Of course the cost goes up. Densification does not lead to lower prices, because it increases wealth. People in denser areas make more money, because businesses in denser areas are more productive, because density is efficient and causes people to be more productive.
This is a good thing.
Affordability is not cost. The problem that we have now is that supply of housing is artificially constrained by bad policy, which allows some groups to capture the surplus. It is broadly not a coincidence that the groups that capture the surplus are the very same that set policy.
It seems to me that "some forms of densification are allowed pretty much everywhere" is doing a lot of work for you. Can you elaborate? How easy is it to build an apartment building "anywhere?" [1] is an example of what I mean, but you can google "housing supply shortage USA" if you want general statistics. The conclusion is pretty much unanimous: it is immensely difficult to build anything, anywhere, which has caused a massive shortage in the supply of housing. Again: density, solution.
If we allow buildings to be built, a developer will gladly come in and build buildings. Someone building a house for someone else to live in is, in general, a very good thing. Everyone participating in this conversation lives in a house that someone else built for them and made a profit in so doing, and it's a good thing, because that allows us to work and create value.
Density is just a side effect of building more homes (housing supply goes up in a given area -> density goes up). The effect of supply on price is, well, unambiguous.
Not in real estate economics. Housing isn't a commodity market. There are firm price tiers, different methods of construction, different fixed costs for those methods, and drastically different markets for individual neighborhoods. Real estate isn't fungible and it's isn't particularly liquid. Basically none of the requirements of Econ-101-style supply and demand are met in the world of real estate. Building skyscrapers is nothing like creating an assembly line for widgets.
So yes, "construction" has some small aggregate effect on the price of a rental in the city, but that effect is meaningless to you if your affordable building was knocked down to make room for a luxury skyscraper.
Moreover, if you do happen to overbuild housing in a market, the price sags. Developers then almost immediately stop building, because the costs of new construction don't decline with scale. Thus, price controls enabled by construction happen on the order of decades, not years. Neighborhoods gentrify much more quickly.
In practice, a low-density neighborhood gentrifies, land values go up, and developers start to replace cheaper, low-density construction with expensive, high-density construction that can only be justified because of the higher land values. Existing residents are displaced. Ideally, those residents then move to a cheaper neighborhood. If no such neighborhood exists (because, say, you're in a small land-locked city with more millionaires per capita than anywhere on earth, and no remaining "undesirable" land), then those residents are, indeed, completely displaced. The fact that luxury apartments are theoretically $30 a month cheaper in some other neighborhood is thin gruel.
That argument is ridiculous. So dense neighborhoods are popular, therefore prices are rising because more people want to live in a dense neighborhood.
The solution to that is not "let's build more undesirable neighborhoods so prices are not increasing" but to change zoning regulations so more dense neighborhoods can be build to satisfy demand!
I didn't mean to validate that there was a causal connection, I was just agreeing with the general claim that yes, indeed, dense places (cities)... whether in terms of supply or demand are generally more expensive than other places.
Knowing why is important, though, and the law of rent explains the mechanics.
I'm in agreement with the idea that more building should occur. I'm just cautioning that even if someone destroyed every housing regulation in existence, or even if lots of public housing were built, we shouldn't be surprised if rents remain super high.
In the technology space we're used to seeing costs plummet from year to year. A land title system, by contrast, will predictably see increasing prices over time, while simultaneously extracting a flow of rent.
Construction is not cheap. If what you were saying were true renovations would be cheap, which they are not.
And the land becoming more expensive is the point. If an area becomes more popular then it will be denser meaning the land is more expensive meaning the housing is more expensive.
Building denser does not necessarily result in cheaper housing in the net.
I used to support the view articulated in this article, but I'm more skeptical now.
If higher density were the solution I would expect to see highly dense cities have cheaper real estate than less dense cities. Instead, it's just the opposite.
That's because of the other side of the economic equation: demand.
And therein lies the devil. I hypothesize that increasing the supply of housing in a city actually increases demand in such a way that the supply increase has little downward effect on housing costs.
It makes sense why this is the case. If more people live in a city, then there's more people who are likely to move there. If you know a bunch of classmates who are all moving to San Francisco after graduation that's going to make you more likely to move to San Francisco too.
So yes, supply exerts downward pressure on housing costs, but I would bet that heigthened density then causes a near commensurate increase in demand such that the supply increase has little effect.
Personally I’ve never believed that adding more houses decreases prices. Though that is true in theory, in practice what happens is:
1. Major housing developments are accompanied by more jobs than the units being built could serve.
2. Developments are accompanied by local initiatives to improve the neighborhood that take effect soon after.
3. The quality disparity in a given area results in people far higher than the neighborhood median income moving in, resulting in (2) and eventually (1).
I’ve yet to see anywhere on earth that’s both dense and cheap which I believe more or less proves the point. If building more houses really made things cheaper it would be trivial to prove: cities, which are denser, would be cheaper than the nearby suburbs. Across virtually every region this is not true, when adjusted for square footage.
The problem with the United States isn't that housing is too expensive - it's that housing is too big.
To that end I agree with this article. The area that has people leaving their (presumably less dense) locales will become cheaper, but those areas will also become less desirable and ultimately have fewer people. If that’s the case, the price decreases is not really relevant in the same way the price of housing in Oklahoma City is irrelevant to someone in Brooklyn.
That being said, post COVID is very different as commercial real estate is not nearly as lucrative. Who knows what will happen now.
You can always build more dense housing on land that is in high demand. In fact, doing that is the most obvious and effective way to keep prices low for desirable locales. Backed up by pretty much all the economic research on the subject in the last decade.
Density increases prices for sure in much of the US - all you have to do is look at Manhattan, SF, or the denser parts of LA to see that - but it's wrong to say it has nothing to do with supply and demand. The expensive places that are dense also have lots of high-paying jobs, so people who get those jobs want to live close to those. But then it spirals: that concentrated pool of talent encourages the creation of more jobs which bring in more people which pushes prices up which impacts a wider and wider radius. That's not a problem that can be solved through increasing density alone, though.
If this were actually true it would never be possible to build more to make housing more affordable. Rents in a market are typically a percentage of the capital investment so what you are saying is roughly equivalent to “building more makes rents go up”. It’s actually the opposite. The demand for density raises the value of land, but the supply of density lowers it.
When you ask why Manhattan is expensive even with increased supply, you ignore demand.
The theory that increased density in itself drives up the value of housing is popular among anti-housing activists. I've never heard an economist who believes it.
If true, it would be an incredibly simple way to generate enormous amounts of money to simply building super dense neighborhoods. Since I don't see anyone getting rich off that, I have strong doubts about that model.
Well you have to pick one. Either people will pay ~$400K for the units and then the builder's incentive to build there is obvious -- because there is enough demand to sell them for $400K, which is profitable.
Or people wouldn't pay quite as much as the existing single-family homes, but they'd still pay more than the builder's costs to construct the building, so it's still profitable. It only becomes not profitable when the price of a housing unit drops below the builder's costs. Which is why they'd want to keep building until that happens.
> If you feel I'm wrong, please point me at a few cities in the US where housing became cheaper as density increased.
I keep saying this. The causation goes the other way. Density increases where demand is higher. Higher demand increases prices, then density blunts the increase so that it's smaller than it would be if no additional construction occurred. That doesn't mean it would become cheaper in the higher demand area than the lower demand area -- particularly if the area is still growing, in which case construction lags the increase in demand and has to catch up. And if construction is inhibited, it can't, so you get as much density as the zoning allows and then prices skyrocket because supply can no longer respond to increases in demand. Which can happen even if the area already has above-average density.
What you'd need to see a price decrease is an area where zoning was relaxed after being strict, allowing density to increase after it had previously been suppressed, so that density increases because of the legal change rather than a new increase in demand. But the lack of this happening in areas of high demand is exactly the problem. Maybe we should try it and see what happens?
Density is necessary to build more supply in the same area. Unless you have a plan to level mountains and use the rock to fill the bay, they aren't making any more land area.
That's why density is the alternative to crazy impossible housing prices.
This article is completely orthogonal. Yes, building more pushes price down. Eventually though, you stop being able to increase density economically, and at that point the only way to prevent housing prices from increasing is rent restrictions.
It's important to note that even according to your article, you need to drastically increase supply even for a modest decrease in rent.
No one here is against increasing density. It is however insane to believe that increasing density is enough to fix the problem. Cities at the edge of density still have affordability issues, whereas much less dense cities with appropriate rent restrictions don't.
There is not a single reference to induced demand here. As long as housing stays a profitable investment, and as long as density cannot be increased infinitely without increasing marginal costs, then rent will rise.
The only long term solution is to reduce the profitability of speculation on land prices, so that only productive activities, such as building, are profitable. Rent restrictions are part of this, as rent is a large part of the profitability of land.
And rent restrictions can work. There are many cases where they have been implemented without a significantly negative impact to mobility. So why oppose them?
But then that just means the area isn't high density enough, right? High density means greater supply. As supply increases, you would expect that the cost of a flat will decrease, except if value had been created by increasing the density. I think value will be created by increasing the density initially; consider the extreme case of city property value versus country-side property value. That can only keep happening up to a certain point, of course. It seems most places haven't found that ceiling yet. As you mentioned, high density to you implies high cost. That's because the density isn't yet high enough.
This is a good thing.
Affordability is not cost. The problem that we have now is that supply of housing is artificially constrained by bad policy, which allows some groups to capture the surplus. It is broadly not a coincidence that the groups that capture the surplus are the very same that set policy.
It seems to me that "some forms of densification are allowed pretty much everywhere" is doing a lot of work for you. Can you elaborate? How easy is it to build an apartment building "anywhere?" [1] is an example of what I mean, but you can google "housing supply shortage USA" if you want general statistics. The conclusion is pretty much unanimous: it is immensely difficult to build anything, anywhere, which has caused a massive shortage in the supply of housing. Again: density, solution.
If we allow buildings to be built, a developer will gladly come in and build buildings. Someone building a house for someone else to live in is, in general, a very good thing. Everyone participating in this conversation lives in a house that someone else built for them and made a profit in so doing, and it's a good thing, because that allows us to work and create value.
[1] https://twitter.com/cafedujord/status/1692713611683066073
reply