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.
Well, I only have one quibble with your piece and that is comparing Brooklyn and Queens with Chicago and Houston.
To those of us outside of New York, only Manhattan counts. Brooklyn, Queens and all the rest are no different than Oak Park or Skokie. Per Wiki, greater Chicagoland is 9.5 million folks or so. In other words, gigantically bigger than Manhattan’s suburbs.
I don’t want to distract from the rest of your note because you are correct regarding population densities, but it is irritating to the extreme when these comparisons are made regarding some outer borough with different cities.
Mark,
I don’t understand your quibble. Also per Wiki (2000 census data, population and population density):
Manhattan: 1.5 million; 66,940/sq.mi.
Brooklyn: 2.5 million; 34,920/sq.mi.
Queens: 2.2 million; 20,409/sq.mi.
Chicago: 2.9 million; 12,750/sq.mi.
Houston: 2 million; 3,372/sq.mi.
Oak Park: 52,524; 11,173/sq.mi.
Skokie: 63,348; 6,309/sq.mi.
On this basis, how are Brooklyn and Queens not more like the cities of Chicago or Houston than their suburbs?
And the NY MSA (at a population of 18.8 million) is gigantically bigger than the population of greater Chicago.
Can you tell I’m bored at work today?
– Chris
Well, what bugs me is not the issue of population density, but carving out parts of NYC and comparing them to other cities. Yes, we all agree greater NYC metro is much bigger than Los Angeles, Chicagoland, etc… But no one outside of New York gives a fig about Queens and the other boroughs. It’s all part of the gigantic NYC megalopolis.
It’s the same reason that 99% of visitors to Chicago are not going to spend time sightseeing in Skokie. The only time visitors to NYC are going to spend time outside of Manhattan is their way to and from LaGuardia.
(Yay! It’s Friday!)
Why is that strange? Brooklyn and Queens reside in separate counties. If they dissolved the merger that brought them into New York City, would that be enough separation, or would their sheer geographic proximity always make them an afterthought? What if Long Island were a separate state (properly named Strong Island)?
Set aside the technical issue of where the lines run on the map. There are five million people in Brooklyn and Queens. I find it a bit strange that this enormous population has to go somewhere else – anywhere else – for restaurants, hotels, a business district. They are more densely packed than municipal Chicago, including downtown, yet their mass transit system is almost entirely designed to get them to Manhattan. It may be that there are no tourist destinations in Brooklyn or Queens, at least as long as we are excepting the airports and baseball stadium. But there are plenty of cities with no tourist destinations – how many people go to Houston for a relaxing holiday? It is the people who have rights and interests, not the municipal entity.
Coming back around to housing, the political games about who gets access to which housing in Manhattan obscures the issue that the future of multi-dwelling units should be in the outer boroughs, where it is possible to build without unacceptably blocking out the sun. The hard construction costs are not terribly different on the two sides of the East River, but the economic rent in terms of “value of planning and zoning permission” is wildly different. This encourages major developers to build in Manhattan…and encourages “tenant’s advocates” to fight all the harder for their “right” to continue to occupy the same space.
I would like the money and energy spent defending the status quo in Manhattan to be used to encourage development in Brooklyn and Queens. Stripped of restrictions, Manhattan will be renovated organically, and the result would be a much more vibrant city overall. Or three cities or five, if you prefer…
Too many people don’t want to live in the other boroughs, which dampens demand. This could change presumably. It took a very long time to carve out parts of Brooklyn to be a place that many strivers (who are partly the people driving demand in Manhattan) would consider. I’m thinking of yuppie types and others.
Great point. The saddest thing about affordable-housing and rent control proponents is that the people who most strongly favor it are tenants-rights advocates who don’t understand that they are hurting the people they are trying to help. The newer entrants to a market tend to be younger and poorer, and many of the people are subsidizing are much wealthier.
The problem is that the logic is counterintuitive to people who don’t understand economics. Or more cynically, pro-rent-control advocates do understand it, but know that anti-landlord policies will get them elected. And the policies end up hurting the people who need it the most. I’ve got a feeling that it’s not that people wouldn’t be able to understand it, it’s that they don’t take the time.
I suspect the amount of time and critical thinking necessary to reflect on what is actually happening is precisely the reason there will be no internally generated change. The people who have an emotional investment in “making things affordable” are the people who don’t understand that controlling price has an effect on supply. The Soviet Union ran aground on these good intentions.
By the way, the large developers love it. Rent control both keeps a large number of units off of the market and keeps extensive land from being redeveloped (no rent control program can succeed without some other provision that makes eviction difficult). The artificial scarcity benefits the well-connected, who are the ones able to navigate the system and get zoning approvals. Think of it as the urban equivalent of What’s the Matter With Kansas.
Since there has been government intervention in the market that has driven up the cost of non-rent controlled rentals, etc, what is the incentive now for developers/owners to drop rents if the other controls are removed? I’m not saying it should be left in place, but it would seem they would leave the how cost rents in place and simply raise the other rents. This will make Manhattan, in particular, even more expensive, no? Or just “in the long run” bring rents down?
**high cost rents** mean to say