In For A New Liberty, libertarian intellectual Murray Rothbard writes that leftist intellectuals had raised a variety of complaints against capitalism, and that "each of those complaints has been contradictory to one or more of their predecessors." In the 1930s, leftists argued that capitalism was prone to ‘eternal stagnation", while in the 1960s, they argued that capitalist economies had "grown too much" causing "excessive affluence" and exhaustion of the world's resources. And so on.
It seems to me that density-phobia involves a similar litany of contradictory complaints. Traditionally, low-density zoning has been based on a desire to exclude so-called "undesirables" and thus keep property values high.
But now that compact neighborhoods are becoming more desirable (and thus more expensive), the argument that density leads to poverty and plummeting property values can no longer be taken seriously.
But Not-In-My-Back-Yard (NIMBY) activists now have a new argument: that far from reducing property values, density increases them too much, by making the neighborhood too desirable. At first glance, this argument makes no sense: if a neighborhood that once had 20 apartment buildings now has 40, the supply of apartments is increased, thus keeping the price down instead of up.
But the NIMBYs notice the housing booms of New York City, Vancouver and some other compact cities, and thus conclude that density must mysteriously raise prices.
Why is this argument flawed? First of all, density and high prices have not always gone together. In 1950, New Yorkers spent about the same amount of money on housing as other Americans (about 25 percent). Thus, it is probably the case that high housing prices in New York are the result of pro-NIMBY zoning policies: according to Edward Glaeser's book Triumph of the City, Manhattan allowed 11,000 building permits per year between 1955 and 1964, but only 3120 per year in the 1980s and 90s.
Second, there are plenty of dense places that are more affordable than New York (such as Philadelphia) and not-so-dense places that are as expensive (such as San Diego and Sillicon Valley). At the end of 2011, the median sale price in New York City and its suburbs was $414,000- but the average sale price in Santa Clara/San Jose was $549,000. (See http://www.realtor.org/wps/wcm/connect/210258804a1865779a1aff7f116f4bb7/REL11Q4T.pdf?MOD=AJPERES&CACHEID=210258804a1865779a1aff7f116f4bb7 )
Third, the high price of new housing does not cause housing as a whole to become less affordable. If consumers prefer newer housing to older, the newest housing will always be the most expensive- but if the new housing causes an overall increase in housing supply sufficient to surpass demand, the price of older housing may decline (as has occurred in the Rust Belt, where suburban sprawl has led to declining property values in some urban neighborhoods).