Monday, February 14, 2005

The price of a roof

I am a registered Democrat, but I find myself more or less perpetually at odds with most of my fellow partisans on a number of issues. Not least among those issues is the question of affordable housing, and how to guarantee it. One of the time-honored if misbegotten approaches to the question is to require that builders included sub-market-rate housing in new developments. Now, that might sound like a perfectly fine idea, especially in a market such as New York's, in which the average cost of an apartment is $1 million in Manhattan and of one in my borough, Brooklyn, is rapidly approaching that figure, even in neighborhoods that require some fairly substantial commuting times into peoples' places of business.

The upshot of controlling the prices of some housing units, whether for sale or (more typically, I would imagine) for rent is to increase the prices of the other housing units, while creating a disincentive for builders to build anything at all, if the return on some of their investment is going to be substantially reduced or eliminated by the action of government. A simple though experiment demonstrates what happens to prices. Imagine a landlord wants to make a gross income of $50,000 per year, and she owns one building that includes ten apartments. Obviously, she should charge $5,000 per year per apartment to do so. But if she is required to rent twenty percent of her apartments at only $1,000 per year, then she will have to charge her other tenants $6,000 per year to do so.

None of that is news. But what is intersting is a paper discussed in the Economics Focus column in the 2/11/05 issue of the Economist, which can be found here. Three economists set out to reckon what exactly has been behind the massive increase in housing prices in the United States in the last several decades, and the answer, especially as it pertains to New York City, demands attention.

As the Economist puts it:

[T]he authors look at Manhattan, where free land is so scarce that the cost of a new unit of housing is simply that of adding an extra floor to a building. Comparing this cost with the market price of housing, the authors estimate that the regulatory “tax” of Manhattan's planning laws has risen to more than 50% of the average price of an apartment.

Still, New York's zoning rules might be economically justified if they reflect the costs imposed by additional residents on those already living in Manhattan. The authors first estimated the value of views and sunlight lost when new flats are built. Then they examined the costs of extra congestion and of new public services, such as schools, sewers and so forth. By their calculation, all these costs taken together could not come close to explaining such a high regulatory burden. In other words, the zoning “tax” was much higher than the cost to existing residents of having new people in the neighbourhood.

To try and explain the constraints on supply, the authors delve into political economy. Perhaps, they wonder, judges and regulators have become more protective of the environment. However, direct evidence for that is lacking. Or maybe property developers have become less adept at making political contributions, or paying straight bribes, to the right politicians. Then again, American politics scarcely seems short of money. Nevertheless, the authors' favourite theory is that existing home-owners have become better at organising themselves politically to thwart new building.

Fifty percent of the cost of housing comes from nostalgia for turn-of-the century buildings—the sort one finds in so many of New York's best neighborhoods, which so often originated as tenenments, and have the 170 square foot apartments and slumping stairways to prove their heritage—and sunsets. What to do, then? Make new housing easier to build is the obvious solution. Maybe, since it is almost certainly the wealthy who are demanding politically that a new (or newly heightened) building doesn't rob them of their $100,000 sunsets, taxes in neighborhoods with low-slung buildings should be taxed at a greater rate, to offset the economic damage—to get an idea of what this is for you, multiply the length of your round-trip commute by your average hourly wage—the residents of them are doing to others by compelling them to live in more far-flung neighborhoods where the residents are not organized enough to stop new development.

For further reading on the topice, see this essay by Joel Kotkin in the Weekly Standard.


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