I recently got a chance to read Ryan Avent's Kindle book
The Gated City. I have a lot of respect for the author. I think he's one of the smartest people around when it comes to urban economics. I even
interviewed him here on this blog back in 2009. As far as the book goes, it's very good, and I recommend it to anyone reading this post.
There are two points that I wish wish would have gotten fleshed out more in the book, and in discussions of housing markets more generally. I'll cover one today, and the other later.
A recurring argument amongst writers like Ryan Avent and Matt Yglesias and Ed Glaeser is that the housing market suffers from a supply/demand imbalance. More specifically, there isn't enough supply, and that's the reason why so many neighborhoods in so many cities are unaffordable. If only we could boost the supply of housing to meet the demand, we could bring down, or at least stabilize, rents.
(from M.V. Jantzen on Flickr)
This idea rests, first and foremost, on the assumption that housing is a commodity. Consider a different commodity market - wheat. If wheat prices are very high, one way to bring them down is to boost production and flood the market with more wheat. This works because wheat actually is a commodity. Every unit of wheat is more-or-less the same as every other unit, so the price is whatever price the market dictates.
Housing is different. There are many unique types and styles of housing, some of which are more desirable than others. When demand for housing rises in a neighborhood, rents will rise, regardless of the type or quality of the housing. A neighborhood might have century-old rowhouses, 70s apartments, and brand new luxury buildings. If demand is rising in that neighborhood, rents for
all types of these units will rise.
But what if a neighborhood doesn't have any vacant land sitting around waiting to be developed? How do you increase the supply of housing when there's no place to build new housing? Basically, you have to knock something down and replace it with higher density housing.