Friday, November 18, 2016

How to raise house prices and inequality

From Chris Kirkham in today's Wall Street Journal, department of you can't make this stuff up:
Nearly two-thirds of Los Angeles voters last week approved a citywide affordable-housing requirement.... 
The rule requires that up to 25% of units in rental properties and up to 40% in for-sale projects meet affordability guidelines. Alternatively, developers can pay a fee to the city.
New York City and Seattle passed similar requirements earlier this year. 
The Los Angeles initiative goes a step further, however. It also sets wage standards for the projects. 
Developers must pay construction wages on par with those required for public-works projects, hire 30% of the workforce from within city limits, set aside 10% of jobs for certain disadvantaged workers living within 5 miles of the project and ensure 60% of workers have experience on par with graduates of a union apprenticeship program. 
The mandates could double the hourly wage for some construction trades compared with state median wages. The pay for a carpenter, for example, could rise to $55.77 an hour from $26.16, according to an economic analysis sponsored by opponents of the initiative.
I wonder what that will do to the cost of housing? Notice also that by restricting who can do construction jobs and forcing up wages, there will be lots of new unemployment among lower-skilled or new entrants to construction, often a first step up the ladder for less educated people.
... some developers will be less affected by the change. Those who build primarily affordable housing, using government subsidies, already must pay higher wages. Developers of large high-rise projects, meantime, often use union work crews.
The measure was backed in part by the Los Angeles County Federation of Labor, a union group,
A union group delighted to eliminate low-wage competition. Let them eat tacos?
“There’s a huge shortage of housing in L.A., and a huge shortage of low-income housing,” he [Shawn Evenhaim, chief executive of Los Angeles developer California Home Builders] said. “They took that problem and made it worse.”
Left out of the article, and a big question I have if anyone knows the answer: who gets "affordable" or "below market rate" housing. Rather obviously more people want subsidized housing than can get it. So who wins the lottery?

"Affordable" housing is parceled out by income limits. So what happens if you get a better job? Are you kicked out of your house? That sounds like a great recipe for perpetuating income inequality. What happens if you get a job offer somewhere far away? Can you trade one "affordable" house for another? I bet not. One more nail in the coffin of advancement.

More deeply, if these things work the way I suspect, there is a long waiting list and a lottery. Once in, you're in so long as you don't get more income. Thus, they entrench and benefit people who have been in one place a long time. And the people really hurt by "affordable" housing -- which restricts supply and raises costs of all other housing -- are newcomers, especially low-income newcomers who would like to come for better jobs. And new businesses who would like to hire ambitious low-income newcomers and give them better incomes.

So the effects are not just to raise house prices -- they are to increase inequality, reduce opportunity, especially for low skill and low income people, and reduce the economic vitality of the region.


  1. My understanding is that (in Minnesota anyway) once you get into affordable-housing you can stay continue to resign the lease each year, even if you get a higher paying job that is above the maximum allowed income level.

    1. So long as that job is within commuting range. Let's add traffic and carbon emissions to the unintended consequences.

      That would only be sensible, but it's easy to have "low income" for a few years. Do you have to show a long period of low income to get the housing?

  2. Thomas Sowell wrote several weeks ago about a proposed rent control bill up for vote and brought up the idea that even the basics of economics seem to be out of the grasp of many public individuals. I believe housing initiatives like this are good reason to agree with that idea. It's like these people just hate math.

  3. Agreed, I think this is easily one of my favorite posts .

  4. You are right. You can't make this stuff up. A shadow rental market will emerge like the one in NYC. Rent control has allowed people to stay in apartments for years. Some of them sublet at rates well above what they pay. I rented one of those apartments when I lived in NYC and was happy to pay up for a Riverside dwelling with a wonderful view of the Hudson River.

  5. This stuff reminds me of Bryan Caplan's book, "the myth of the rational voter." He basically argues that stuff like this gets passed not because of vested interests, but by popular demand. These things just make sense to people and the damage remains sufficiently opaque that they won't learn. Its amazing this economy works as well as it does.

  6. As to who will qualify for a rent controlled home. The mayor of New York city Ed Koch lived in a rent controlled apartment until his death. He was applauded for being a humble public servant. So I won't be surprised if other humble public servants, their friends and family wind up in these subsidized properties.

  7. The existing home owners in any jurisdiction are always happy to make sure that no new homes may be built in the jurisdiction. This set of ordinances is just an elaborate way to make sure that no new homes are built in LA.

    No "affordable housing" will be built at all. "Alternatively, developers can pay a fee to the city." They will build the fee into the cost of any new construction that occurs. Of course, only the most expensive housing will be built under this set of rules, but that is what they clearly want. Keep out the riff raff you know.

    I would suggest that what the Federal government should be is to attack the industries that prop up the economy of LA, specifically, the film industry. Maybe we should repeal all of their tax benefits, and reduce the period of copyright to 28 years like it was after WWII.

    1. so, who wrote the requirement? Did the builders write it to maximize their profits? Did residents write it to keep out riff raff?
      and why did people vote as they did? Was it "up-yours", as so many votes were this time? Was it no-on-priciple, as is always common? How many, do you think, actually read about it and made a considered vote? And was there any rational advice given to voters from either direction?
      Is there any rationalist influence at all?
      It looks to me like the system is a mess and beyond redemption.
      The elephant in the room is resource exhaustion due to increasing population combined with increasing resource consumption per person. This amid fear of economic collapse if demand diminishes.
      --Michael (E5)

  8. I think there needs to be a return to the idea of company towns. One of the reasons our workforce cannot be competitive is that each worker needs to spend a good size of their wages on living expenses and transportation, whereas in a country like China, many factories provide dorms for their workers. America adopted the model of the separated household in a time that there was less competition. For the companies, the housing could become a capitalizable cost, so they would win by providing a part of the worker's income in the form of housing and lowering their outgoing wages. This would also put downward pressure on housing prices.

    1. Actually, it's already happening. Most universities are operating company-town schemes -- like my employer, Stanford. Why not just sell or rent the company houses at market rates, and pay people more money? Well, company town properties can avoid some regulation, and above all they can avoid paying income tax. They can also pretend to pay people the same in the name of equality, and then distinguish workers by the housing allocation. Another whole set of distortions.

    2. In NZ, fortunately, things are a bit different. Companies that offer houses, cars etc as part of a compensation package are hit with a whacking great fringe benefit tax that makes it far more efficient to, as you suggest, just pay employees more money.

  9. Portland just passed a $258 million "housing affordability" bond. It provides money to build the projects but zero money to operate the projects.

    So, where does the operating funds come from? Section 8.

    Typically, Section 8 vouchers are attached to an individual. If you have a Section 8 voucher, you can use it just anywhere that accepts its.

    The program however, allows for "project based" Section 8 vouchers. These vouchers are tied to specific projects. You can't shop around.

    Portland is converting 400 existing Section 8 vouchers to project based vouchers to guarantee income for the projects they plan to build.

    Portland plans to build (or "maintain," ha-ha) 1,300 units. But 400 of the "new" units will go to existing Section 8 voucher holders. So, rather than increasing affordable housing, the program shifts 400 families from choosing where to they live to tying them down to projects paid for by the quarter billion dollars in bond proceeds.

  10. Take a look a look at the results of same scheme in place in Chicago. Huge cost on developers, nearly zero new affordable units.

  11. With the additional development costs, the sale/rental prices for the housing in these developments will necessarily be higher than otherwise. The pool of potential buyers/renters will shrink by the number of possibles thus priced out of the market for these properties.
    Those left in the pool(s), being more able to afford the higher prices, are LESS likely to choose to share their [now exclusive] neighborhoods with Section 8 residents. If developers want to market to the remaining "pool" members, the developers will increase the marketability of the properties by choosing to pay the fee to escape the "affordable" housing requirements.
    So the city gets extorted fee income from the developers (to do what with?), the developers get to build and sell the housing they want, and the Section 8 folks looking for an increased supply of "affordable" housing are SOL.
    ...sound like an ideal plan to me!

  12. `What happens if you get a job offer somewhere far away? Can you trade one "affordable" house for another?'

    No. Talk to any French economist. They'll tell you about all the interesting research that similar French policies generates. In France, a lot of housing is public, and if you have a nice house in one city, you don't necessarily get a similar place in another should you choose to move, because you get put in the back of the waiting list. This has the obvious effects on employment. Except for French economists, who get to write lots of nice papers with all this extra data.

  13. The solution to housing shortages is the one that must never be mentioned, even in right-wing blogs.

    No more property zoning.

    Yes, we want to gut the minimum wage, open the borders wide for immigrants, capital, goods and services, and deregulate pharmaceuticals and all other industries! Go!

    Eliminate property zoning? Decriminalize push-cart and truck-vending? Not a topic for today. Or tomorrow. Or ever.

    But how silly are those people with their affordable housing schemes!

  14. I have seen things like this in other latitudes. You can go a step further, beyond the mere supply and demand of housing and labor. It becomes fully speculative, and sinister. What would happen to all those Mexican immigrants that are cut off from the job market? Will they go home? Will they be recruited by a gang? In those other latitudes, the second option has not been uncommon. Of course, if you are a culture warrior living in a gated community, that's a less pressing issue... Now, if you people are willing to implement policies like this, better build that wall...

  15. Is it constitutional to have a state or local government impose restrictions on which U.S. residents can be employed, based on where they live? Isn't that protectionism, and outlawed by the Union?

  16. Awesome post, Los Angeles and California as a whole needs to figure out this housing issue. I spent the summer in Tokyo and I was surprised by not just the affordability but the diversity of housing options. According to the median rent in Tokyo is just over $800 a month. While I was there looking at apartments I found several nice sized studios for $600-$650 a month. You can't even rent a room in most of the Greater LA Area for $600 a month. But as you drive out of the city you just see more new planned communities full of 5 bedroom houses.

  17. This piece of legislation was voted in by the immigrants you praise as the solution to all of the nation's ills.

    More immigrants means more gullible, uneducated voters and more idiotic legislation such as this. Soon our great nation will turn into another Venezuela.

    1. Don't you think we have enough locally produced gullible uneducated voters? The citizenship test for naturalization is a lot harder to pass than a high school civics class in the typical US public shools.

  18. Yasmin SepahmansoorDecember 11, 2016 at 8:42 PM

    I agree, this new citywide affordable-housing requirement does not seem very well thought out. Although good in theory, since helping the working class and those who are disadvantaged is always good, this doesn't seem like the way to go about it. The wages will sky-rocket because of the requirements for hiring workers, too. Seems to be raise more questions about how this will every benefit anyone rather than answer anything.

  19. Great post! The price ceilings put on these "affordable housing" projects have been a topic that I have been very engaged in recently. As these housing projects continue to develop, costs are offset by other non "low-income" housing. The price of my SF Bay Area Suburb house can get me property in the midwest twice the size of my current house. Are large metropolitan areas the right areas for these housing projects? Is this just going to increase the wage gap in metropolitan areas?

  20. This is definitely a very interesting point, because it is clear that affordable housings significantly helps low income families, yet with time as wages increase in more urban cities like Los Angeles and San Francisco, if those same individuals who live off from affordable housings choose not to move even after they could afford a higher standard of living, that could really distort the market. More extensive citywide affordable housing requirements could limit much opportunity for those who would benefit from it in the long run, and in the end raise general housing prices, and increase inequality.

  21. An interesting paper by the Wharton School analyzing the impact of deregulation on real estate:


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