Tag Archives: supply and demand

Housing Affordability Across The Globe

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The 11th Annual Demographia International Housing Affordability Survey: 2015 has been released. The survey provides ratings for metropolitan markets in Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the U.K. and the U.S. There are some interesting global trends:

Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices from 2.0 to 3.0 times median household incomes. However, in recent decades, house prices have been decoupled from this relationship in a number of markets, such as Vancouver, Sydney, San Francisco, London, Auckland and others. Without exception, these markets have severe land use restrictions (typically “urban containment” policies) that have been associated with higher land prices and in consequence higher house prices (as basic economics would indicate, other things being equal).
Virtually no government administering urban containment policy effectively monitors housing affordability. However, encouraging developments have been implemented at higher levels of government in New Zealand and Florida, and there are signs of potential reform elsewhere. (1-2)
These findings are consistent with Glaeser and Gyourko’s research on U.S. housing markets. Not too many local politicians seem to acknowledge the tension between land use policies that limit residential density on the one hand and housing affordability on the other. The de Blasio Administration in NYC is a refreshing exception to that general rule.
The explicit bias of the Demographia International Housing Affordability Survey “is that domestic public policy should, first and foremost be focused on improving the standard of living and reducing poverty.” (2) Those who favor policies that create more affordable housing should take to heart the call for greater density and less restrictive zoning for residential uses. Otherwise, we are left with subsidy programs that can only help a small percentage of those in need of affordable housing and a lot of empty promises about affordable housing for all. Subsidies have a place in an affordable housing agenda, but so does density.

Housing Vouchers for Landlords

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Collinson and Ganong have posted The Incidence of Housing Voucher Generosity to SSRN. The abstract of this important paper is a little technical for non-economists. It reads:

What is the incidence of housing vouchers? Housing voucher recipients in the US typically pay their landlord a fixed amount based on their income and the government pays the rest of the rent, up to a rent ceiling. We consider a policy that raises the generosity of the rent ceiling everywhere, which is equivalent to an income effect, and a policy which links generosity to local unit quality, which is equivalent to a substitution effect.

Using data on the universe of housing vouchers and quasi-experimental variation from HUD policy changes, we analyze the incidence of these policies. Raising the generosity of the rent ceiling everywhere appears to primarily benefit landlords, who receive higher rents with very little evidence of medium-run quality improvements. Setting ZIP code-level rent ceilings causes rent increases in expensive neighborhoods and decreases in low-cost neighborhoods, with little change in aggregate rents. The ZIP code policy improves neighborhood quality as much as other, far more costly, voucher interventions.

The eye-catching part is that raising “the generosity of the rent ceiling everywhere appears to primarily benefit landlords, who receive higher rents with very little evidence of medium-run quality improvements.” The paper itself fleshes this out more: “a $1 increase in the rent ceiling raises rents by 41 cents; consistent with this policy change acting like an income effect, we find very small quality increases of around 5 cents, meaning that as much as 89% of the increase in government expenditure accrues to landlords.” (20-21)

Given the inelasticity of the supply in many housing markets, this is not such a surprising result. That is, if demand increases because of an increase in income but supply does not, the producer (landlords) can capture more of that income just by raising prices. This finding should give policymakers pause as they design and implement voucher programs. The question that drives them.should be — how can they maximize the portion of the subsidy that goes to the voucher recipient?

Compact Units: Mountain or Molehill?

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NYU’s Furman Center has posted a short Research Brief, Compact Units:  Demand and Challenges. The brief notes that there is no formal definition of a compact or micro unit of housing, but

the term is typically used to refer to units that contain their own bathroom and a kitchen or kitchenette, but are significantly smaller than the standard studio apartment in a given city. Accessory dwelling units (ADUs) are self-contained units located on the property of a single-family home. Sometimes ADUs are separate structures, like a cottage on the same lot as a primary dwelling; sometimes they are attached to the primary structure, located in a basement, in an extension, or over a garage.

Proponents of compact units argue that they allow seniors to live independently, respond to changing household sizes and demographics, reduce sprawl through urban infill, mitigate the environmental effects of larger developments by reducing energy consumption, free up larger units for families, and help cities provide housing affordable to a wider range of households. (2)

The brief is a very useful overview of the debate concerning compact units but my own take is that they represent a mere molehill of possibility when it comes to affordable housing. No new construction in cities, unless heavily subsidized, is geared toward low-income households and probably only a small portion of such new construction is geared to moderate-income households. The economics of new construction just don’t allow it.

This is not to say that New York City shouldn’t change its larger-than-average minimum unit size regulations (400 square feet) so that they are in line with those of other cities (220 square feet). These small units could work well for all sorts of one-person households, which, by the way, make up more than half of all households in NYC. They just wouldn’t be low-income households. But, by expanding the total number of units available, they can put at least some downward pressure on rents.

My bottom line: compact units are good, but they will not provide the mountain of affordable housing that some claim they can.

Location Affordability

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Following up on an earlier post on NYC’s (Affordable) Housing Crisis, I turn to the Citizen Budget Commission’s report on Housing Affordability Versus Location Affordability. The report opens,

How much more would you pay for an apartment just a short walk from your job than for an equivalent apartment that required an hour-long commute by car to work?

This question highlights two important points about the links between housing costs and transportation costs. First, transportation costs typically are a major component of household budgets, usually second only to housing. Second, a tradeoff between housing costs and transportation costs often exists, and taking both into account can provide a better measure of residential affordability in an area than only considering housing costs.

In recognition of these important points, the U.S. Department of Housing and Urban Development (HUD) has developed a Location Affordability Index (LAI) that measures an area’s affordability based on housing and transportation costs relative to income. This policy brief uses the HUD data to compare costs for a typical household in New York City to those in 21 other cities . . .. (1, footnote omitted)

The report finds that “Low transportation costs and high incomes make New York City relatively affordable: New York City is in third place in location affordability. Housing and transportation costs for the typical household are 32 percent of income in New York City, with lower ratios only in Washington, D.C. (29 percent) and San Francisco (31 percent). This is well within HUD’s 45 percent affordability threshold for combined costs as a percent of income.” (1)

This report makes a very important point about the cost of living in different cities. It should also reframe some of the national discussion about affordable housing policy. It would be great if there were a way to account for length of commute in the Location Affordability Index to make a better apples to apples comparison among cities when it comes to the housing choices that are available to households.

NYC’s (Affordable) Housing Crisis

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The Citizen’s Budget Commission is releasing a series of Policy Briefs on affordable housing in New York City. They raise interesting questions. The first policy brief, The Affordable Housing Crisis: How Bad Is It in New York City, compares the affordable housing situation in 22 large American cities and finds that NYC is not the worst, notwithstanding how many New Yorker’s feel about it. Some of the particular findings included,

  • New York City relies more heavily on rental, as opposed to owned, housing than all other large cities; more than two of every three occupied housing units are rental.
  • The increase in housing supply since 2000 was slower in New York City than in every other large city with population growth.
  • New York City does not have the highest average rents. New York City median rent ranks sixth most expensive among the 22 cities, slightly worse than 2000, when it ranked seventh.
  • New York City is not the most unaffordable: New York City ranks ninth worst in rental affordability, defined as the percent of households spending more than 30 percent of income on gross rent. This is slightly better than its eighth worst ranking in 2000, although the share of renters with burdensome rent increased from 41 percent to 51 percent.(1)

For me, the real story is the second bullet point.  New York City had the fourth slowest growth in the number of housing units out of the 22 cities, notwithstanding the fact that it has always had a limited supply and compounded by the fact that its population has been growing significantly for quite some time. It is depressing to learn that “the number of housing units in New York City increased” only 5.8 percent between 2000 and 2012. (2) This leaves New York City with a vacancy rate of 3.6 percent in 2012, which means that we are a long way off from making a serious dent in the affordability problem. The de Blasio administration has made affordable housing a centerpiece of its agenda. This report reminds us that part of the solution to the affordable housing puzzle is just building more housing overall. We have lots of pent up demand, we just don’t have the supply. That is one reason the rent is too damn high!