Welcome back to Sunday reading. This week, a different take on housing markets. We normally focus on issues like zoning and development that affect the quantity of housing that gets built in a city, but things aren’t necessarily all hunky-dory once the housing’s there. Mike Konzcal writes about “the violence of eviction” in Dissent Magazine:
A central premise of markets is that people who can afford to pay the price will end up where they belong. According to this assumption, eviction is simply a correction made by the market, one where people simply end up in a cheaper house that’s better suited to their income. But this is not what happens. One important reason is because there are very small rent differences across the poorest and richer parts of the Milwaukee. “A mere $270 separated some of the cheapest units in the city from some of the most expensive,” writes Desmond. In the poorest neighborhoods, median rents for a two-bedroom were only $50 less than in the city overall. Meaning, people who are evicted aren’t automatically reshuffled by the market to cheaper housing, because such housing simply isn’t always available.
This is because prices don’t determine who ends up where, landlords do. Desmond writes, “landlords were major players in distributing the spoils. They decided who got to live where.” No matter what else the poor have in common, “nearly all of them have a landlord.” Rather than a facile notion that people end up where they best belong, we see that people’s respective power dictates where they end up, and in poor neighborhoods, landlords have the power.
Landlords make decisions heavily informed by race. White and black families live at opposite ends of Milwaukee, but they might as well live in different galaxies. The black families can’t find any landlords willing to work with them in the white parts of the city, rendering false the idea that they could simply move if they so wished. The white families, for their part, refuse to look in the black ghetto at all, and receive a location dividend based on their race.
The way landlords choose to screen tenants reshapes the housing market in fundamental ways. Having kids, for instance, usually means an instant rejection. This is particularly tough on single moms, who are often already in difficult economic situations, and the children themselves. Eviction means school connections and deeper community roots, essential for children, are impossible to sustain.
Kim-Mai Cutler (Techcrunch) also wrote an excellent article about racial exclusion in housing markets, looking at the history of a single community in Silicon Valley: “East of Palo Alto’s Eden: Race and the formation of Silicon Valley“. It’s a long exploration of the dark side of the American (housing) dream.
Do we need to think about housing markets differently? Perhaps. In general, I think the case for renters’ protections and public involvement in providing rental properties of last resort, i.e. state houses, is stronger than we usually think.
Does this mean we need to rethink our approach to market analysis more generally? Perhaps. Eric Beinhocker puts forward the case for reinventing economics to take better account of market failures, behavioural economics, and complex, nonlinear relationships. He writes:
New economics seeks explanations of how the economy works that have empirical validity. Thus behavioural economists run painstakingly crafted experiments to explain actual human economic behaviour. Institutional economists conduct detailed field investigations into the functions and dysfunctions of real institutions. Complexity theorists seek to understand the dynamic behaviour of the economy with computer models validated against data.
In my book The Origin of Wealth (2007: 97) I offered a table to summarise the contrast between traditional economics and the new economics perspective. I provide here an updated version.
Traditional economists often respond that the limitations of orthodox theory are well recognised and there is much work being done to relax restrictive assumptions, introduce more realistic behaviour, heterogeneity, institutional effects, dynamics, endogenous innovation and so on. They are correct and this work is a very positive development for the field. However, much of this work introduces just one element of realism to an otherwise standard model – a bit of behaviour here, a bit of institutional realism there, and so on. It is very hard or even impossible to relax all of the assumptions at once without throwing out the whole structure of the model – in particular without abandoning the core idea that the economy is an equilibrium system.
The radical challenge the new economists have accepted is to relax all of the unrealistic assumptions at once, move to the right column of the above table, and create an economics that has much greater fidelity to the real world. It is an enormous challenge and it requires a new toolkit and methodologies.
For boring mathematical reasons, I’m a bit sceptical that Beinhocker’s research agenda will converge to a tractable set of models. But even so, there’s value in seeing what happens when you relax the conventional assumptions in traditional economic models. Sometimes the models no longer work.
On a completely different note, let’s take a look at some lessons from Paris. TransitCenter reports on the success of their new outer-suburb light rail network:
The Paris tramways have proven exceptional not just because there are so many of them (nine, with more in the planning and construction phases), but also because they are so popular. Ridership is 900,000 per day, which is five times greater than America’s busiest light-rail system (Boston’s Green Line) and greater than any subway system in the U.S. except New York.
All this is taking place on a network whose first line opened just 24 years ago and whose entire existence many visitors to Paris might not even be aware of, given that the routes are in the less touristy parts of the region…
It takes just a few seconds looking at the RATP map to see why the Paris trams are so useful. In Paris’s hub-and-spoke transit network, they are the rim of the wheel, connecting the ends of Metro and RER lines in far-flung parts of the region. All nine lines offer at least two stations that connect to other modes of transit. Some offer many more:
No. of transfers No. of total stations Pct. of stations with transfers T1 8 36 22% T2 4 24 17% T3a 12 25 48% T3b 8 18 44% T4 2 11 18% T5 2 16 13% T6 3 21 14% T7 4 18 22% T8 3 17 18%
It’s not just, as the map implies, that the tram lines travel near other transit stations. In most instances, the streets and stations are designed to make the connection as smooth as possible. Here, for example, is the T1 tram where it meets the M7 Metro line at the La Courneuve station in Aubervilliers. The stairs to the underground Metro platform deposit riders right at the tram:
Even commuter rail stations don’t present an obstacle to tram transfers. Here again the T1, this time at the Noisy-le-Sec rail station on the RER:
The ability of the trams to link existing transit is not a happy coincidence, but rather an explicit goal of the network’s planners. According to Sandrine Gourlet, a STIF deputy director who spoke to Le Figaro about the trams back in 2012, the agency calculated that forcing customers to make transfers that take longer than two minutes produces a ridership drop of 10 percent.
That’s a lesson well worth applying in Auckland’s public transport network.
— Omar Ureta (@theworksla) July 14, 2016
And now for two bits of history. First, Envirohistory NZ takes a look at “vanishing forests: the pre-European transformation of the South Island“. We think of New Zealand, and the Southern Alps in particular, as a relatively untouched natural environment. But the truth is that humans have massively transformed the ecosystem since arriving. We terraformed New Zealand:
When we encounter the extensive tussocklands of the eastern South Island [see below right], it is hard to imagine any other landscape in that place – so much a part of the “natural” New Zealand landscape have they become. Yet, as explored in a previous post What is natural? The tussocklands of Lindis Pass, this is in fact a human-induced landscape; the tussocklands have replaced podocarp and beech forest [see left] that once covered the South Island. However, this occurred long before any written history was established, and this environmental history has had to be pieced together through painstaking paleoenvironmental research.
New ground-breaking research, undertaken by an team of both New Zealand and international scientists, has determined how, to what extent, and over what time-frame large tracts of South Island forest were destroyed…
Pollen records show that before Polynesian arrival in New Zealand, 85 to 95% of the country was heavily forested, with low scrub and herbaceous plants above the treeline. The South Island supported beech (Nothofagus) forest at wetter, higher elevations, and podocarp forest (rimu, miro, matai, kahikatea, totara etc) at drier, lower elevations.
However, between the arrival of the first settlers from the Polynesian Islands 700 – 800 years ago to the European settlement of New Zealand in the 19th century, 40% of this forest had disappeared from the South Island, mainly on the eastern side [see forest cover maps below left]. What makes this remarkable is that this extensive deforestation was achieved by small, largely transient, non-agricultural populations in places remote from any settlement, and occurred throughout the relatively large South Island in only a few decades.
Humans obviously don’t always get it right. An architectural historian, Dr James Alexander Cameron, takes us on a tour of “great mistakes in English medieval architecture“. A bit too much mead involved in the construction of some cathedrals, I think:
One of the great things about medieval art and architecture is that people just went in and did things. They didn’t build models and scale them up, building great cathedrals and abbeys was a learning process as much as anything else. This means many of these apparently perfect aspirations to the Heavenly Jerusalem have some often quite comical mistakes, corrections and bodge-jobs that once you see, you can’t unnotice. There do seem to be a few more of them in English architecture than anywhere else, that makes it all the more fun to study…
Ok even I know arches don’t look like that
Just a bit of settlement abbot, nothing to worry about
I don’t know why we even bother sometimes
Uhh, master William, we’ve had a small problem in the triforium, some guy springed the arch at the wrong pitch and oh god it looks ridiculous
Naw, leave it, yeah
Seriously? William of
Sens had us redo loads of things because they were not up to s-
Look, I’m going to get this thing finished on time or my name isn’t WILLIAM THE ENGLISHMAN
And now for something a bit more local, although still controversial. The great Island Bay Cycleway blog explains why “the hypocrisy around cycleway safety needs to stop“. It’s a must-read article, and not just because they quote some blog posts I wrote:
Any objective discussion about safety on our roads really starts and ends with motorised traffic. To argue that separating people on bikes from cars, trucks and buses travelling at 50 kph is less safe overall is disingenuous and dangerous. If we really care about safety then let’s focus on motor vehicles and have a discussion about things that will actually make a difference.
Let’s talk about dropping the speed limit across Wellington to 30 kph. Let’s talk about about the design of roads and road geometry that encourages people to keep to safe speed limits. Let’s talk about giving pedestrians and cyclists on paths priority over turning traffic at side streets. Let’s talk about having more traffic lights and pedestrian crossings. And let’s talk about removing more on-street parking from Wellington’s roads in order to make more room for cycleways and footpaths (in Island Bay it is actually the preservation of so much on-street parking on The Parade that creates almost all the key risks that people perceive with the cycleway).
If we just don’t want to talk about these things that’s fine, life is full of tough choices and trade-offs and we might not be prepared to make some of those. But if we are prepared to mitigate, manage and ultimately accept the significant risks associated with having motor vehicles in our cities and suburbs please don’t be a hypocrite and tell me we can’t do the same for a cycleway.
To close, University of Auckland economics professor Ryan Greenaway-McGrevy explains (at interest.co.nz) why intensification is the only way we can bring down housing prices without imposing large losses on existing homeowners:
Suppose that house prices stood still, and that nominal household incomes grew at 3% per year, which is slightly higher than the 2.7% average rate of general inflation since 2000. It would take about twenty-four years for nominal incomes to double. That would lock a generation out of the property market. (And that is with an optimistic inflation rate; there are significant deflationary pressures in the global economy that could be here for the long term.) Another way to look at it: If house prices stay at the levels they are at now, household incomes would have to grow at about 5.1% to hit the Council’s target by 2030. Unless we strike oil in the Hauraki Gulf, that is just not going to happen.
The calculus is inescapable: House prices have to halve. They have to go back to 2006 levels. That is a difficult reality to come to terms with. And it will be even more difficult to actually achieve…
It is possible that some combination of the more reasonable demand-side policies would succeed in bringing down property prices by fifty percent. But such a policy would be quite reckless, and possibly push the economy into recession. It would come at a huge cost to those who have diligently used housing as a savings vehicle. And it would also push the mortgage on many recently-purchased homes underwater. That is a terrifying prospect for many families, because it massively increases the downside of involuntary unemployment for the breadwinner(s). Moreover, the reduction in household wealth would likely cause property owners to cut back on spending, lowering economic growth, and exacerbating the risk of recession.
Any policy that caused property prices to halve would not be fair to these groups of people. But the status quo is not fair to prospective home buyers either. The only policy option that is fair to both groups is to increase urban density.
To understand why, first note that there is a distinction between the price of a property and the price of a dwelling. With increased density there will be an increase in new dwellings supplied to the market, putting downward pressure on dwelling prices. But this does not mean that the price of property has to fall. Property that can be redeveloped under the relaxed density restrictions will retain its value: You can always bulldoze the villa and build two homes that make better use of the available space. That option to redevelop will be capitalised into the value of the property – and could in fact increase property values – provided that the unitary plan grants the right to redevelop.
Which brings us to the crux of the issue.
Increasing urban density is the only policy that ensures that both current and prospective home owners can win. Any other policy – including the status quo – will punish one of these groups. With increased urban density the average price of a dwelling will come down – allowing families to purchase a home at a reasonable cost – but the price of developable property will retain its value – ensuring that many current property owners won’t lose on their investment.
Property owners that oppose increasing urban density in their suburbs should be aware that properties that cannot be redeveloped could fall in value once the supply of dwellings increases. If they are not comfortable with a capital loss, then they should be lobbying for greater density in their neighbourhood – not opposing it.
That’s it for the week. Until next time!