Suppose we fully deregulated the housing market. What would happen? A common YIMBY trope is that cities would dramatically expand; the endless millions of people who have been priced out of New York, San Francisco, and LA would rush to enjoy affordable, spacious urban living. A common doubt, however, protests, “Most people don’t want to live in cities!”
What’s the real story?
To answer, consider the following scenario. X and Y are substitutes. For decades, there has been a 100% tax on X and a 1000% tax on Y.
What happens to consumption of X and Y if you suddenly abolish both taxes?
Theoretically, of course, it all depends on elasticities. The reasonable prediction, however, is:
1. Consumption of Y will almost surely rise massively.
2. Consumption of X will probably rise by a lot, but maybe not.
This scenario closely fits actually-existing housing regulation. Current regulation strangles urban construction, and heavily restricts suburban construction. If you got rid of this regulation, skyscrapers really would start going up all over high-priced cities – and millions of urban commuters would swiftly relocate to occupy these new buildings. Families with children would naturally be less-eager to go urban, but even they might be tempted by large, cheap apartments across the street from their jobs.
Plenty of other folks would respond by moving into all of the newly vacant – and suddenly cheap – suburban homes. This could conceivably fully satisfy suburban demand, but the more likely result is that developers would also take advantage of deregulation to subdivide existing lots and build lots more single-family homes. And of course other developers would buy up neighborhoods of old single-family homes, bulldoze them, and replace them with massive cheap apartment complexes.
“People don’t want to live like that”? That depends on the price. Deregulation doesn’t just make dream homes affordable. It also allows people to settle for ultra-cheap, so-so housing and spend the savings on their higher priorities. Whatever they may be.
READER COMMENTS
robc
Aug 31 2021 at 9:22am
SF (San Francisco) would look like NYC and NYC would look like SF (Science Fiction).
robc
Aug 31 2021 at 9:27am
To back some of that up:
The sweet spot in urban building is to build to a 9:1 building:land ratio. As land increases in value and buildings decay, a ratio of 2:1 or 3:1 is the prime spot for gentrification and building up to the next increment.
Due to regulation, SF is about 3 increments behind, as in many places downtown you are looking at a 1:3 ratio. I don’t think the immediate result would be buying a block of SFHs and knocking down and building something 27x as expensive, but some of that might happen until a new equilibrium was established.
Phil H
Aug 31 2021 at 10:34am
I don’t disagree with this, but there are two points to make.
First, I’m not sure there’s that much population (at the moment). Most of the US population is already urban; there aren’t that many people out there who want to move into the cities. If more immigration were allowed, then sure.
Second, much higher population densities make mass car ownership less feasible. More people would switch to public transport. That’s not a big thing in itself, but outsiders love to marvel at the American love affair with cars, and this site loves to moan about how socialist public transport is, so I guess it’s worth thinking about.
robc
Aug 31 2021 at 10:54am
The prices for relatively subpar properties in urban areas suggests the demand is high.
There are a lot of people in the bay area, for example, who would love to not be commuting over an hour to work. Of course, WFH has changed that somewhat.
Transit doesn’t have to be socialist, with the proper density it could be run by a for-profit for a profit. Or even run by a city thru user fees alone.
MarkW
Aug 31 2021 at 11:00am
Only if you count suburban and exurban as ‘urban’. If you mean, ‘living in central cities’ or living in multifamily housing without free off-street parking, then no — most Americans do not live that way. And the percentage of Americans in metro areas who live within dense central cities has been declining for decades (compare the ‘market share’ of, say, Chicago city vs the rest of the metro area in 1960 and in 2020 — the central city accounts for a much smaller fraction now — and that’s true in virtually every metro area in the country).
chris
Sep 2 2021 at 12:52pm
Part of the decline in population within cities is due to a combination of regulations that make large developments more difficult to build, high demand creating a market for developers to replace two-flats with much more expensive single family homes, and long term disinvestment in poorer areas, pushing those populations out. I know, for instance, that my neighborhood in Chicago consistently loses population while housing prices increase substantially, all because of the two-flat deconversions.
robc
Aug 31 2021 at 11:01am
Here is an example. That price exists because there is a huge demand to live in SF.
https://www.zillow.com/homedetails/1074-Treat-Ave-San-Francisco-CA-94110/15146836_zpid/
That isn’t a $1.8MM house. That is a $1.5MM lot with a $300k house (plus or minus on both). See my point above. Get rid of regulations and a bulldozer turns that block into high end condominiums, I would guess about 9 stories tall. The first movers would make a ton of money before the new equilibrium settled in. As pent-up demand is satisfied, property values across the city (and especially the suburbs) would crash.
But there is a lot of demand.
KevinDC
Aug 31 2021 at 12:00pm
There aren’t that many people who want to move into the cities given current pricing and availability, but that doesn’t imply that there aren’t people who wouldn’t want to move into the cities if pricing and availability were different. Right now, I “don’t want” to live in the city, in a reveal preference sense of “want,” because it’s too expensive. If prices were lower, then I would want to live there. This is what Caplan is driving at when he notes “‘People don’t want to live like that’? That depends on the price.”
Regarding “this site loves to moan about how socialist public transport is” – really? Searching the history of Econlog for “public transport” reveals a grand total of seven entries discussing public transport, going back to 2003. And most of them are just offhand mentions of it – one references how Italy handled public transport during Covid, another briefly mentions the low quality of the public transport system in Istanbul decades ago. One talks about how Japan’s widely renowned public transport system is actually mostly privately owned and operated – does that count as “moaning about how socialist public transport is” in your book?
Which ties into the next point- there’s no intrinsic reason why mass transit has to be “public” transit. When private mass transit systems aren’t legally forbidden from operating, they do quite well. Another one of those seven articles, for example, talks about the Mass Transit Railway in Hong Kong, which is a privately operated subway system, which puts public subway systems to shame in terms of cost and performance. Plus this EconTalk interview with Mike Munger about how private mass transit worked in Chile (before it was banned by the state) makes for a pretty interesting listen, if you have an hour to spare.
Chris
Aug 31 2021 at 12:35pm
A lot of the big dense metro areas also see a pretty substantial domestic outmigration right now, which is almost certainly caused in large part by housing costs. Even a small percentage change of “people moving from the Bay Area to Texas” could have a dramatic effect on populations in both places over time.
I don’t know what level of supply increase in the dense areas would actually make this change, but there’s got to be some level.
Ben
Sep 3 2021 at 5:39pm
The demand is suppressed. Even in Kentucky plenty of people who live in Elizabethtown commute to Louisville for blue collar jobs. Why? Louisville is expensive.
Same story plays out between Greenville county and Laurens county South Carolina.
To be clear, I’m not suggesting that housing density in Louisville or Greenville would look like NYC, but driving down housing costs could certainly encourage more movement from rural to urban areas (more likely suburban to urban, rural to suburban).
MarkW
Aug 31 2021 at 10:54am
Look at the lower-regulation cities now — are they denser or less dense than high-regulation cities? The answer seems to be ‘less dense’. I’m thinking of Phoenix, Houston, Dallas-Ft Worth, Salt Lake City, Las Vegas, etc. When cities have developed recently in lower-regulation environments, the rule seems to be lower density than ‘legacy’ cities.
Keep in mind, too, that if dense infill development is allowed, more housing is built and prices drop, but at the same time, congestion increases and traffic gets worse. And then there’s the effect of remote-work which — as the pandemic drags on — looks more and more likely to become a permanent change in the way we all live and work.
So my prediction is that there is less pent-up-demand for dense urban living than is commonly assumed and that relaxing housing regulations will not appreciably increase urban density in the U.S.
robc
Aug 31 2021 at 11:05am
It depends. Especially if at the same time we relax regulations we also relax subsidization. Water/sewer costs are roughly proportional with the number of pumps needed between the property and the water station, but the pricing model isn’t that way. If infrastructure costs were handled properly, there might be more demand for closer to the city dwelling, if not truly urban.
People might prefer living closer to the city than dealing with a septic tank. Or paying for their roads directly.
MarkW
Aug 31 2021 at 12:26pm
When distance grows and density is lower, a well and a septic field works great and at very low cost (which is what we have at our family cottage). The cottage is about 50 years old, and a new well was needed after about 40 years. Otherwise, the only cost is the minimal electricity needed to run the well pump. On the other hand, city water & sewer service here at home costs around $700/year (a number that has grown far faster than inflation). In the SE Michigan region where I live the Detroit-Water-Sewerage Department (now GLWA) which also serves a number of unfortunate regional communities (but thankfully not mine), is notoriously mismanaged. For water and waste disposal, I’d have to say ‘advantage low-density’ on this one.
Chris
Aug 31 2021 at 12:37pm
All of those cities are dramatically more dense than eastern suburban/exurban areas.
Lizard Man
Aug 31 2021 at 7:48pm
You need to compare apples to apples. I am pretty sure that Houston has the least onerous land use regulations of sunbelt cities, and is also the densest.
Andrew_FL
Aug 31 2021 at 1:26pm
“Most people don’t want” is a perfect encapsulation of how majoritarianism breaks peoples’ brains. Sure, most people may not want something. Plenty of people do. The point of markets isn’t to cater majority rule, but to consumers in general, including niche consumer demand.
TMC
Aug 31 2021 at 1:53pm
Around me, zoning laws can be voted on. If the owners (and renters) wanted more density, they’d have it. YIMBY people always project their wishes on everyone else.
Niko Davor
Sep 1 2021 at 12:28pm
You are suggesting that the zoning laws enforce the preferences of existing incumbent residents, not future prospective residents, and you seem to suggest that that is morally right.
The YIMBY argument is that incumbent resident preference shouldn’t overrule large number of prospective resident preferences, which is what zoning laws are often designed to do.
I find the YIMBY view more persuasive.
chris
Sep 2 2021 at 1:07pm
It’s actually more complicated than that even.
Current residents typically want to maximize their property value, which is why they often vote in NIMBY ways. However, at some point they want to sell, and at that point, a developer being able to maximize the value of that property through higher density becomes more important, so they take advantage of regulations allowing higher density. Essentially existing owners want to keep others from building dense developments but allow their property to increase in density at some point.
Further complicating things is that, while residents may not want things to change, the city definitely does, as the higher density increases the tax base, making for a healthier city.
As an owner of property in a city, I fully understand the NIMBYism of some, but I always argue for more development (as long as it’s quality), because it makes for a healthier, more vibrant city, increases my options for moving within the city in the future, and better supports the businesses and services I use and need (such as mass transit, or restaurants).
TMC
Sep 3 2021 at 8:08am
I’m suggesting that we respect property rights.
AMT
Aug 31 2021 at 4:07pm
Well, for both 1 and 2 to be true, that means you have a huge increase in the total number of housing units utilized. It seems unlikely that we would see that from the creation of new households. Some of the 20-somethings working at starbucks with their masters in art history might now be able to move out of their parents’ basement, but this number can’t be too massive.
The issue is that x and y are, for the most part, mutually exclusive (they are substitutes, after all). People typically live in just one home. The main exception is vacation homes. It is possible that if prices drop a huge amount, people might begin to have a home in the city during the week, and then a weekend home in the suburbs. But in order for both x and y to increase, the number of people with multiple homes would have to increase a lot.
It seems more likely to me that urban living would increase a fair bit, and suburban living would decrease a fair bit, probably slightly less, with the total quantity of housing units increasing a moderate amount because more people can afford to live on their own. How many people get a second home would depend on elasticities. I’m not sure how many would, especially given the potentially permanent trend towards more work from home, which will be a critical factor.
David S
Sep 1 2021 at 5:04am
There are significant marginal cost increases associated with the construction of taller buildings. These are driven by building codes and physics—and although some libertarians would like to abandon building codes, insurance companies would not.
The wicked tall residential buildings that have been going up in Manhattan are mostly speculative fetish objects. Similar to Bitcoin, but less portable. Even if their number were to triple across America they wouldn’t have a meaningful impact on housing consumption or density. Prices would fall at the “low end” of the spectrum but something like 432 Park Avenue would not turn into a mixed income vertical neighborhood.
The surge of subdivision and increase in density that Bryan suggests would play out is correct for some specific high value neighborhoods on the East and West Coast that currently have snob zoning. This might be constrained by the fact that speculators would be cautious about a “race to the bottom” when entering high income markets.
chris
Sep 2 2021 at 1:12pm
There are a huge range of densities between single family suburban development and super-talls. Recent reports indicate that developments of 5-10 stories are the sweet-spot for urban density, and would still be a huge increase in density for most cities outside of NYC perhaps. Even New Urbanist 3-5 story development would be an increase in density in most areas.
Yes, very tall structures are significantly more expensive to develop, however you can very cheaply develop a 5-story building following the existing building code. The hard part is getting it through city zoning right now in most cities, if it’s even remotely allowed in an area.
OneEyedMan
Sep 6 2021 at 8:24pm
Chris, I think you are already saying this, but just to be crystal clear, the cost of low rise apartment construction (excluding regulations) is generally lower than single family construction. Basically, the lower costs of sharing a roof, exterior walls, a boiler, stairs, and other standardization benefits more than offset the additional costs of building higher in the air. Ed Glaser has documented some of this.
OneEyedMan
Sep 6 2021 at 8:19pm
In a world where desirable urban living was inexpensive, many people would own second homes in rural areas or at least spend a lot more time renting such properties. When Americans got richer and the real cost of cars fell, they consumed more cars (absolutely but also per household), and the same thing could happen with housing.
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