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February 15, 2023

Building Market Rate Housing is the Path to More Affordable Housing

Moving chains study shows why.

We have a dilemma: government can’t afford to build or even subsidize all the affordable housing which is needed. Here in Vermont as in many other places both low-income and middle-income families are being priced out of housing. Street homelessness has many causes beyond economics; but in this post I’m taking only about the price and availability of housing for purchase or rent, not mental illness or drug problems.

Hundreds of millions of dollars of public money have been put into subsidies and tax breaks for building affordable housing. Legislative demand to spend even more keeps growing along with the affordability gap.  Builders say they can’t afford to build low-income housing without subsidies. Communities resist new low-income housing, making it more difficult to build – and more expensive. The people whom we need to work here can’t afford to live here.

If something is in great demand, prices generally go up and new supply emerges until demand is satisfied at a price buyers can afford and which gives sellers (builders and landlords) a return on their invested capital.

Why isn’t the free market working to provide housing? It’s time to rethink our approach. A study published by the Journal of Urban Economics, “City-wide effects of new housing supply: Evidence from moving chains” supports that building market rate housing may be the best way to increase the supply of affordable housing:

“The supply of new market rate units triggers moving chains that quickly reach middle- and low-income neighborhoods and individuals. Thus, new market-rate construction loosens the housing market in middle- and low-income areas even in the short run. Market-rate supply is likely to improve affordability outside the sub-markets where new construction occurs and to benefit low-income people…

“In addition to the direct effect of increasing the housing stock in the neighborhood it is built in, new market-rate housing may have more far-reaching indirect effects through a moving chain process. As new residents move into the newly constructed units, they vacate their old units. These vacant units then get occupied by a new set of residents whose old units become vacant and so on. Through this process, new market-rate housing can have moderating price effects not only in its immediate neighborhood, but also in the city’s lower-income neighborhoods, by effectively loosening the housing market in these areas through vacancies.”

Market rate housing, by definition, is housing which requires no subsidy because rents or purchase costs are sufficient to incent its development. Market rate housing is built by private capital so doesn’t make a demand on scarce government resources. But, also by definition, market rate housing will not be affordable for everyone. The study shows (in Helsinki so not directly applicable everywhere) the chain of people moving up.

“In sum, the probability that a chain reaches zip codes in the bottom quintile (bottom half) of the income distribution is about 31% (66%). That is, for each 100 new, centrally located market-rate units, 31 units get created through vacancy in bottom-quintile income zip codes and 66 units in bottom-half income zip codes.“

This is the way the car market works. We don’t build subsidized low-income cars; we build new cars. The people who buy the new cars sell their old cars to people who are trading up. After a few trades the cars which become available are at the right price for lower-income purchasers including those who need their first car to get to their first job. Except in times of supply-chain disruption, we don’t end up with a shortage of cars. Ironically, people who can’t afford housing often end up sleeping in their cars.

Market rate housing can be built more quickly than subsidized housing both because it doesn’t need to wait for a government program or appropriation and because there is less resistance from neighbors than to housing which is perceived as bringing down property values. May not be very nice but it’s true.

However, here in Vermont currently very little land is available for market rate housing smaller than a McMansion because of both restrictive zoning and obsolete land use laws. One answer is allowing development on parts of failed farms (more on that here). More on zoning in a post to come.

Pouring subsidies into building low-income “affordable” housing has not made an appreciable dent in the shortage of either middle-income or low-income residences. The most effective steps government can take to provide housing across the spectrum is to remove zoning restrictions, update land use plans to recognize that not everyone wants to live in urban centers, and speed permitting.  Private capital will then be available to build market rate housing whose new owners and tenants will leave chains of more and more affordable housing behind them.

See also:

Building Affordable Housing is NOT a Good Way to Get More Affordable Housing

Vermont Needs More Forest and More Housing

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