San Francisco's Proposed Housing Moratorium Is a Bad Idea
It will come as no surprise when I say that the debate in San Francisco over housing is, well, heated. The latest in the drama playing out in the City by the Bay comes from Supervisor David Campos, who represents the city’s Mission District. Campos is requesting the city impose a moratorium on all new so-called luxury construction projects (basically all market rate projects) in the Mission for up to two years. The Board of Supervisors rejected the moratorium on Tuesday with a vote of 7-4 in favor (9 votes were required to pass as an "interim" ordinance), but proponents have vowed to place the ordinance on the November ballot.
As I’ve said numerous times in similar posts, concern over the rapidly rising rent and housing prices in San Francisco is both understandable and reasonable. Residents are leaving, prices are out of range for most, and change is ultimately difficult for anyone to deal with. However, a moratorium is not simply overreaction to the issue; it’s incredibly bad policy that will do far more harm than good to the very bloc of residents proponents are trying to protect.
Supply and demand is fundamental
Supply and demand is like global warming. It’s real whether you believe in it or not. The state’s Legislative Analyst’s Office agrees. There is an incredible dearth in the supply of housing compared to the high demand leading to high housing costs. Supervisor Campos argues that he and others don’t deny the existence of supply and demand, yet a moratorium is a very purposeful manipulation of the supply curve in the wrong direction. Campos argues that the housing market is more complicated than supply and demand alone. And it is. Yet the complex nature of the housing market and the real estate development industry does not negate the fundamental role supply and demand plays. Those calling for a moratorium while simultaneously insisting it would not have negative effects either deny this fundamental role of supply and demand akin to denying the realities of global warming, or are simply ignoring it for political and rhetorical points at the expense of the very bloc of residents they purport to protect. Instead, such market manipulation only helps those who stand to profit from continued scarcity: real estate investors.
I emphasize the investor because they are a unique group. While developers are, by definition, investors in real estate, the real estate investor does not have to develop anything. These are, for example, the wealthy foreigners buying property. They don’t buy property to build on. For them, all talk of moratorium is dollar signs to their bank accounts.
Moratoriums help investors and the rich, not residents
When you have a moratorium or any other policy that severely impacts the ability to construct new housing, you are only placing a cap of the supply of housing and ensure scarcity in the market. Ensuring scarcity does nothing to alleviate the demand for housing. After all, just because you aren't building more housing units doesn't mean we don't want more housing units. Sure, you may have saved your neighborhood from a new development you don't like, but you actually made your neighborhood that much more desirable for the non-developer investor. The end result is still higher housing prices with a more focused target on existing properties.
When an investor has no interest in building as a developer does, they also have no qualms about buying existing properties. Under normal circumstances, an investor would be less likely to park money in an existing older property because it will likely require additional work and upgrades to achieve its maximum return, which is usually less compared to other investment alternatives such as buying a brand new unit. However, when scarcity ensures higher prices, such as with a moratorium, the higher prices make investment in existing properties more appealing. An investor can buy a property that requires the additional time and expense of work and upgrades because the higher return will compensate for the added expense. In other words, you have created an even more appealing environment for more condo conversions of rental properties and, thus, Ellis Act evictions. I don’t believe those are consequences activists are seeking purposely, but absent policies that make investment a less lucrative action, such policies are nevertheless more likely as a result.
Even if we presume that we can stop investors who see real estate as a financial vehicle rather than a community building opportunity, we still have to deal with the simple fact that there are those who have more money and can afford these high prices. They aren’t going to stop wanting a place to live simply because there is a moratorium in place. If there are no new housing units to purchase, wealthy home-seekers will simply move down to the next tier of the housing stock—the stock that would otherwise be left to middle class residents—and easily outbid them, forcing middle class residents to the next tier of housing stock, and so on.
Think of it the same way as if you were looking to buy tickets to the next San Francisco Giants home game. More specifically, let’s assume you go to StubHub to buy your tickets, which uses a supply-demand model for pricing and explains why you pay more for the same seat at a Giants-Dodgers game compared to a Giants-Brewers game.
As a Giants fan ready to attend a game, you have a set amount of money you are able to spend on tickets and you want the best ticket you can get for that budget. Like in the real estate market, AT&T Park has different tiers of seating, ranging from luxury boxes to bleachers (for the sake of argument, let’s call them Tiers 1 through 3), and ticket buyers range in incomes and ticket budgets.
Let’s say we decide to block out all of Tier 1 (such as suites and field boxes). You can’t buy a ticket for these, but all other seats remain available. With an even lower finite number of seats at AT&T Park available, the prices on StubHub increase for the same game, but the budgets for all fans have not increased. If we assume everyone has an equally strong desire to attend the game (as we assume everyone has an equally strong desire to live in San Francisco), then those who were willing to pay for the Tier 1 seats that are no longer available will now use their funds to purchase tickets at the Tier 2 level. Though Tier 2 tickets are now more expensive given the black-out of Tier 1 seats, they can still afford to buy them.
Of course, those who were originally intending to buy Tier 2 tickets now face two hurdles. The first is that ticket prices have increased, which means many may be priced-out of those seats. The second hurdle is that they are now on StubHub competing for the same tickets with those who have a larger ticket budget than they do. Some might get lucky and snag a ticket before the others. Some might stretch their ticket budget to get in but have to forgo their hot dogs and beer to do it. Many, however, will likely lose out on those tickets.
Again, if the desire to see the game is equally strong among all fans, those who were originally going to purchase Tier 2 tickets are now going to look at the Tier 3 tickets, resulting in the same effect on those who were originally going to purchase Tier 3 tickets. However, as with housing, there are limited seats in AT&T Park. Thus, as the Tier 3 tickets are bought up, fans with the lowest budgets are ultimately unable to compete for tickets and can no longer attend the game, despite their equal desire to do so.
Not trickle-down economics
This has been an argument increasing in frequency lately; comparing the need to build more market rate housing to supply the market with more affordable housing as similar to the Reagan-era economic policy. Though catchy from a rhetorical standpoint, it doesn’t really apply here.
Trickle-down economics involves some kind of government incentive that results in indirect benefits to middle and lower-income groups. Usually, the benefits provided are a means to decrease the capital gains tax to the benefit of the firm or individual, which would somehow stimulate economic growth across the economy. Thus, the benefits would “trickle-down” to all income levels. For example, lower tax rates would allow a company more profit, which could then be distributed to workers in the form of increased wages. This, of course, rarely ever happens, and I join others when they say trickle down is bad economic policy. However, claiming the affordable housing required in new development (and thus the argument we need to build more) is a form of trickle-down economics is intellectually dishonest and untenable.
What separates trickle-down from what I will simply call “new construction theory” is that the benefit under trickle down, such as lower capital gains tax, is provided by the government without any hard agreement on how the firm may use its windfall from that benefit. As I mentioned, a firm may make more money with lower capital gains tax, but the government doesn’t require the firm to use that money in a specific way, such as paying more to employees. Under the new construction theory, however, benefits to the developer are offered in exchange for specified public goods. For example, the State Density Bonus grants increase density for housing projects if the developer agrees to provide additional affordable housing units.
Remember that in most cases, regulations requiring community benefits of new housing projects, such as affordable housing, are not incentives. In fact, the requirement to provide a percentage of affordable housing units in new development is often required without any concession by the city. In the cases where a concession is provided, such as the State Density Bonus, the incentive comes from the concessions the developer receives in return for providing a community benefit.
If we return to our San Francisco Giants ticket analogy, requiring community benefits would be like requiring a season ticket holder to sell 15 percent of their season tickets at below market rate prices on StubHub. If a season ticket holder is trying to make back the money they spent on the tickets to games they are unable to attend, they would raise the prices on the tickets that they can sell at market rate. Or they would simply choose not to sell on StubHub. Developers make a similar choice by raising prices on market rate units to compensate for the loss they take on their required affordable units. Or they simply do not build anything.
However, if regulators offered season ticket holders a voucher for a free hot dog at every game (stadium dogs are never cheap) in exchange for selling 15 percent of their tickets below market rate on StubHub, it may be enough to incentivize season ticket holders to do so. Such an offer is the same as telling a developer to build affordable housing in exchange for a taller building. I doubt even Reagan himself would call that trickle-down.
The irony is that if stopping new construction actually helped lower prices, which activists claim would be a causal effect, it would have happened already. San Francisco residents have successfully stopped many large development projects and new housings over the years, yet housing prices continue to climb rapidly. Some may argue that there is a building boom in San Francisco, and yet prices still climb despite mine and others’ arguments that more housing results in lowers prices. Therefore, supply and demand is not what’s at work here. This however is not the case at all.
If you will forgive the introduction of a second analogy, our housing crisis has been akin to the long-running California drought. We have been without a strong supply of housing for many years. There may be the appearance of a housing boom in San Francisco (cranes everywhere!) but this would be the same as if there was a heavy rain for an entire weekend and consequently saying there is no drought, or the drought is not nearly as bad as they say it is, because we received all that rain. Of course, as the LAO report shows, the severity of the housing shortfall is so great that even a burst of construction activity is only playing catch up to where we should have been years ago. We need more housing like we need more rain.
Concern is understandable, but bad policy is not
No one denies that housing prices are high—so high in fact that they are out of reach of the middle-class. We can all agree that we need to find ways to ensure a reliable stock of housing is available to everyone, but supply and demand is a fundamental part of our market economy. Whether you want to believe in supply and demand or not, its effects are pervasive across all sectors. Housing is no exception. Supervisor Campos states that evictions in San Francisco are up 38-percent in the past three years, but a moratorium only ensures scarcity, making real estate investment that much more lucrative, continuing to lead to increased prices and likely even more condo conversions and evictions.
It's important that we reject such rash actions as moratoriums on building. We should be doing more construction not less. We should focus on the right kind of government intervention that opens up opportunities to build, including upzoning for increased density, adaptive reuse of older buildings, reducing parking requirements, efficient and effective public transportation, increasing the number of by-right projects, and finally creating a replacement to community redevelopment agencies.
A moratorium, no matter how long, is the wrong solution to the housing problem and only hurts the very people it is intended to help.