even harder and longer.

        I've read online rags like the Bold Italic as well as many of JWZ's posts on San Francisco. All of these writers love San Francisco, but they sound like people in an abusive relationship. That's it; I'm convinced. The parts of Detroit around the Renaissance Center are more livable than Frisco, even if not by much.

        "San Francisco is everyone's favorite city. Until they get here."
        - C. W. Nevius

        • margaret says:

          average home price in detroit for 2014: $38k. average february 2015 temp: 14F. that last one rules me out (but then again i despise the bay area too)

        • Leonardo Herrera says:

          You are right in the sense that these processes take longer than wanted, and in the meantime there are, hum, casualties. But I don't think this is a bubble; I think this process will correct itself and this will be an ongoing situation.

          The best thing city officials can do is to stay away. That's an almost universal truth.

          (Of course, I know squat about this whole situation and your particular experiences, and how do you all live through this whole ordeal. I'm just a couch pundit sitting thousands of kilometers away.)

    • Nate says:

      Trickle-down economics doesn't work. Remember that its claim is that cutting taxes on the rich makes everyone better off, from your dentist on down to the dog walker.

      The problem isn't that no money trickles down, it's that it does so unevenly, going mostly to the Mercedes dealer and Armani, not to the plumber. Maybe it creates a few barista jobs along the way, but this leaves out a huge path upward from barista to CEO (haha, like that happens).

      • Harry says:

        You make the claim that 'Trickle-down economics doesn't work', then go on to state that it works, just not enough for your liking; 'The problem isn't that no money trickles down, it's that it does so unevenly'.

        So which is it? Does it work or does it not? Like most soft thinking leftists, you seem to want to have things be both at the same time.

        Let me ask you a question. You seem to think that taxing the rich more will somehow benefit you, at least you state that cutting taxes on the rich will not benefit everyone. Thus, like most leftists, you look to the state to 'make things more equal'.

        When has the state ever given you a job? When has the state ever done anything that would help you become successful? And no, public schools do not count, roads and infrastructure do not count. These are funds taken from the people and directed to such things by the state, but they are mismanaged and corrupted beyond belief. The public school system is nothing but a retirement program for the incompetant and a funding mechanism for the Democrat party. All of these things could be done better by the people, with their own money.

        Just wait until the state is the sole provider of healthcare! Lucky you!

        'The problem isn't that no money trickles down, it's that it does so unevenly'. Soft thinking. Money is fungable, there is no such thing as uneven in a free market. Indeed, we do not live in a free market society. And who exactly do you have to thank for that! The state.

        There is your problem Nate.

        Remember, socialism is for the people, not the socialists.

  5. Tom Lord says:

    An additional myth is that population increase is inevitable. The size of the population is entirely a matter of public policy. Dense regions with fragile, earthquake-prone and neglected infrastructure, water insecurity, and poor public transit for the forseeable decades might do well not to drastically expand population.

    There are three solutions to the housing affordability problem:

    1. Full communism now. (yeah, yeah)

    2. Cause an economic collapse. (fun!)

    3. Impose price controls and/or forcibly socialize housing stock.

  6. Kyle Huff says:

    Maybe you could just have a really huge fire, or something.

  7. From skimming the report, I can't determine what fraction of the new market rate units it predicts will be purchased by people who have newly moved to SF. The conclusion is only plausible if most of the luxury condos are purchased by people who wouldn't otherwise be living/moving here, which is a little unlikely.

    • Actually, it's very likely. Saeid Fard has been griping about how Chinese billionaire apparatchiks and other oligarchs have been stashing away their ill-gotten gains by buying up Vancouver real estate, driving ordinary people out of the city.

      • Nate says:

        Yes, this is happening. I have multiple relatives in Vancouver. The Cantonese are getting pretty sick of the mainland Chinese new money that's been arriving over the past few years.

  8. Minor math quibble: The Nexus study says 30% affordable rate housing will hold the supply/demand point steady. If creating 100 market rate units creates demand for 43 affordable units, then 43/143 units needs to be affordable. Still, that's double the current requirement, soooooo....