We Should All Be On Supply’s Side

With the latest reports of surging housing prices in Seattle, affordable housing is once again a hot topic in wonkland. Both the Mayor’s office and City Council have recently convened committees to explore affordable housing strategies, but unfortunately these efforts are largely focused on approaches that place the burden of providing affordable housing on new development. The problem is that exacting additional fees on new buildings discourages development and increases the cost of production, both of which run counter to the original intent of making housing more affordable.

If Seattle aspires to be truly progressive on affordable housing—and hopes to avoid the fate of insanely priced cities like San Francisco—a serious reassessment is in order, a key component of which must be proper consideration of the housing supply side.

First of all, it cannot be overstated that creating new multifamily housing in Seattle’s urban centers is a public benefit in itself. That a sustainable future depends on concentrating growth in dense urban centers is arguably the most agreed upon and defensible concept in the history of modern urban planning. That means when housing sites are developed below their potential in places like Seattle’s South Lake Union urban center, it’s a 50 to 100 year lost opportunity.

The stupid simple reason the supply side matters for affordability is that increasing housing supply puts downward pressure on prices. This relationship can be obscured, because in growing, high-demand cities prices may rise even as gobs of new housing is built, as is currently the case in Seattle. But despite claims that housing gets a magical exemption from basic principles of economics, it is an indisputable fact that housing prices are heavily influenced by supply and demand, as is verified over and over again by direct experience, e.g:

“More buyers and a limited supply of available homes have lifted prices in most cities across the country…”

Or closer to home:

“Whitworth manager Chris Garvin said the increases … are reflective of a high demand/low supply rental market in Capitol Hill. With a slew of new apartments coming online next year, Garvin said he expects rents in older buildings to level out.”

When housing demand is very high, it may not be possible to increase supply fast enough to completely turn around rising prices. But even in such cases, greater supply will keep prices lower than they would have been absent that increased supply, and that benefits everyone in the housing market, those on the lower end of the income spectrum in particular.

Still, some affordable housing advocates balk at the supply side because they know that even with limitless supply the private market cannot deliver housing at deep affordability levels. What they are missing is that it doesn’t have to be an either/or scenario:  Supply and subsidy can be mutually beneficial. When supply keeps prices in check, it reduces the amount of subsidy required to make up the difference between market rents and rents that lower-income households can afford. The availability of new units also reduces competition for older housing, thereby helping to preserve that lower-cost option.

What those who are inclined to ignore the supply side are also missing is that trying to maintain sufficient affordable housing through subsidy when housing supply is constrained in a high-demand market is like trying to hold back the incoming tide with a broom. How much does suppressing supply aggravate affordability? Consider San Francisco:

Over the last 20 years, San Francisco has added an average of 1,500 new housing units per year— to keep up with demand, we should have built two or three times that many. The inevitable result is a matter of high school economics: With too few apartments and too many people, prices keep going up.

“That didn’t have to happen,” says Enrico Moretti, a UC Berkeley professor whose book, The New Geography of Jobs, argues that restrictive zoning and land-use policies are a prime reason for San Francisco’s housing affordability crisis. He likes to cite a study by economists at the University of Pennsylvania’s Wharton School of Business, which found that, of nearly 2,500 municipal areas across the country, San Francisco is the most restrictive large city of all. That’s no surprise to anyone who follows local politics, where every new development is subject to endless lawsuits, petitions, and NIMBY-funded opposition.”

Many Seattle policy makers like to point out that San Francisco has more stringent requirements on developers to provide affordable housing—including “inclusionary zoning” that requires low rent housing units in new development—not to mention rent control. The implication is that San Francisco is doing a better job than Seattle at tackling affordable housing, and therefore Seattle needs to catch up by emulating them. How’s that working out for ya down there, San Francisco?

What’s lacking in Seattle’s assessment of San Francisco is a recognition of the blatant truth that, with the exception of a tiny percentage of residents who are lucky enough to score a subsidized unit, San Francisco has failed spectacularly at maintaining affordability. And that has everything to do with neglect of the supply side. The suppression of supply has led to an increase in housing prices across the board that dwarfs any gains that may have been made through subsidies derived from “incentive” fees on development or inclusionary units. This is not an outcome a smart city would want to emulate.

Addressing the supply side means rezoning to allow greater development capacity, easing onerous development regulations, cutting fees and delays on permitting, reducing construction costs and developer risk, and generally allowing for more flexibility, options, and variety in the housing market. It also means having the backbone not to pander to naysayers who will always find some reason to oppose pretty much any proposed development project.

Requiring subsidized units or increasing the “incentive” fees charged in exchange for allowing the development of larger buildings are perfect examples of how to work against the supply side. In the best case, these requirements result in the production of a relatively small number of low-rent units with a commensurate price increase in the market-rate units, and that offsetting of expense from one unit to another does not make for a net improvement of overall affordability.

More typically, however, we can expect such encumbrances to constrict housing production because they undermine financial feasibility. Currently there are at least half a dozen proposed multifamily projects in South Lake Union that are opting to leave significant development capacity on the table because the “incentive” fees are in reality a disincentive. Again, when housing sites are underdeveloped, the sacrificed supply sets back progress on both affordability and sustainable growth.

And given all there is to be gained, do we really need to be worried about developers making money? If potential profits are high, it will attract more private developers into the game and more housing will get built, providing the dual benefit of putting downward pressure on price while also helping us meet our smart growth goals. If development is allowed to respond to the market, eventually supply and demand will move toward a healthy balance, and profits will fall accordingly.

As is widely recognized, even if the supply side is cultivated, subsidies will still be necessary to provide housing that is affordable to very low income households. Seattle’s affordability mission should be to establish innovative new funding sources for subsidy that (1) don’t restrain supply, (2) don’t favor existing residents over newcomers, and (3) don’t sabotage smart growth. Seattle’s Housing Levy and Multifamily Tax Exemption are good existing options. In contrast, taxing new development with “incentive” fees fails on all three counts.

I believe that one appropriately fair new tax revenue source for subsidizing affordable housing would be an additional assessment on single family homes. Seattle has about 2/3 of its land area zoned for single family houses only, which amounts to a huge constraint on increasing housing supply that pumps up prices across the board. Or how about a capital gains tax on the sale of land, which would have the added benefit of tempering land speculation? Seattle is overflowing with smart people. Let’s avoid repeating the mistakes of other cities, accept the challenge to think outside the box, and get this figured out.

Efforts to provide affordable housing are motivated by the desire to foster equitable access to all the valuable advantages offered by vibrant cities such as Seattle. But if the supply side is left out of the equation, you can be sure that equity is going to take the hit.

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Dan Bertolet lives in Seattle and is a socialist at heart.

Note:  Gerding Edlen’s “Pine + Minor” market-rate apartment building shown in the photo above is participating in Seattle’s Multifamily Tax Exemption program. Twenty-three of its 111 total units are required to be rent-restricted. Sixteen of its 75 studios must be set aside for households earning less than 65%AMI at a total housing cost of less than $986/mo. Seven of its 36 one-bedroom units must be set aside for households earning less than 75%AMI at a total housing cost of less than $1,301/mo. The market-rate units are expected to rent for an average of $1,487 (studios) and $1,792 (1-bedrooms). Thanks to reader Mike Kent for pointing this out. It is also important to remember that the building is also playing a positive role for affordability in Seattle by simply providing new market-rate supply to help meet Seattle’s voracious demand for housing.