Sunday, March 18, 2018

Housing: Part 287 - Closed Access and Gentrification

There are many things that housing obstructionists in Closed Access cities say that make sense in a Closed Access context but don't make sense in an Open Access context.  One of the ways that normal economic intuitions frequently fail is that people have a really hard time thinking about second order effects in complex economic spheres, and also people tend to think in terms of power, so that they tend to make inferences that depend on monopolistic assumptions in markets that are competitive.  So, the sorts of things that Closed Access obstructionists say match the poor economic intuitions that people tend to have about competitive markets, and so those things don't naturally meet with rhetorical opposition where they should.

The sorts of things I'm talking about are claims about how allowing more units to be built will raise rents, or claims about how since luxury units are more profitable, they are the only type of unit developers will build, etc.  These sorts of things may be sort of true in some places in Closed Access cities, because those cities have turned housing into a monopolistic asset, but they aren't remotely true in other cities.

I don't think there is enough pushback on those sorts of claims because our poor economic intuitions prevent most people from realizing how wrong they are.  An example outside of housing where intuitions fail us is, say, in grocery stores.  Food has gotten progressively cheaper over decades and generations.  Yet, in cases where, say, cans of soup over time have changed from a standard size of 12 oz. to 10.5 oz, in my experience, many or most people will chalk that up to some sort of conspiracy among food producers to trick us into paying the same amount for a smaller size.  Or, to take another example, I hear people complain that when oil prices rise, gas station prices rise immediately with them, but when oil prices fall, it seems like it takes a while for gas station prices to fall.  This is always stated as if gas station owners simply use this trick to increase their profits above some normal, reasonable level, using a trick to pocket a little extra.

People will commonly intuit a monopolistic conspiracy, even regarding a business whose primary distinguishing feature is a large, illuminated street-side sign with a price that changes daily.  In the same way, someone living in a place where entry-level apartment buildings are going up all over the place can hear that developers only invest in luxury units because those units are more profitable, and yet not naturally notice what a strange thing that is to say.

This is all a long-winded way of getting around to an idea that occurred to me.  I wondered if gentrification pressures might be stronger in Closed Access cities than they are in other cities.  They clearly are stronger, simply because Closed Access forces current residents to have to move away.  But, specifically, what I mean is that since location and social amenities are a more important factor in Closed Access rents, then when a neighborhood is developing and moving "up market", that might have a stronger effect on local rents in Closed Access cities than in other cities.

What caused me to think about this is that I realized the notion that an improving neighborhood would be bad for existing tenants is mainly a Closed Access problem.  In Phoenix, I think most people are naturally happy to see their neighborhoods improve.  Even in a place like Chicago, this mostly seems to be true.  The reason is that rents in most cities mostly reflect the cost of building.  There are some locational premiums having to do with commute times, etc.  And, other factors, such as the value of nearby units or the types of neighbors one has, don't account for that much of a difference in rents.

In a place like Dallas, at the zip code level, except for some rarified areas, rents just don't rise that far above the cost of building, so changes in neighborhood character don't affect rents that much.  In cities like that, tenants have the normal way of reacting to changing neighborhood character.  They like living in a neighborhood that is "moving up" and they don't like living in a neighborhood that is in decline.  (Of course, class, race, and other factors are in play there, and these perceptions aren't always fair.)

But, in a city where demand for housing from potential new tenants is less elastic than the demand for housing from existing tenants, because existing tenants have income limitations, then maybe rents do systematically rise at a rate that is so unfavorable to existing tenants that it reverses the normal reaction.

Here, I have graphed the rent per square foot for every zip code, in order from lowest to highest, for several metro areas.  And, as one might expect, rent per square foot is pretty stable throughout the metro area in Phoenix, Dallas, and Chicago.  It runs 80 cents to $1 in most of Phoenix and Dallas.  Slightly higher in Chicago.  With a few zip codes at the top where rents are much higher.

Interestingly, the pattern in Boston and LA is not that different.  In those cities, most zip codes have similar rents/square foot.  It is just that the entire metro area has inflated rental values.  The difference is that in Boston and LA, there are more areas with relatively higher rents/sq. foot, and the jump from the typical zip code rent to the level of top tier rents is higher.  So, we can see that, on the margin, in some small portion of neighborhoods that might be transitioning from low-tier to high-tier because of peculiar localized development, there might be some areas where rents are especially rising.  But, for the typical zip code, adding some new units along a mass transit corridor that might be targeted at a high tier demographic, probably isn't going to raise rents for locals by 40%.

On the other hand, if the existing units have some sort of rent control, then marginal increases in local rents could displace some tenants if landlords sell into a strong sellers market.  So, in a couple of ways, there might be especially strong localized pressure on rents in Boston and LA, but it doesn't seem to be the case, metro-wide.

In San Francisco, the pressure does appear to be metro-wide.  Rent/sq. foot is quite variable throughout the metro area.  Presumably, the housing shortage there is so severe, and prices are so far from basic cost of construction, that local character and amenities do have a strong effect on rents in most parts of the city.


  1. Would be interesting to see how London is doing on that quantile graph.

    1. True. Do you know of any accessible Zillow type data sources for any international areas?

  2. Great post love the chart.

    The optics of property development in closed-access cities are horrible. Almost inevitably you get the development of luxury units displacing existing middle-class or lower-class units. Yet the number of new units needed to tip the scales back to lower rents, in a city like Los Angeles, would probably be in the hundreds of thousands of units.

    Of course a property development and subsequent business boom along the West Coast would actually be good news, and would follow an elimination of property zoning.

    But the elimination of property zoning appears only a pipe dream.