Wednesday, January 11, 2017

Affordable Housing is not Housing Affordability

Early 20th century houses in NW Portland.  Attribution

Amid fast-rising rents, affordable housing has come to the forefront of Portland politics as the necessary prescription.  But despite widespread political popularity, there is often confusion in the public about what affordable housing actually means. Affordable housing, as the term is used, means specifically subsidized housing, as opposed to market-rate housing which happens to be affordable. (I will use affordable housing here to mean subsidized housing and affordability to mean the general cost of housing) The federal government provides several programs to build and maintain subsidized housing, mostly administered through the Department of Housing and Urban Development.  Some states and local jurisdictions (such as Portland) also commit additional tax dollars to this purpose.  Some cities even require affordable units in new apartment buildings, effectively creating a subsidy by "taxing" the remaining tenants.  (Portland recently approved such a proposal)  Affordable housing is an important part of the social safety net that can advance a lot of our common goals: alleviating poverty, reducing income and racial segregation, promoting diverse neighborhoods, providing better social services to the very needy, improved mental health care, reduced homelessness and the list goes on.  There are lots of good reasons to support more affordable housing, and in the spirit of full disclosure, I work for an architecture firm that designs a lot of it.  

Rents in the Portland area have been growing significantly faster than incomes for the last few years. Attribution: Oregon, Metro

...But one thing that affordable housing can't do is reduce the cost of housing for the people who don't live in it.  By design, affordable housing is reserved for people with few economic resources, which by extension means those who are least likely to bid up the cost of housing.  In order to have an effect on the over-all cost of housing a large and ever-increasing portion of the population would have to live in subsidized units.  That's neither sustainable nor desirable.  In the city of Portland about seven percent of the population lives in subsidized units and that's well above average for an American city.  For the metro area as a whole the number is around four percent.  Even if we were to significantly increase those numbers - which would be a very ambitious (and worthwhile) feat - it would still leave the vast majority of us to deal with the spiraling costs of market-rate housing.  So it's important not to confuse affordable housing with housing affordability.  Affordable housing alleviates cost increases for a small segment of the population that is most disaffected by them - and that's a good thing - but it is not a solution to an affordability crisis. It is a much needed band-aid that, if we fail to take on the issue of housing affordability, will always be too small for the wound.

So what is a solution to declining affordability?  A real solution to an affordability crisis means addressing the problem at its root cause: it's too difficult and too expensive to build the additional housing that the growing city needs.  Despite all the cranes in the sky, new housing is not actually keeping pace with population growth.  Lots of people are moving to Portland and building housing to accommodate them is expensive, unpredictable and can take a long time.  That means less of it is built than is needed, which in turn drives up housing costs across the board.  It also means that units are smaller than they otherwise would be, which anyone who has toured a new apartment building has likely noticed. 

While Portland is experiencing an impressive growth spurt, it is hardly alone in this regard. Several cities have had growth spurts in the last few decades and not all of them have seen major increases in housing costs.  Cities that have mostly expanded at the periphery, where building housing is predictable, fast and inexpensive have generally seen relatively steady housing prices.  Houston, Dallas, Atlanta and Phoenix all fit that description.  Cities like San Francisco and Boston, that have constrained borders and a complicated regulations have seen exponential increases in housing costs.  (see chart below)  To be clear, I'm not advocating that Portland develop housing in the same way that Atlanta has - there are very real downsides to the extreme outward expansion of American cities.  But it is important to recognize that Portland's focus on infill development puts the city at an inherent disadvantage when it comes to controlling costs.  If the city wants to maintain its urban growth boundary and still keep housing affordable, it means going the extra mile to remove impediments to redevelopment.  

Circle size denotes percent population growth.  Note that population growth does not correlate with increasing housing costs.  Attribution: Issi Romem/Build Zoom

Few growing American cities have kept housing costs in check without aggressive outward expansion, but the same is not true internationally.  Tokyo has been dense and geographically constrained for a long time, and yet, in the city's recent growth spurt, redevelopment kept apace with population growth to such an extent that rents actually declined slightly.  Portland has also managed to solve the growth-affordability conundrum in its more distant past.  In the years following the Lewis and Clark exposition in 1905 the city grew at a rate that dwarfs its current growth spurt without creating a major housing crisis.  In part this resulted in the city pouring over the Willamette river creating the rambling east-side neighborhoods, but it is also evident in the northwest quarter of the city where apartment buildings rub shoulders with single-family mansions.   Michael Anderson has a very compelling recount of this period here.  The reason the city was able to grow so dramatically says Anderson is simple "Growing cities built and built and built — because until 1920 or so, there were no laws that said you couldn’t".   

There is a very real and well-documented correlation between barriers to constructing new housing and the cost of housing over-all.  A Portland where housing remains affordable to the middle class is a Portland where new development faces fewer barriers.  (My next post will look specifically at how we might do that.) The argument I've made here is basically the supply and demand argument many people remember from economics 101, but  I want to address few common objections to that argument because they tend to come from people who are genuinely concerned about the problem of rising rents and want to help.

The first is that housing is expensive because developers are greedy and "over-charging" for new housing.  I happen to know some developers that are very thoughtful, generous people, but even if they are exceptions to the rule, the point is moot.  If you make greed the cause of Portland's expensive housing you must also accept that the cause of Atlanta's relative affordability is its particularly generous developers.  Clearly this is not the case.  Greedy or not, developers operate in an economic ecosystem that defines what they can get away with.  In a market where new housing is easily produced, many people will produce it and any "greedy" developers will soon be forced to reduce their prices or be put out of business.  Conversely, the more complicated the land use process and the more expensive it is to produce new housing, the fewer who will be able to do it and hence there will be little competition to prevent developers from "over-charging".  In other words, don't blame the developer, blame their environment.

The second objection is that new housing is a cause of rising housing costs rather than a solution to it.  New housing is correlated with rising costs and generally new housing is more expensive (per square foot at least) than older housing, which sometimes leads people interested in helping low income people to oppose development.  Obviously this conflicts with the basic logic of supply and demand, but it's important to note that, As Noah Smith at Bloomberg points out, it's not a crazy notion.  Supply and demand often take counter-intuitive twists that don't match the x-shaped graph we know from our high school economics class.  Famously freeway construction has struggled with the phenomenon of induced demand in which expanding capacity leads to an even larger increase in demand for road space and thus more congestion.  (Congestion is a price paid in time rather than money.) The problem with the induced demand theory of housing is not the idea itself is flawed, it's that the evidence simply does not bear this out.  Looking at cities across time and comparing cities to one another shows that, in the big picture, fewer impediments to development, and hence more development, correlates to lower housing costs, not the other way around.  

Thus far the primary political response to decreasing affordability in Portland has been to propose more affordable housing.  This a good thing, but as I've said, it is not a solution.  Even worse, in the absence of a real discussion about over-all affordability, its way of changing the subject.  As an advocate for affordable housing I'm happy to see the issue getting so much press, but as a Portlander that values the economic diversity of the city I'm concerned we are not doing the things we need to do to keep the city affordable long term.  City policy has a major hand to play in determining how redevelopment responds to the need for more housing, and the extent to which the regulatory environment promotes housing growth is the extent to which the city remains affordable to the middle class.  The conversation about reducing the impediments to redevelopment is happening at the fringes through efforts like the Residential Infill Project, but it has been dwarfed by the focus on affordable housing.  This may be a sincere misunderstanding of the problem on the part of our city leaders, but tellingly, it is also a politically convenient one.  A real solution involves building a lot more housing - even more than we already are - and that involves some difficult conversations with people reluctant to see their neighborhood change.  Promoting redevelopment means taking on existing homeowners who have a financial interest in keeping housing expensive, and it means making some difficult decisions about the trade-offs between historic preservation and the benefits of new development.  None of these decisions are easy and none have a magic bullet solution where everyone gets their way.  They are real trade-offs, and as we know, trade-offs are never politically popular.  Politicians tend to promise that we can have it both ways even when we can't.  Unless there are advocates at the table forcing the difficult conversation politicians will continue to do what politicians do: change the subject.