Call it trickle-down housing. When developers build luxury housing for the wealthy because more expensive housing provides bigger profit margins, do the poor go homeless? No. When an affluent household moves into a luxurious new penthouse apartment, it creates a vacancy in its previous residence…. which a less well-to-do family moves into, creating yet another new vacancy. The idea, if not the label, has been around at least since the time of 1960s-era urbanist Edward Banfield, author of the sociology classic “Unheavenly City.”
The trickle-down description of housing markets always made sense to me because I saw up close how it operated. When my father was serving in the U.S. Navy in the early 1960s, he was stationed in Newport, R.I., the summering place of the Vanderbilts and other captains of finance and industry in the late-19th century. We lived next door to a former mansion that had been chopped up into multiple rental apartments. Some rich family had built the manse in the 1800s. After decades passed, it was no longer suitable enough or fashionable enough for rich people. The building was re-purposed as rental housing.
The reason people are going homeless is that not enough new housing, luxury or otherwise, is being built — not because luxury housing is too expensive for most people to afford.
Leftist pundits and commentators criticize the market’s proclivity for building higher-end housing, especially when luxury units arise in gentrifying neighborhoods where rents are rising and poor people are being displaced. But new research shows how trickle-down housing — also referred to in the academic literature as migration chains, or filtering — works to the benefit of not only the rich but the poor.
Building 100 new luxury units induces 65 people to move out of below-median income neighborhoods and 34 people out of bottom-quintile income neighborhoods, reducing demand and loosening the housing market in such areas,” writes Evan Mast with the W.E. Upjohn Institute for Employment Research in a new paper, “The Effect of New Luxury Housing on Regional Housing Affordability.” “These results suggest that increasing housing supply improves housing affordability in the short run.”
Trickle-down practices occur in many sectors of the economy. Wealthy people buy new cars, sell them a few years later, and less-wealthy people buy the depreciated vehicles for much lower prices. Likewise, wealthy people buy expensive clothes, get tired of them (or get too fat for them), and give them to thrift shops. Less-wealth people buy them for a fraction of their original price. (My family was a frequent customer of used cars and second-hand clothes.)
Mast describes what he calls a “migration chain” that links luxury housing to cheaper segments of the market. “Some households who would have otherwise occupied cheaper units move into new units, reducing demand and lowering prices for the units they leave vacant. The process iterates when a second round of households move into the units the first round left vacant, and so on, eventually reducing prices in affordable areas.”
That’s the theory. Does it work that way in reality? A number of things might interrupt the migration chain, Mast suggests. Affluent families might spawn new households (a college grad moves out on her own). A unit might be used as a second home. Or oligopolistic landlords might not reduce prices enough to fully fill the vacancies. To see what happens in the real world, he identified 802 large new luxury multifamily buildings in 12 central cities and tracked their current residents to their previous housing units. He then tracked tenants of those housing units back to their previous housing units.
The results … suggest that new luxury housing construction is an important source of affordable housing, even in the short run. This highlights the importance of market-based strategies to improve housing affordability and suggests that diverse areas of a metropolitan area may benefit from policymakers expending the political capital required to get new housing through the often onerous approval process. Moreover, it suggests that policy that ease the approval process or reduce construction costs in other ways are likely to improve affordability.
Inclusionary zoning policies, which compel developers to provide subsidized housing for lower-income tenants, can be counter-productive, Mast says. “A back-of-the-envelope calculation suggests that if each required income-restricted unit crowds out more than 1.53 new market-rate units, the lost equivalent units in below-median income areas would outnumber the gain in income-restricted units.”
Mast doesn’t rule out housing vouchers, public housing or other subsidies for lower-income households. But these, he says, are better viewed as in-kind income support programs than housing affordability programs.
Writing in the Strong Towns blog, Daniel Herriges explores the implications of Mast’s research. He draws two main conclusions:
1. Policies that are intended to do good can end up doing net harm. The specific example of this which Mast does invoke, in the realm of housing policy, is Inclusionary Zoning. … The problem with Inclusionary Zoning is that, by imposing additional costs on the developers of new housing (requiring them to build units that must be rented or sold at a loss), it may decrease the amount of such new development that occurs. If it does, according to Mast’s findings, it is directly eliminating some of those migration chains that would have caused homes in low-income neighborhoods to be freed up for new occupants. …
2. Practice via negativa instead. The via negativa is an approach recommended by Nassim Taleb for working with complex systems: work via subtraction, not addition. Instead of adding distortions to the incentives that people face, take away existing interventions that are distorting things.
In the case of housing markets, this means letting feedback mechanisms work. Where you have a productive place that people want to be, it should be possible for that place to naturally “thicken up” over time—not in large leaps that risk killing the golden goose that made it a successful place, but in small increments. This means letting people build more homes—yes, even if some are “luxury” homes. It means letting them build a diversity of home styles and sizes, so that the emergent wisdom of the crowd can shape the evolution of a place.
Mast’s migration chains suggest that this approach may even do more to produce broad housing affordability than explicitly mandating capital-A Affordable housing, and micromanaging where it is built. The housing market is a complex system, and its overall outcomes—who finds a home at a price they can afford in a place they want to be—are going to largely be shaped by an ecology of causes and effects that defies micromanagement or simplistic understandings of cause and effect.
Such concepts are totally alien to the public housing-industrial complex. Housing policy in Virginia is geared to subsidizing new construction for lower-income Virginians at absurdly uneconomic costs, typically at $200,000 per dwelling unit or more. Current policy is not sustainable. We need to think differently about affordable housing. Trickle-down housing is a viable alternative. Perhaps we should spend more time thinking about how to make it work.