Apartment development in Auckland often seems to be caught in a Catch-22. When we build cheap apartments, they’re criticised as a blight on the city – “shoeboxes” that nobody would ever want to live in. (Never mind that many people do live in them, and value the fact that they are an affordable way to live near jobs and universities in the city centre.) When we build high-quality but pricey apartments, some people claim that they prove that apartments aren’t a solution to Auckland’s high housing costs. (Never mind the fact that they allow more people to live in desirable areas.)
Over in the San Francisco Bay Area, they’re having a similar debate over how to plan for growth. The Bay Area has more severe affordability issues than we do, as the tech boom is placing pressure on both housing and office space. In San Francisco, new condos for wealthy geeks are frequently criticised as out-of-keeping with the city’s unruly liberal character.
Moreover, fragmented local government means that there is no coherence in regional planning – every city is effectively assuming that their neighbour will accommodate the growth that they won’t. This is the result:
Asking Prices Relative to Units Built
Even though Manhattan and LA have more expensive neighborhoods, San Francisco is far and away the most expensive metro in the nation. This is due to the small number of units built each year relative to demand.
In Berkeley, a university town in the East Bay, residents just voted down a (binding) referendum that would have prohibited the construction of new dwellings in the downtown area. Local writer Zach Franklin reviews the state of the debate on the measure. His point about expensive apartments is particularly important:
Some “progressives” don’t believe in supply and demand. I’ve heard this at parties and online – people who say “the new condos are just for rich people”, or think that pro-development policies are a front for greedy real estate interests. Then there are the folks who have pet theories about how housing economics really work, which can feel eerily like talking with climate deniers. It’s actually pretty simple Econ 101 stuff – the rich folks will be at the front of the line no matter what, and if you don’t build the condos they’ll just take over middle-class housing. Build more housing and at least the line gets longer.
This is absolutely essential to understand. Economists have all sorts of arcane ways of describing this phenomenon, but the principle is simple: If you try to push down growth here, it will pop up there instead.
Preventing people from building new homes in a neighbourhood won’t simply make them go away – they will stick around and compete with each other to bid up the prices. (Some will lose out, of course – they’ll have to go to somewhere else that’s less convenient.) Here’s how this works in practice:
- We regulate to make it difficult to build new homes in inner-city areas which offer the best access to labour markets
- Upper-income people bid up prices for old villas and flats in Ponsonby, Mount Eden, and Newmarket
- Middle-income and lower-income people can’t afford to pay these prices, so they move a bit further out, and bid up prices in Avondale, Three Kings, and Onehunga
- The people who could formerly afford to live in those areas go even further west or south, driving up prices in Te Atatu and Otahuhu
- The people at the bottom of the income ladder are thoroughly rogered – they’ve got a choice between paying heaps to live in overcrowded, unhealthy houses or moving so far out that they can’t access jobs or education.
The end outcome is residential segregation and unaffordable housing. A casual look at Census data on household incomes suggests that this might be happening in Auckland. The map below shows the share of households in individual Auckland suburbs that had low incomes in 2001 and 2013. (I used a higher threshold for “low income” in 2013 to account for the fact that average household incomes increased over this period. This is a pretty cursory analysis – I’d welcome ideas on better ways to present or analyse the data!) Areas coloured in darker blue had more low-income households, while areas coloured in yellow had relatively few.
As you can see, the Auckland isthmus and many coastal suburbs have become yellower over this time – which suggests that low-income families are being priced out of these areas. Many other areas – especially in west Auckland and Manukau – have gone from blue to green. Meanwhile, some pockets of blue in south Auckland have become darker, which suggests that low-income households may be crowding into those areas.
Notably, the city centre, where loads of apartments (both expensive and cheap) have been built, has a greater share of low-income households now than it did in 2001.
This is not a good outcome for Aucklanders, especially those on low incomes. By comparison, building lots of apartments, even expensive apartments, in desirable areas means that some of the well-heeled people who want to live in that area will not bid up prices on the run-down houses down the street as a second-best option. As a result, the affordable houses in the area can remain affordable.
Supply and demand – how does it work?