The Federal Housing Finance Agency recently published a working paper where they looked at within-city house price gradients for a selection of US cities over a 40 year period. The goal of the study was to address what they call a “persistent blind spot” in local house price measurements.
Here is their diagram showing annual average real appreciation from 1990 to 2015 for 9 US cities:
The Federal Housing Finance Agency recently published a working paper where they looked at within-city house price gradients for a selection of US cities over a 40 year period. The goal of the study was to address what they call a “persistent blind spot” in local house price measurements.
Here is their diagram showing annual average real appreciation from 1990 to 2015 for 9 US cities:
The darker areas indicate more appreciation. They are generally clustered around each city’s CBD.
And here is an excerpt from the paper’s conclusion:
“In an area with a highly elastic housing supply, a permanent housing demand shock is first capitalized into prices, but over time as quantities adjust, prices return to pre-shock levels (see Glaeser, Gyourko, Morales, and Nathanson, 2014). In contrast, near the CBD, where buildable sites are less available and regulation is presumably more onerous, a permanent demand shock can outpace supply responses, leading to permanent price increases.”
What stood out for me was this last sentence. It’s a reminder of the perfect storm that many cities now find themselves in.
When everyone wanted to live in the suburbs, it was fairly easy to just build more homes. Supply was relatively elastic. And this kept prices in check.
However, the same is not true for city centers. Supply is relatively inelastic, meaning it’s much harder to build more homes when demand increases. And demand has been increasing.
So what we have today is a situation where many central cities are operating with basically a perpetual supply deficit. Hence the the comment about “permanent price increases.”
I don’t want to oversimplify the situation, the potential solutions, and/or the well-documented mistakes, but there was arguably a middle class price benefit to mass produced sprawl.
What should we be doing today to address housing affordability concerns?
What he did was dig deep into whatever data he could find – the data goes back to the beginning of the 20th century in some cases – to try and figure out a solution to San Francisco’s housing affordability problem.
Many (including myself) have argued that, at least part of the solution, is to build more, not less, housing. However, others, such as Tim Redmond of 48 Hills, have argued that building more market-rate housing would simply exacerbate the current situation.
In Eric’s analysis, he looked at everything from median rents and new housing units constructed (above graph) to annual wage growth and income inequality. I particularly liked his summary of the city’s various building booms.
In the end, here’s the conclusion that he came to:
“In the long run, San Francisco’s CPI-adjusted average income is growing by 1.72% per year, and the number of employed people is growing by 0.326% per year, which together (if you believe the first model) will raise CPI-adjusted housing costs by 3.8% per year. Therefore, if price stability is the goal, the city and its citizens should try to increase the housing supply by an average of 1.5% per year (which is about 3.75 times the general rate since 1975, and with the current inventory would mean 5700 units per year). If visual stability is the goal instead, prices will probably continue to rise uncontrollably.”
By visual stability, he is referring to maintaining the current urban fabric of San Francisco just the way it is. In other words, he is making the link between preservation and affordability in a prosperous and growing city.
Intuitively, this makes sense to me. It’s unrealistic to think that you can maintaining some level of housing affordability without allowing supply to increase alongside demand.
At the same time, I do not believe that preservation needs to equate to no changes whatsoever. Urban preservation, to me, should be about dutifully respecting the past while still looking firmly towards the future. And that’s how I believe successful should be approaching this problem.
The Centre for Urban Research and Land Development at Ryerson University recently published the following chart on their blog:
It’s a look at population growth across a few North American cities, broken down according to natural increases, net internal migration from other parts of the respective country, and net immigration from outside of the respective country.
When you sum up the pluses and minuses shown above, you get to population growth numbers that look like this:
Houston, Dallas, and Atlanta are monsters in terms of population growth. They’re obviously smaller than New York and Los Angeles, and so on a percentage basis they are really adding a lot of people. Much of this has to do with the ease in which housing can be added in those cities and their relative affordability.
Toronto is competitive with New York and Los Angeles in terms of an absolute number, but again our base is smaller so on a percentage basis we are growing faster. The big story with Toronto is our dependence on immigration to grow.
The one city on this list that might surprise some of you is Chicago. Toronto and Chicago share many similarities and are often compared. But when you look at how the Chicago metropolitan area is shedding people, you see that, at least in this regard, it’s in structural decline.
The darker areas indicate more appreciation. They are generally clustered around each city’s CBD.
And here is an excerpt from the paper’s conclusion:
“In an area with a highly elastic housing supply, a permanent housing demand shock is first capitalized into prices, but over time as quantities adjust, prices return to pre-shock levels (see Glaeser, Gyourko, Morales, and Nathanson, 2014). In contrast, near the CBD, where buildable sites are less available and regulation is presumably more onerous, a permanent demand shock can outpace supply responses, leading to permanent price increases.”
What stood out for me was this last sentence. It’s a reminder of the perfect storm that many cities now find themselves in.
When everyone wanted to live in the suburbs, it was fairly easy to just build more homes. Supply was relatively elastic. And this kept prices in check.
However, the same is not true for city centers. Supply is relatively inelastic, meaning it’s much harder to build more homes when demand increases. And demand has been increasing.
So what we have today is a situation where many central cities are operating with basically a perpetual supply deficit. Hence the the comment about “permanent price increases.”
I don’t want to oversimplify the situation, the potential solutions, and/or the well-documented mistakes, but there was arguably a middle class price benefit to mass produced sprawl.
What should we be doing today to address housing affordability concerns?
What he did was dig deep into whatever data he could find – the data goes back to the beginning of the 20th century in some cases – to try and figure out a solution to San Francisco’s housing affordability problem.
Many (including myself) have argued that, at least part of the solution, is to build more, not less, housing. However, others, such as Tim Redmond of 48 Hills, have argued that building more market-rate housing would simply exacerbate the current situation.
In Eric’s analysis, he looked at everything from median rents and new housing units constructed (above graph) to annual wage growth and income inequality. I particularly liked his summary of the city’s various building booms.
In the end, here’s the conclusion that he came to:
“In the long run, San Francisco’s CPI-adjusted average income is growing by 1.72% per year, and the number of employed people is growing by 0.326% per year, which together (if you believe the first model) will raise CPI-adjusted housing costs by 3.8% per year. Therefore, if price stability is the goal, the city and its citizens should try to increase the housing supply by an average of 1.5% per year (which is about 3.75 times the general rate since 1975, and with the current inventory would mean 5700 units per year). If visual stability is the goal instead, prices will probably continue to rise uncontrollably.”
By visual stability, he is referring to maintaining the current urban fabric of San Francisco just the way it is. In other words, he is making the link between preservation and affordability in a prosperous and growing city.
Intuitively, this makes sense to me. It’s unrealistic to think that you can maintaining some level of housing affordability without allowing supply to increase alongside demand.
At the same time, I do not believe that preservation needs to equate to no changes whatsoever. Urban preservation, to me, should be about dutifully respecting the past while still looking firmly towards the future. And that’s how I believe successful should be approaching this problem.
The Centre for Urban Research and Land Development at Ryerson University recently published the following chart on their blog:
It’s a look at population growth across a few North American cities, broken down according to natural increases, net internal migration from other parts of the respective country, and net immigration from outside of the respective country.
When you sum up the pluses and minuses shown above, you get to population growth numbers that look like this:
Houston, Dallas, and Atlanta are monsters in terms of population growth. They’re obviously smaller than New York and Los Angeles, and so on a percentage basis they are really adding a lot of people. Much of this has to do with the ease in which housing can be added in those cities and their relative affordability.
Toronto is competitive with New York and Los Angeles in terms of an absolute number, but again our base is smaller so on a percentage basis we are growing faster. The big story with Toronto is our dependence on immigration to grow.
The one city on this list that might surprise some of you is Chicago. Toronto and Chicago share many similarities and are often compared. But when you look at how the Chicago metropolitan area is shedding people, you see that, at least in this regard, it’s in structural decline.
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