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Why New Market Housing Reduces Displacement

2015 February 27
by dan bertolet

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Most Seattleites understand that the public has an obligation to subsidize housing for the city’s most needy, and residents have voted twice to tax themselves to that end through the housing levy. What’s far less appreciated is the essential role of the private sector in sustaining affordable housing.

It’s probably safe to say that the average Seattleite-on-the-street believes that expensive new housing is a major cause of declining affordability. And that is a regrettable thing. Because under current conditions of high demand for housing in Seattle, the reality is that new housing—regardless of price—actually abates displacement of those on the lower end of the income spectrum.

How can this be?

Consider the simplified case of a city with a total of five rentals ranging from cheap to expensive, and five people living in them with corresponding incomes. Along comes a wealthy newcomer who offers more for the most expensive unit, so the landlord raises the rent and the newcomer gets the unit because the current tenant can’t afford to pay that much.

The person who was displaced then offers more for the next cheapest rental, and so that landlord raises the rent, displacing the current tenant, who then bids up the next cheapest rental, and so on. In the end the person left without a place to live is the one with the lowest income of the five original renters.

Now consider how that scenario changes dramatically when there is one simple difference: a newly built expensive rental is available. The wealthy newcomer rents that unit, and that’s it—nothing changes for any of the existing five renters. No rents are raised, and no one is displaced. As counterintuitive as it may seem, the creation of a new expensive rental prevented displacement of the poorest renter.

Today in Seattle, the scenario of the lacking new unit is the fundamental process behind declining affordability and increasing displacement. And that’s why the ever popular sport of bashing “greedy developers” for building “luxury” housing is actually doing more harm than good.

Yes, of course Seattle’s housing system is far more complex than the above thought experiment. But none of those complexities negates the fact that the root problem is we’re not making enough room for newcomers. Still, this idea tends to encounter remarkably spirited resistance in progressive circles. Here are five common objections and why they are misguided:

  1. New housing causes displacement because older, cheaper housing is demolished to make way for it.

In recent years the ratio of new to demolished housing in Seattle has been about eight to one, which means that displacement prevented by new housing far outweighs any displacement caused. For high density housing the ratio is more likely in the range of 50 or 100 to one. That’s because a lot of new high density housing is built on parking lots or spent commercial buildings, as is readily observed in the city’s growing neighborhoods such Capitol Hill, Ballard, or downtown.

  1. New expensive housing drives up rents of surrounding housing; owners of new housing keep their units vacant to drive up rents; outside investors are buying up housing in Seattle and jacking rents to cover the inflated prices they pay.

The simple reason all of these related claims have no merit is because the primary determinant of rents is demand. And neither the existence of expensive housing, nor vacant units, nor inflated rents can create demand. These factors may introduce short-term marginal upticks, but over the long-term, rents always fall back in line with demand. This is simply indisputable reality, as verified by decades real estate market data.

  1. Housing consists of multiple bifurcated markets, so new expensive apartments do not affect prices of any other type of housing.

Regarding price, the thought experiment discussed above illustrates that in a large housing market there is a continuum of prices that allows renters to easily move up and down the market as needed—in other words, there is no financial bifurcation. Regarding housing type, bifurcation can be a factor, but the fact is, every new apartment added to the stock absorbs demand from a household that otherwise may have been forced to compete for other options. For example, a person who can’t find a cheap enough apartment may end up renting a room in a shared single-family house. Ultimately, every unit built relieves the entire market.

  1. The market cannot provide affordable housing.

It is no secret that the raw costs of production are simply too high for new housing to be affordable to a significant swath of the lower end of the income spectrum. But to claim that the market doesn’t provide affordable housing is highly disingenuous. Past census data and market surveys show that about three quarters of Seattle’s rentals were affordable to households earning 80 percent of the area median income. Today’s new housing becomes tomorrow’s affordable housing as it ages. Furthermore, because new housing absorbs demand, it reduces market pressure to renovate older, cheaper housing, thereby helping to preserve these low-rent options and reducing displacement.

  1. It’s a lost cause because we can’t build fast enough to get ahead of demand.

Even if production isn’t keeping up with demand, each new unit still has the potential to prevent one poor household from being displaced. It’s far from a lost cause to the person who can afford to stay in his or her home because just one additional unit of housing was built. This is not to say that building new housing will solve the whole problem. Subsidies will always be necessary to provide decent housing for the poorest households, as has been true in cities for centuries. But when so many people want to live here, the less new housing we build, the bigger the subsidy problem becomes.

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If Seattle hopes to successfully tackle affordability, the critical role of market housing must be given more weight in policymaking. Take for example Capitol Hill, one of the city’s most in-demand neighborhoods, for which a policy choice has been made to not allow high-rise buildings, a policy that will curtail the creation of new housing by hundreds, if not thousands of units. And that translates to hundreds if not thousands more lower-income residents displaced from the neighborhood. Limiting height or density in places where there is strong demand is putting aesthetics before social equity.

In the public conversation about housing affordability in Seattle, rigid progressive ideology all too often leads to the demonization of private developers. But this can only lead to failure, because it will encourage policies that attempt to solve the problem at the expense of market production, such as the City’s proposed linkage fee.

Again, to be clear, no one is saying that market production alone will solve Seattle’s affordability problem.

There will always be some level of subsidy necessary, but that level will be determined by the balance of supply and demand. If market production continues to fall behind demand, the need for subsidy will balloon to the point where it becomes essentially unsolvable, as it has in San Francisco. And even if some households are protected from displacement through subsidized housing, the displacement caused by housing scarcity will simply shift to the next poorest households not protected.

It’s really not that complicated. Seattle has a housing shortage. Every occupied new unit of higher cost housing translates to one less higher income household competing for a limited amount of existing housing. And whenever there are more people who want housing than there are housing units, it will be the poorest who lose.

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This post originally appeared on PubliCola.

5 Responses leave one →
  1. Chris permalink
    April 19, 2016

    Thanks for the detailed post. I was shaking my head about the fact that this even needs to be explained, especially in a city with a lot of educated folk.

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