housing policy

New ‘Luxury’ Apartments Are Good, Actually

Photo: Brandon Bell/Getty Images

The United States has more households than homes, and the gap between the two is widening.

Over the past decade, Americans formed 15.6 million new households and built 11.9 million new housing units. Last year, the pace of housing starts slowed while that of household formation accelerated to its fastest rate on record. As millennials continue aging out of their tolerance for roommates and into their child-rearing years, demand for floor space is poised to grow greater still.

Yet public policy actively suppresses housing construction in the U.S. Municipal governments have made it illegal to erect an apartment building on roughly 75 percent of our nation’s residential land. And since condo towers can house more people per dollar (and square foot) than single-family homes, these prohibitions make it harder for the housing supply to keep up with demand.

Some people look at this state of affairs and say, “We need to build more housing, and legalizing the construction of apartment buildings seems like one important way to further that goal.” Recognizing that the popularity of the sentiment “not in my backyard” is an obstacle to apartment construction, these people have come to identify as “YIMBYs” (i.e., people who say “yes in my backyard”).

Their analysis is oddly controversial on the American left. Many intelligent people with progressive values will bend themselves into pretzels trying to refute it. They’ll equate opposition to rules that enrich landlords at the expense of renters with support for “trickle-down economics.” Or they’ll insist that banning apartment buildings from 75 percent of all residential land mass couldn’t possibly have any negative impact on the supply of apartments. Or they’ll make up a long list of YIMBYs to get mad at.

Sometimes, they will make the important and true observation that making it legal for private developers to build more apartments will not by itself achieve housing justice. Too often, though, they’ll let this valid point devolve into the less credible claim that “legalizing the construction of apartment buildings will make the housing crisis worse.”

And unfortunately, on occasion, some reporters will treat the latter as a plausible analysis.

Last week, Bloomberg published an article titled “Cities Keep Building Luxury Apartments That No One Can Afford.” In it, reporters Prashant Gopal and Patrick Clark suggest that rising rents in Austin, Texas, discredit YIMBYism and vindicate that movement’s critics. But this argument rests on a misrepresentation of housing policy in Austin, a misinterpretation of the dynamics fueling rising rents in America’s cities, and a misconstrual of the empirical research on the relationship between new development and housing costs.

The piece’s strained attempts to validate progressive opposition to zoning reform are unfortunate since its authors ultimately make the vital and accurate point that such measures are insufficient for keeping fast-growing cities affordable. We need more new apartments than private developers can profitably supply. Making it easier for the private sector to create new condos is a precondition for resolving the housing crisis, but expanding the state’s role in housing development is too.

True YIMBYism has never been tried.

Bloomberg’s argument for how YIMBYism has failed Austin is simple. In 2021, the city and its suburbs issued nearly 26,000 multifamily-housing permits, more per capita than any major metro area since Las Vegas in 1996. And yet its rents are still too damn high.

“Inconveniently for the Yimbys, Austin, like other cities, is still way more expensive than it was years ago, even though it’s built so many apartments,” Gopal and Clark write. “Desirable cities around the world have all, one way or another, tried the Austin-style solution to their own housing crises. And they’ve all ended up in a similar bind: urban centers packed with luxury properties that regular folks can’t afford.”

There are several problems with this argument. The first and most basic is that Austin has not enacted anything resembling a YIMBY agenda. As Bloomberg itself noted back in March, Austin’s citywide zoning code hasn’t been changed since 1984. Single-family zoning still bars apartment buildings from much of the city’s residential land, and the legal barriers to upzoning are formidable.

In the summer of 2020, a developer submitted a request to rezone a single, 2.16-acre parcel of land presently occupied by a single-story home. The firm sought to replace that building with 33 condos, 17 of which would be entrusted to the Austin Habitat for Humanity and sold exclusively to low-income families. But nearby residents opposed the project. And in Austin, if a proposed rezoning attracts opposition from a group of homeowners who collectively lay claim to 31 percent of the land within 200 feet of the project, then the rezoning cannot pass the Austin City Council unless three-fourths of all councilmembers vote in favor of it. So the project died.

Meanwhile, as Bloomberg also recently reported, Austin’s zoning rules make it unusually difficult to build even single-family homes. The city’s minimum size for a single-family standard lot is 5,750 square feet, a requirement that discourages the construction of more modest and affordable starter homes. By comparison, the comparable minimum in California is 1,200 square feet.

Suffice it to say, YIMBYs do not encourage municipalities to (1) retain single-family zoning across much of their residential land, (2) give local homeowners more say over proposed rezonings than City Council majorities, and (3) maintain high minimum lot sizes for single-family housing. Therefore, it doesn’t make much sense to say Austin has tried YIMBYism and found it wanting.

Further, Gopal and Clark’s claim that other desirable cities have already tried YIMBYism in one way or another is even more baseless. In the U.S. context, the reporters support this assertion by writing, “California, Massachusetts, New York and Washington are all trying to make it easier to develop apartments on land previously reserved for single-family homes or other uses.” Which is to say, the reporters claim that America’s other major cities have already tried zoning reform, and they back this up by observing that many large states are currently trying to liberalize their zoning laws but have not yet done so. It is hard to understand how this is supposed to discredit the efficacy of zoning reform. Do we judge any other policy on the basis of whether it yields positive results before it has been enacted?

The second problem with Gopal and Clark’s argument about Austin is that they fail to contextualize the expansion of the city’s housing stock. Yes, Austin issued 26,000 new multifamily-housing permits in 2021. And yes, this was more per capita than most U.S. cities have managed. But whether this qualifies as a massive expansion of housing supply yielding “so many apartments” depends entirely on the trajectory of housing demand in the city.

Between 2020 and 2022, the number of office jobs in Austin increased by roughly 13 percent. No other U.S. city saw a larger expansion in white-collar employment.

In recent years, Tesla, SpaceX, Google, Apple, Amazon, JPMorgan Chase, Charles Schwab, Oracle, and other major firms have all expanded hiring in Austin. This has naturally attracted upper-middle-class workers from around the country. It is therefore not surprising that Austin could simultaneously expand its housing stock more than other cities and still see its rents increase.

Austin’s experience may demonstrate that small-bore incremental upzonings will not, by themselves, enable enough private construction to save fast-growing cities from rising rents. But since Austin’s zoning code still makes it illegal to build apartments in much of the city, its experience cannot tell us much about the efficacy of the blanket upzonings YIMBYs endorse. To argue otherwise is a bit like pointing to the existence of NYCHA and then to rising rents in New York City and concluding, “Well, NYC tried social housing and it didn’t work, so no reason to build any more.”

In any case, it certainly does not follow from Austin’s rising rents that housing there would be more affordable if the city had permitted fewer new apartment buildings. Yet this is what some of YIMBYism’s critics claim.

Umbrellas are not the cause of rain.

There is some ideological diversity within the YIMBY movement, and at its right fringe are libertarians who believe deregulating the housing market is the be-all and end-all of housing reform. This is not the view of the country’s most prominent and influential YIMBY organizations. Such groups have actively lobbied for social housing and eviction protections for existing tenants. Many progressive YIMBYs are ardent supporters of rent control. Thus, if all leftists could agree that repealing restrictions on multifamily-housing development is good but insufficient for resolving the housing crisis, there would be little reason for anyone on the left to use “YIMBY” as a pejorative.

But no such agreement exists. Some on the left contend that enabling the development of new “luxury” condos reduces affordability.

Gopal and Clark take this view seriously. Describing proposals to reduce “zoning restrictions near mass transit to encourage apartments, instead of single-family homes,” they write the following:

The idea is to promote “density,” or more people living on prized real estate, which increases the supply of housing. There’s another potential benefit: promoting clusters of highly paid, educated workers in fields such as finance and tech, which can lead to outsize productivity gains, according to many economists.

But the very popularity of these places with the affluent drives up housing costs, making it harder for companies to find workers and pushing firms to relocate elsewhere.

The apparent causal chain described here goes something like this: When cities legalize the construction of apartment buildings near mass transit, tech and finance firms respond by increasing hiring in those cities, which then spurs a large influx of affluent workers, which drives up the cost of housing, making it difficult for firms to find workers and thus forcing those businesses to leave the city. (Apparently, no one goes to upzoned cities anymore — they’re too crowded.)

The apparent upshot is that legalizing the construction of apartment buildings causes a city’s rents to rise. This idea is fairly popular. But it is also empirically dubious and theoretically confused.

As Noah Smith writes, believing that the development of new “luxury” condos causes high-income workers to move to a city is a bit like believing that people opening umbrellas during a drizzle causes it to rain harder. In other words, it is a confusion of cause and effect.

As progressives are wont to emphasize in other contexts, private capital tends to be risk averse. Housing developers aren’t going to build new condos in a city where demand isn’t already rising, in the hope that Jeff Bezos will hear about their building, shoot up from his chair, pick up his telephone, and shout, “The new tower on 12th and Sixth in [insert city] has a sick roof deck. Let’s open a new office there!” Rather, the causal arrow generally runs in the opposite direction: Firms start adding jobs in a given metro area, high-income workers move there, and private developers build new units in response.

It isn’t hard to understand why people miss this. New housing developments are highly visible. And just as the sight of pedestrians opening umbrellas on a city street often presages a downpour, new condo towers often presage further inflows of high-income workers and thus rising rents. But the umbrellas don’t bring the rain, and at the citywide level, the towers do not bring the gentrifiers.

When Amazon, Tesla, Google, and similar employers decide to expand hiring in your city, blocking the construction of new apartment buildings will not prevent their employees from displacing existing residents; on the contrary, it will make displacement worse. If there are no shiny new condo towers ready to absorb the incoming yuppies, the latter will simply outbid incumbent tenants for existing housing units. Any white-collar worker who has ever paid an exorbitant sum to live in an old rundown apartment in New York City knows that blocking new construction will not keep our kind away. Rather, in a context where a city’s high-income labor force is expanding, barring new market-rate housing will merely exacerbate displacement pressures.

A large body of empirical research supports the intuitive premise that expanding a city’s housing supply exerts downward pressure on market rents. To their credit, Gopal and Clark mention one such study in their piece, a 2019 paper from the economists Brian Asquith and Evan Mast, which found that new market-rate housing developments in low-income neighborhoods “decrease nearby rents by 5 to 7 percent relative to locations slightly farther away or developed later.” This is because the new buildings absorb high-income tenants, lowering upward pressure on the price of older housing units relative to other neighborhoods that lack such “yuppie flypaper.”

The empirical literature is not unanimous on the hyperlocal impacts of new construction, however. Gopal and Clark juxtapose the Asquith and Mast paper with a 2020 study from Anthony Damiano and Chris Frenier, which found that new construction had slightly reduced nearby rents in upscale buildings while driving up the prices of lower-quality units. This is an important finding, but it does little to undermine the case for zoning reform.

For one thing, it’s not as though all studies that examine the effects of new construction on low-income tenants in the immediate area affirm Damiano and Frenier’s basic narrative. A 2021 study of San Francisco’s housing market by the economist Kate Pennington found that renters who live within 100 meters of newly constructed market-rate housing tend to enjoy lower rents and a lower risk of displacement than those who do not live near such buildings. And several other studies on the hyperlocal impacts of new construction are consistent with that finding. For example, a 2019 examination of the New York City housing market by Xiaodi Li found that “for every 10% increase in the housing stock, rents decrease 1% and sales prices also decrease within 500 feet.”

More important, though, there is scant evidence that new construction raises rents on a citywide level. It is theoretically plausible that new condos could sometimes cause rents to rise faster in their immediate vicinity than in other parts of the city: As high-income workers begin concentrating in a given neighborhood, desirable amenities like new restaurants arise to serve them, and the area may then attract more high-income workers from other parts of the metro area. What’s not plausible is that the construction of new condos in Harlem will cause yuppies in Boston to quit their jobs and move to New York City. At the citywide level, it is job growth — not housing development — that sucks in affluent workers.

This has two big implications. First, to the extent that new development induces higher demand for housing in its immediate neighborhood, it simultaneously reduces demand for housing in other parts of the city by pulling yuppies out of other neighborhoods. Second, by extension, if every neighborhood blocks new development to avert the theoretical threat of hyperlocal gentrification, then they will all be liable to suffer larger rent increases than they would in a world where all tolerated new development. This is because blocking the condos will not keep the yuppies out of the city. And if there is no new housing stock to absorb high-income migrants, then they will even more aggressively outbid tenants for existing units.

These conclusions don’t hold up just theoretically but empirically. In a 2019 study, Mast examined address-history data from 52,000 residents of new, market-rate, multifamily buildings in large cities. He found that new (so-called “luxury”) buildings attracted many high earners out of low-income neighborhoods with lower-quality housing stock. Analyzing these migration patterns, he estimated that adding 100 new market-rate housing units to a city tends to attract between 17 and 39 people out of bottom-quintile income tracts, thereby reducing demand for housing in the city’s lowest-income neighborhoods.

A 2022 paper on Helsinki’s housing market provides even stronger evidence that new market-rate construction reduces demand for existing housing units at the citywide level. Examining government data tracking where individuals move to and from, researchers found that new market-rate construction attracted high-earning tenants from across the city, putting downward pressure on rents in middle- and low-income neighborhoods. A 2020 study of the impact of new construction on rents in German cities yielded similar results.

It is worth reiterating that, even at the neighborhood level, new construction is often associated with lower rents. But there is some empirical and theoretical cause for fearing that, in certain cases, it can have the opposite effect. This fact constitutes a sound argument for rent control, rental subsidies, and other protections for longtime tenants in fast-growing areas. It does not make a strong case for blocking new housing through zoning restrictions. If every gentrifying neighborhood were to block new development, they would all end up suffering more displacement.

You cannot achieve housing justice in high-demand cities by banning new market-rate units. But you also can’t do so through private development alone.

Big government should become a big developer.

The poorly substantiated, anti-YIMBY framing of Gopal and Clark’s article is unfortunate since they eventually arrive at the entirely reasonable conclusion that new market-rate development is insufficient for ensuring affordability.

It is true that we don’t actually know how large an impact full-bore YIMBYism could have on rents because no large metro area has legalized apartment buildings on the entirety of its land mass while repealing all unsound, development-discouraging regulations such as parking minima and two-stairwell requirements. But we do know the private sector by itself will never provide adequate housing to our economy’s least fortunate. Or at least it will not do so as long as our economy’s least fortunate are forced to subsist on scant income.

By the same token, we know the amount of housing that is socially useful exceeds the amount that is profitable to build. When the Federal Reserve raises interest rates, the need for new housing in fast-growing cities does not instantly decline — but the incentive for private developers to supply such housing does. This is true for two reasons. First, higher interest rates increase a developer’s borrowing costs. And second, higher rates also raise the bar of profitability that any new housing project must clear. If one can secure a risk-free 5 percent return on a certificate of deposit, then any innately risky investment in new housing must promise a return well in excess of that figure.

From the standpoint of municipal governments, by contrast, the value of new housing does not hinge on its profitability. Such governments are also under no obligation to maximize the financial return on their investments. And they typically already own a lot of their city’s undeveloped land. Put these three traits together, and you get a case for city governments to get into the development game.

Of course, states’ directly financing the construction of public housing is not a novel proposition. And in most cities, it is not currently a politically viable strategy to pursue at the socially necessary scale. Low-income tenants cannot afford to pay rents high enough to cover the costs of maintenance or construction, so building projects that exclusively serve that population requires substantial tax revenue, which voters are often reluctant to provide. For this reason, cities have increasingly opted to expand affordable housing by giving tax breaks to private developers that include a few income-restricted units in new market-rate buildings.

But governments can get more bang for their buck by cutting out the middleman and directly financing new mixed-income housing on the front end. In Maryland, the Montgomery County Housing Production Fund offers one model for how cities and states can do this. The HPF invests in new housing projects by providing cheap financing to developers interested in constructing buildings that feature a mix of market-rate and low-income units. This has two advantages over the “tax breaks for a few affordable units” model. For one thing, by providing capital upfront, the county can secure a much higher share of new units for low-income tenants than it typically does with tax-subsidized private developments. More critically, by securing an investment stake in the project, the county secures a cut of the new building’s market-rate rents. This effectively enables the county government to profit off rising land values and then use that money to (1) offset the cost of providing housing to low-income tenants and (2) invest in additional mixed-income projects.

In other words, the government effectively creates a largely self-sustaining, publicly owned housing financier. Unlike private housing investors, this entity can afford to provide zero-interest financing to developments that promise narrow profit margins. And unlike traditional public housing agencies, it can continuously expand the supply of affordable housing without requiring large tax increases. The mixed-income-housing model has the additional benefit of promoting socioeconomic integration.

Progressives across the country have taken notice. Rhode Island’s House of Representatives is currently considering a bill that would invest $50 million into the nation’s first statewide revolving fund for mixed-income housing. In February, Seattle established its own public housing development authority. As in Maryland and Rhode Island, Seattle’s social-housing plan aims to sustainably provide affordable housing to low-income tenants by collecting higher rents from middle-income residents.

Upzoning will not be sufficient to keep places like Austin affordable, and resolving the U.S. housing crisis requires changing the nature of government intervention in housing markets, not eliminating such intervention. We need to leverage the power of public financing and land ownership to build more affordable housing than the private sector will provide. We need rent control and other protections for longtime tenants in gentrifying areas. We need to redistribute income to our society’s poorest residents, whether through cash transfers or rental subsidies.

But we also need to stop actively exacerbating the housing shortage by making it illegal to build apartment buildings in wide swaths of our metro areas. Progressives who spend time and energy opposing that objective, or demonizing those who agitate for it, are helping rentiers get rich at tenants’ expense.

New ‘Luxury’ Apartments Are Good, Actually