Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

What favelas can teach us about America

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Anthony Ling, an excellent Brazilian blogger who also happens to be an avowed market urbanism, gives us an interesting look at the politics and economics of low-income housing in Brazil:

In Brazil there is a vast regulation defining what are the minimum requirements to have a building approved by local authorities. The most common example is probably the Building Codes set by each city, but specific details imposed by planning, environmental and building departments of each city are added to the equation. The recently created Performance Standard also follows this same path, being enforced nationally.

The explanation given to establish this regulation is the legal guarantee that every citizen will have a minimum quality of living. However, those who study public policy understand that the passing of a law does not miraculously create high standard buildings accessible to all and, like many other laws, produces effects opposite to those desired. The lower standard building prohibition does just that: tough regulation prevents entrepreneurs from building accessible housing for the poor. This results in government spreading the idea that entrepreneurs think only about attending the high class, and transforms itself as the hero that will build millions of popular houses, as [Brazilian Pres. Dilma Rousseff] did with the Minha Casa, Minha Vida [My House, My Life] program.

I think this has a very close parallel in modern American cities with inclusionary zoning and affordable housing mandates. In Brazil, the government creates a housing shortage by having unrealistical building safety standards (which ironically, as Anthony explains, encourage slums that are completely unregulated) and then swoops in and acts plays the savior with its own housing projects. In America, the government creates the shortage through sprawl-forcing zoning codes.

But unlike Brazil’s public housing, our politicians instead use rent control (rebranded as “inclusionary zoning” or “affordable housing”) to supposedly bring down the high prices that they unknowingly created. This is great for the lucky few who manage to get apartments (often middle-class public employees), but it acts as a further constraint on supply for the vast majority of renters and homebuyers, who have to buy market-rate housing, and sends prices even higher. The voters, who are just as economically illiterate as their elected representatives, then clamor for even more affordable housing, and the cycle repeats itself, resulting in ever higher housing prices.

The American planning profession has mostly learned its lesson about parking minimums and low-density zoning (at least in theory), but they remain stubbornly in favor of the density taxes known as affordable housing. Come to think of it, I can’t think of any progressive urbanists who have come out against inclusionary zoning and affordable housing mandates (with the exception of Matt Yglesias). Can you?

Comments

  1. Stephen – the narrative you’re weaving around affordable housing is too simple. The way you tell it, affordable housing is a scheme by the planning elite to make people dependent on the government. But the messy reality is that there is no single, over-arching “government” that creates sprawl-inducing zoning codes. As we both know, zoning happens at the municipal level, where local interests, typically upper and middle class homeowners, insist on low-densities and other exclusionary policies. The pressure rarely comes from government officials and planners. To take an example, I was doing some work in Concord Mass, a posh Boston suburb, and it was the planning department that was the biggest advocate for lowering exclusionary policies. It was the voters (whom you believe to be the group clamoring for more government-provided affordable housing) who wanted to keep their town just the way it was by excluding any dense development. This sentiment isn’t necessarily confined to well-off people either. I would hear homeowners in working-class Baltimore neighborhoods speak out against apartments because they thought the apartment-dwellers would be a source of crime and drugs.

    This is the political context that inclusionary housing programs were created in. Yes, I too would like to live in a country where wealthy people were more accepting of urbanism and what comes with it, but the reality is that I don’t. And it feels great to get righteous and say that a property owner shouldn’t have the right to decide what another landowner does with his property, but again, we both know that the municipal authority to zone isn’t going away, either. To cite a Massachusetts example again, I wish 40B wasn’t necessary, but with towns like Concord, it is. So, to me, inclusionary housing is a necessary policy. Maybe the micro-economics are messy, but if you can think of a better way to provide affordable housing within the basic political framework we have, I would like to hear it (I’m not being sarcastic, I actually would).

    I would also agree with you that there are some regulations that can be rolled back – minimum space standards come to mind, and there is a group in New York City doing some work on that but I forget the name. My main criticism is that your misunderstanding of land use politics leads to a distorted view of why we have the policies we do and why some might be necessary.

    And I don’t know of any affordable housing program that favors middle-class public employees at the expense of private-sector workers. What program are you referring to?

  2. I don’t disagree with the basic premise that over-burdensome regulation increases housing prices, which then justify government actions to create affordable housing. But, it’s important to realize that there is no unified government actor here. The parking minimums and zoning codes that reduce supply and drive up price are the purview of local governments and are pushed by interest groups opposed to growth/change. Affordable housing programs are legion and range from local to state to federal government, residing in various departments and pushed by a very different set of interest groups. The policies that exist are primarily a compromise between these varying stakeholders.

    The affordable housing programs you cite are very different and have different impacts on the market. Rent control is a price ceiling, and its distortion causes quirks in tenant selection and incentives against reinvestment. Inclusionary zoning is a different tool entirely, providing incentives or penalties depending on which exact local policy you are considering with market distortions depending on the exact tool but usually encouraging an increase in supply (density bonuses for example). Other mechanisms include subsidizing consumers or subsidizing producers, both of which increase supply but with different effects.

    I don’t understand how you reach the conclusion that affordable housing programs increase prices, let alone on the same level as parking minimums and restrictive zoning, when most programs have the effect of increasing the overall supply of housing.

  4. yes and no. The current local zoning in most places has been pushed hard by the FHA for decades. FHA guaranteed loans = people moving into town.

  5. I believe that here Stephen is referring to affordable housing programs that are inacted as subsidies (for either consumers or producers) rather than price ceilings. These programs both increase the supply of housing and increase the price of housing for those who do not receive the subsidies. This effect can be seen perhaps more easily in healthcare where Medicare and Medicaid drive up costs for patients who are paying out of pocket. The out-of-pocket cost is lower for consumers who do receive subsidies, but for everyone else out-of-pocket costs rise with subsidies.

  6. Good point – you’re right that the FHA only insured mortgages in “good neighborhoods” which usually meant white-only, low-density suburbs. But to what extent are those overtly pro-suburban guidelines still in effect? I don’t want to get into the whole debate about whether suburbs were driven by the market or by government, but my point is that in most places, (ie, outside of poor urban neighborhoods), the voters are the ones fighting against affordable housing, not the ones clamoring for it.

  7. Good point – you’re right that the FHA only insured mortgages in “good neighborhoods” which usually meant white-only, low-density suburbs. But to what extent are those overtly pro-suburban guidelines still in effect? I don’t want to get into the whole debate about whether suburbs were driven by the market or by government, but my point is that in most places, (ie, outside of poor urban neighborhoods), the voters are the ones fighting against affordable housing, not the ones clamoring for it.

  8. In theory, a consumer subsidy in housing (mobile vouchers for example) can drive up price if supply does not respond. If supply responds (and housing supply is very chunky in its elasticity) there is no problem. In practice, there are no consumer subsidy programs large enough to exert much upward pressure on rents. Even in markets serving many many low-income people, property managers only expect a portion of their residents to be voucher-holders, and they can’t practically raise their market-rent units in response.

    Supplier subsidies (project-based Section 8, LIHTC, etc) increase supply – often of market units as well as a range of affordable units since deals are most commonly structured with mixed financing. How exactly does raising supply increase price?

    Medicare and Medicaid do not act as consumer subsidies that increase demand of a fixed supply of goods and thus increase prices. You have read somewhere that they can cause cost-shifting onto other payers. The extent to which that happens is debatable, but the mechanism by which it can occur is the difference between the lower reimbursement rates for Medicare and Medicaid for certain services than those from private insurers (but not necessarily out-of-pocket, who can afford surgery or radiology out of their personal piggy bank?) so hospitals may depend more on the private insurers for positive program income. Of course, that depends on the relative bargaining power of the provider and the payer since rates for medical services are based solely on negotiated agreements that bear very little direct relation to any market mechanisms. In terms of other out-of-pocket medical costs such as co-pays, deductibles, and co-insurance, your payments are based entirely on the plan structure and underwriting of your insurer and the numbers set by public and private insurers don’t influence each other. As complicated as housing finance is, medical finance is much, much crazier. I’d shy from using it as a simplifying analogy.

  9. Government programs cannot increase the supply of a good without driving up the price as well. The additional cost may be borne by taxpayers entirely, but in the case of housing subsidies it is generally shared by taxpayers and those consumers who must pay the

  10. The explanation is that supplier subsidies often displace market-rate housing. Other times, the displacement could come from politics rather than from narrow application of the law. For example, New York offers a 20% FAR bonus if developers include affordable housing – but the city still gets to approve or deny permit applications, and some developers feel compelled to offer more affordable units because of political pressure.

  11. That’s not how it works. A developer will propose a unit mix that makes the best economic sense for the project. If a density bonus would allow him to build additional units, he will do so to the extent it helps the development’s bottom line. Density bonuses work by creating additional units that would not otherwise exist (until we tackle restrictive zoning!) and cannot in practice “crowd out” any significant number of market rate units. I am more familiar with Boston’s programs, which allow developers to donate to an affordable housing trust fund rather than include the affordable units in their development. So, a downtown condo tower can still include all of the market units and the donation goes to construction of affordable units somewhere else. This results in more overall supply. More overall supply at any level reduces competition for units at all levels (if there’s not enough affordable housing, people tend to crowd into market units). It doesn’t create upward price pressure on market units.

  12. You are completely neglecting the housing that is never built because
    certain site’s can’t justify building x units at a loss in order to build
    enough market rate units to justify doing a development.

    These schemes (I’m familiar with Boston – and did some research at MIT on
    these so called “bonuses”) only transfer housing from the middle class to
    the lucky lottery winners of the “affordable units. The rich will still be
    able to live in Boston. The middle and those who don’t win the housing
    lottery are squeezed out of town.

    But you’re right to point out that all of this is just playing political
    games with housing “until we tackle restrictive zoning!”

  13. You’re talking about density bonuses like they’re really bonuses. But in practice, what I’ve seen is that neighborhoods will purposefully downzone so that to build what would have been allowed by right earlier, the developer needs to add affordable housing. I can’t find the link now, but I actually remember some neighborhood in Manhattan actually explicitly fessing up to doing that. I’d like to write a longer post about it sometime, but that’s my main problem with density “bonuses.”

  14. In New York, the permit process is onerous enough that developers have been kowtowed by community and NIMBY demands. For example, in Flushing, and I believe also on the Brooklyn waterfront, the community boards are pressing two separate megaproject developers to include more parking. Something similar happens with affordable housing; developers wouldn’t include 35%+ affordable units in a project that’s required to have 20% just because they want to be altruistic.

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