Steve Dodson over at the Idea Locker sent me this map and asked for my take. The site is an interesting mapping mashup that goes neighborhood by neighborhood in New York and tries to measure median income and housing affordability. Call it TIGER for dummies.
The problem is in the text overlay essentially complaining that NY has a dearth of affordable housing. The site proceeds to advocate more affordable housing programs. It’s a shame, because it is exactly these affordable housing programs that have created the high costs in the first place.
First of all, to concede a point often made by Mike Bloomberg, NY is a luxury good and will cost more than other parts of the country. This does not mean that property will appreciate more quickly than elsewhere – it was a luxury good last year, too – but it does mean that absolute values for any item will probably be higher.
Still, the cost of real estate in NY is astronomical when compared with both the cost of real estate in other dense, vertical markets – think downtown Chicago, which has no shortage of skyscrapers – and the cost of construction. Whenever discussing real estate, I feel the need to bring in Edward Glaeser’s great observation:
As Glaeser says: “It’s so easy to forget the world that we were living in around 1970, when basically almost all of the value of houses was in the physical infrastructure. That was actually the cost. There was some land, and it was worth something, but it wasn’t worth more than 20 percent of the value of the house.” Even in New York City, Glaeser says, the price of an apartment back then was essentially the cost of building the next floor. In researching New York City’s housing prices, in fact, Glaeser and Gyourko discovered that over the past 30 years, the average height of new residential buildings in Manhattan decreased in size. “That’s crazy,” he insists, especially in light of how much the demand to live in New York has increased. “You know, if prices in Manhattan are skyrocketing, you should be building more and more at 50 stories, rather than at 30. Not the reverse.”
Let’s go back to Manhattan in the 1920’s, Glaeser says. “New York in the 1920’s is a pretty developed place, a pretty mature place. But they’re producing a hundred thousand units a year. They’re tearing up swaths of Manhattan and building higher buildings.” That would be legally and politically impossible today, but as he and Gyourko see things, it is precisely those legal and political roadblocks to “tearing up” the city that have made the place so expensive. Actually, in 2004, the two men took a close look at Manhattan and estimated that one half or more of the value of condominiums in the borough could be thought of as arising from some type of regulatory constraint preventing the construction of new housing.
There has never been a national policy to create affordable plasma televisions. There are no subsidized plasma televisions. Plasma televisions have never been subject to price controls. Certain plasma televisions are not removed from the general plasma pool and sold at discounted prices to individuals who have won lotteries or been television viewers the longest.
Despite the government’s benign neglect for the plasma television industry, plasma quality has doubled in the past five years and prices are perhaps a quarter to a sixth of comparably-sized units then. Indeed, prices fell so quickly that otherwise accomplished manufacturers, such as Pioneer and Fujitsu, lost so much money they had to exit the market.
If NY wants affordable housing, it should encourage the sort of arms race that governed the plasma industry. Encourage developers to build ever-larger and ever-nicer apartments. Get rid of the tax abatements for segregating units for an “affordable” pool. Every new “luxury” unit makes the existing units slightly less luxurious by comparison. Keep going quickly enough and the entire housing stock is lifted up.
Furthermore, NY has a completely insane system of rent control that, despite being the one thing that unites all economists, is still beyond the comprehension of most of the population and its legislators.
In 2008, there were 2,092,363 rental units in New York City. Only a third of these are free market rentals; the other two thirds fall into one of the many flavors of rent regulation. Most of these regulated units are in the outer boroughs, and depending on the neighborhood the regulated rent may actually be higher than the market clearing rent, so these cases do not matter much.
The ~250,000 rent regulated units in Manhattan south of 96th street, however, have a massive effect on the market. Essentially a third of the entire housing stock is held off the market. Remind me what happens when supply is incredibly constrained?
If NY were remotely serious about housing affordability, the easiest thing to do would be remove rent control. In 2007, at the height of the bubble, 6,584 housing units were built in Manhattan. It would take the better part of half a century at that pace to accomplish what could happen overnight with rent deregulation.
Amazingly, Massachusetts managed to deregulate its rental market in 1994 – Boston and Cambridge voted to keep it, the rest of the state voted to scrap it, and the rest of the state just barely won. The sky did not fall. Poor people were not thrown into the streets wholesale…largely because the people who have been in town the longest and occupy the land that has appreciated the most are not poor. The poor are the people overcrowded in substandard housing that are squeezed between the desire of residents to maintain zoning that allows for light to reach the ground and the lack of a free market in those units that do exist.
Government attempts to deliver an economic windfall via the back door become endlessly complex as the importance of shielding the back door grows with the value of the windfall. Take the curious case of 101 Warren/89 Murray.
The developers who built the complex decided to build some units for direct sale and some units for rental. By reserving 77 of the rental units for the city’s “affordable housing” program, the developers received tax credits.
77 people whose incomes fell below a threshold amount were selected by lottery to receive the units at a greatly reduced rent – a rent that is “affordable” to them. That means 77 fewer market-rate rentals in Tribeca – and 77 fewer units whose rental income generates valuable tax revenue for the city, and a useful tax shield for the entire building that was worth more to the developers than the foregone income.
Now, if people with genuinely low incomes had been given money for housing, there is virtually zero chance they would have spent the money purchasing Tribeca housing. Of course, there is no chance the government would give someone a housing voucher twice the size of his annual pretax income (which is effectively what is happening for the lucky 77)…but even if that were the case, the odds are overwhelming that the beneficiaries would bank part of the money and use the rest to find a place in a lower-rent district. But if the city is giving away Tribeca, who is to complain?
Well, plenty of people, but they just don’t know it. The other renters in the area, of course, who face a greater scarcity of housing. But also the guy in Chelsea who could afford Tribeca if only there were a few more units, and the guy in Brooklyn who could afford Chelsea if only there were a few more units, and the guy in Queens who could afford Brooklyn if only there were a few more units.
The solution to affordable housing issues is pretty simple: come up with more units. That requires a lot of construction, particularly in the outer boroughs; Atlantic Yards may be a giant fraud, but the general idea that five and change million people in Brooklyn and Queens – more people than Chicago and Houston together – should live in a place without hotels, shopping or large employers is bizarre. And it also requires using the units that exist today.