- Enact “as-of-right” zoning, which prohibits neighborhood interest groups from dramatically delaying any project they don’t like through bureaucratic regulatory processes (construction can take 8–10 years to approve in San Francisco, compared to a similar process that takes just 17 weeks in Seattle).
- End density regulations — much of San Francisco effectively prohibits anything but 2-story single family homes [pdf].
- Raise height limits in each neighborhood.
- Ensure each new building creates the maximum number of affordable units for residents making less than the median income. Generally speaking, more construction means a higher percent of subsidized apartments for those making the median income or less. For instance, Seattle’s Mayor put forth a plan to build roughly 4 times more affordable units than San Francisco (40,000) — a plan made possible thanks to Seattle’s famous commitment to density.
Those seem like pretty strong shifts in San Francisco policy. I don't know how realistic the proposal or the plan behind it is, but it would be really interesting to see something like this on the ballot. Home values in coastal California are so inflated by future rent expectations, that any downward shift in expectations should have a large effect on current prices - like if expected revenue growth for Amazon dropped from 20% to 10%.
If something revolutionary ever did get on the ballot, I would expect the San Francisco housing market to take an immediate hit. If it had a chance of winning, I would expect home sales and prices to start dropping, possibly, even before election day. It would be interesting to see the effect that would have on the process of gathering support. And, since values on long-lived assets are so difficult for the public to understand, I would expect to hear belly-aching about why rents aren't falling along with prices. So, the only solution to the problem would potentially have headwinds to face from both owners and renters that it would face precisely because housing markets are efficient in ways that Closed Access advocates seem to doubt.
Thanks for the pointer, Kevin. I pledged & signed up.
ReplyDeleteI am very uncertain of your logic on market price reaction. It seems to me that if the market were free, my home (structure) would be worthless, but my land would be far more valuable than today. If I could build a nice MDU on my Menlo Park half acre, I would I have (making this up) 50 units renting at $4000/month each (typical for a 2BR apt), say $2M a year in rents. If I can borrow at 2% then I can justify a $100M structure. I don't know what op-ex would be, or what the actual cost of the structure would be, but if the op-ex (other than interest) ate half the rents and the structure cost $30M to build (??) then my land is worth $20M if building restrictions were lifted versus maybe $2M today. This means that we would see land values go up, not down, if this legislation looked likely to pass.
Caveat: I did not understand the part about "maximum units for below-median-income residents". If that provision forced me to build a second-best MDU, then obviously the value of my land drops accordingly.
You have a good point. And, I suppose at some margin there would be properties that have the effect you suggest. But, in an unencumbered housing market, the land would not be that valuable. Most of the capital base would come from the cost of the building. There is some land value, but in San Francisco, the vast majority of this is from closed access. In constrained supply with sustainable income opportunities, housing demand becomes inelastic, so lower quantities actually lead to higher total values. Consider, in 1998, Total residential real estate in San Francisco MSA was equal to total residential real estate in Dallas+Houston MSA- about $400 billion. San Francisco had a population of 4 million, D-H had 9.5 million. By 2006, D-H had 11.4 million. San Francisco had 4.1 million. Real estate in D-H was worth $600 billion. San Francisco $1 trillion. The real estate gained value because they didn't build. This is the source of the value. Adding real estate will lower the total value. Stick a second unit on every lot in San Francisco, and, counterintuitively, the total value of each lot will be lower. The numbers are so severe, this clearly is not a product of productivity. It's limited access.
DeleteYes, it is possible land values would go up in the short rrun. Developers being who they are (and I admire them), they would overbuild at which point you would get a real housing bust (not a Fed-induced artificial one) and land values would start to retreat.
ReplyDeleteThat's assuming no property zoning, limited building codes.
A real housing glut would raise living standards. Be nice to see that in combination with labor shortages.
Ain't going to happen.
The nice thing, too, would be that it would be disinflationary, so an inflation targeting Fed would let it run.
DeleteWould NY and SF be as productive as they are if they were more open? I think we may have cause & effect backwards. Reminds me of a high-priced country club. They are valuable precisely because they limit who can join and therefore every node in the network is high "value."
ReplyDeleteWe may solve the rent problem but kill the productivity bonus.
I think part of what has been happening is that our economic models tend to assume open access, so we have been measuring economic rents to Closed Access workers as productivity. Wages in tech, finance, etc. would drop if those cities built homes because the source of rents would go down.
DeleteThere is the question of why these industries, globally, seem to be attracted to Closed Access cities, which suggests that possibly there is some benefit that Closed Access provides which pushes industries past a tipping point and makes certain investments plausible that wouldn't be plausible without the rents. But, it could just be that these high valued human networks require a density that modern cities are incapable of reaching, so that the causality runs the other way.
Moretti and Hsieh touch on this in their 2015 paper. They argue "that holding constant land but lowering land use regulations in New York, San Francisco and San Jose to the level of the median city would increase U.S. output by 9.7%."
Deletehttp://faculty.chicagobooth.edu/chang-tai.hsieh/research/growth.pdf
Yeah. That's an interesting paper. If I remember right, I think the gains may be even more than they estimate, because I think they attribute higher wages to productivity. But, I think much of the higher wages in the closed access cities are economic rents from limited access, so that even some of the economic activity we have been measuring as real has really been a transfer of rents.
DeleteI could be in over my head here, but I think this is the case.
The problem is housing prices are determined regionally, and SF's suburbs restrict development to an even more ridiculous degree than SF does! That's not to say this isn't a great idea, but it won't be enough.
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