Why Paul Krugman Blew It on His ‘Solution’ for Gentrification

Yves here. As someone who has chosen to live in large cities as an adult (New York, Sydney, and for a few months on a project, London), I greatly prefer the vibrancy of areas with a mix of income levels, as opposed to the sterility of urban areas that cater strictly to the upper middle class and wealthy (and worse, since parts of London have a neutron-bombed feel by virtue of how many of the global wealthy have apartments there that they only occasionally inhabit).

One of the fallacies that this article addresses is the idea that promoting more development in cities leads to more affordable housing. The reality is that developers, absent carrots and sticks (incentives and requirements) will build housing for the moderate to seriously well-off, because the returns per square foot are higher. The increase in construction cost for putting in a few more amenities and using better materials and fixtures is disproportionately rewarded in higher sales prices and rents. And that higher-cost housing is just not fungible with “affordable” housing.

One remedy that was very effective, and also attractive to developers was Section 8 housing, which provided tax breaks for building affordable rental housing. Steve Ross, now a Forbes 400 member (known best for developing New York City’s Time Warner Center, but he was a billionaire long before that), started out doing Section 8 housing.

By Randy Shaw, the author of Beyond the Fields: Cesar Chavez, the UFW and the Struggle for Justice in the 21st Century (University of California Press) and the Executive Director and Supervising Attorney of the Tenderloin Housing Clinic in San Francisco. Originally published at Counterpunch

I usually agree with NY Times columnist Paul Krugman, but he is surprisingly misinformed on the causes and solutions to urban gentrification. A case in point is his November 30 column (“Inequality and the City”) blaming “land use restrictions” for promoting gentrification and identifying the solution as “increasing the housing supply.”

Krugman surely knows that “the 90%” he wants to keep in New York City do not benefit from new housing they cannot afford. These households need below-market housing that is subsidized by government and/or private developers, a solution barely referenced in his column.

Many dispute whether increasing market rate housing ultimately reduces rents for the non-wealthy by increasing supply. But there is a near consensus that new construction must be coupled with stringent tenant protections and more subsidized housing to forestall gentrification.

Land Use Restrictions

Krugman’s blaming of land use restrictions for rising housing costs in urban America is also misplaced.  Restrictions that limit rental housing and keep tenants out of neighborhoods and entire cities are clearly a cause of the nation’s housing crisis, but such policies are not what ails New York City or other major urban areas.

To the contrary, New York City is a case study for how loosening land use restrictions promotes gentrification. That’s because allowing thirty-story condo towers in formerly low-rise neighborhoods like Williamsburg rapidly expedited the gentrification process. This new housing, like most of that built after the Bloomberg Administration’s massive upzoning of as much as 35% of the city, did not serve “the 90%” and instead contributed to the city’s most recent displacement wave.

Land use restrictions are actually among the most critical tools for those seeking to slow or stop gentrification.

In my new book, The Tenderloin: Sex, Crime and Resistance in the Heart of San Francisco, I show how San Francisco’s still primarily low-income Tenderloin neighborhood avoided gentrification despite being surrounded by neighborhoods and a city of dramatically increased wealth. A key factor in this outcome was the enactment of tough land use restrictions that deterred upscale uses.

These restrictions included a 1985 rezoning that brought height limits down from over 40 stories to eight in much of the Tenderloin and thirteen on the borders. The rezoning also banned non-residential uses above the second floor, and barred new tourist hotels.

Since a major component of the Tenderloin’s housing stock is SRO hotels, the Tenderloin also was part of an effort to pass citywide restrictions on their conversion or demolition. These tough land use restrictions imposed on the SRO industry helped stop, rather than facilitate, the neighborhood’s gentrification.

Similarly, San Francisco’s rent control and just cause eviction laws are a leading bulwark against gentrification both in the Tenderloin and in other San Francisco neighborhoods. While state law preempts the city’s ability to restrict rents on vacant apartments, local controls are extremely effective at keeping tenants in large buildings in place.

Krugman famously opposes rent control laws, calling San Francisco’s then much weaker law in 2000 “draconian.” Having long failed to recognize that rent control is essential to stop tenant displacement in potentially gentrifying neighborhoods, Krugman still believes that the housing crisis is caused by land use regulations suppressing supply rather than an unrestricted market leaving housing that “the 90%” cannot afford.

Ignoring State and Federal Funding

Gentrification is most effectively resisted when nonprofit organizations provide housing that is off the speculative i.e. unrestricted market. This is one of the factors that distinguished San Francisco’s Tenderloin, which has roughly a third of its units off the speculative market, from the nearby Mission District, which failed to match the Tenderloin’s aggressive acquisition of nonprofit housing sites.

Creating this nonprofit bulwark against an overheated housing marketplace costs money. Yet Krugman’s analysis of the urban housing crisis ignores that maintaining economic diversity requires significantly more state and federal housing funds.

This omission is even more unfortunate than Krugman’s erroneously blaming land use restrictions for growing urban inequality. Because if there is one feature lacking in today’s seemingly saturated media landscape, it’s a national columnist or reporter promoting affordable housing.

Housing is as far off the national stage as ever before. It’s been ignored in both parties’ presidential debates and even Democratic Governor Jerry Brown in the bluest of states vetoes a major housing funding bill. To have someone with Paul Krugman’s national stature be a voice for increased state and federal housing funding could make a huge difference in returning the housing crisis to the nation’s agenda.

Krugman ended his November 30 column by saying he would revisit the issue. Let’s hope he does soon, and next time gets the ingredients necessary to keep longterm urban residents in their neighborhoods right.

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  1. CornerStore

    I think it is difficult to justify not increasing the supply of housing when faced when increasing demand. There is much that can be done to preserve affordability (landmarking, rent control) while still supporting the growth of housing units. Much of the housing in NYC that’s affordable was privately built (and probably overbuilt) that has gotten cheaper over the years due to filtering. Look at inner city neighborhoods elsewhere where many low rent units are found in single family homes built over a century ago. Provided displacement can be minimized or mitigated, the only way you can get yourself out of a housing crisis is by building your way out of it.

    Let’s not forget that housing capacity in NYC has been artificially deflated over the years through downzoning, whereby a number of neighborhoods (with siginifcant political and financial clout) were able to lobby to have more land use restrictions put in place, thereby stunting growth in those neighborhoods and forcing mega developments in places that didn’t have the means to fight against it. Additionally, NYC’s tax code squeezes out many small builders who would build small and mid-size apartment buildings (which themselves tend to produce more affordable units in cities nationwide), whereas the land and capital intensive high rises tend to hardly ever be naturally affordable on the outset unless inclusionary units are in place.

    Due to construction prices, new construction will almost always be more expensive to live in than older housing stock. Today’s market rate housing is tomorrow’s affordable housing.

    1. Yves Smith Post author

      Another big factor in Manhattan, and I suspect this is now happening in Brooklyn too, is that townhouses, which had been originally built as homes for a single family (sometimes with servants quarters with a separate entrance) were turned into multi-unit dwellings. And these were often very comfortable units. The second apartment I owned was carved out of a townhouse, and my unit was 1100 square feet, with a second apartment of just about equal size on the same floor. Over the last 20 years, the majority of these buildings have been reconverted to single-family use, and in some cases of ostentation, two (I’ve even heard of an instance of three) townhouses have been converted into a home for one family.

      1. Carol S.

        You are so right! The rich and greedy insist on living in the hearts of cities the way they did in the suburbs, with enormous homes big enough to hold their mountains of status possessions. I saw the reconversions in my home town San Francisco displace thousands of people as Victorian mansions designed for large extended families and their servants and later converted into apartment houses were reconverted into single family homes, often for one or at most three people. Now it’s happening in Portland, Oregon where I now live. For those of us who can’t afford to buy because we have merely middle-class incomes, a 175 sq ft room in a newly constructed building now costs more than a 650 sq ft one bedroom apartment did 5 years ago, and the rich are enjoying big houses downtown where poor people used to live because it’s really the only part of town with reasonable public transportation. And thousands of homeless sleeping outdoors. Now with thousands of unhosted airbnbs opening, soon even the tiniest apartments will be off the market in every area except the areas with no public transportation at all. People are already going onto public assistant because they have to move so far out of the city center that they can no longer get downtown to work. (Note for suburbanites: minimum wage workers who live in cities rarely have or can afford cars.) This is the future of unregulated greed.

  2. doug

    Thanks for this excellent post pointing out what can only be called ignorance on the part of Krugman. Having read his NYT column, another word applies as well: laziness. In any course about housing and public policy, this essay by Krugman would deserve an F. Not even a D plus.

  3. Steve H.

    I spent a year after Katrina hit trying to build low-income housing in the college town I live in. The underlying land values shredded the plan. Those prices were not hit hard by the financial collapse.

    The City built about a dozen or so units, but attrition has been scraping away what-was, with little what-will-be. We now have multi-story megabucks condos downtown which have utterly altered the character of the main street from ten years ago. Nothing lower-density lower-cost is in the pipeline, and an interview in the paper gave the incentives: a builder said, once the main structure is built, stainless-steel sinks and marble countertops are a negligible investment for a much higher return.

    None of this would go without outside money coming in. The three thousand Chinese students we have are making the President of the University look brilliant. Local author Gregory Travis spells out the situation with brutal clarity:

    Local government exists for one reason and one reason only: to decide how land gets used. Everything, and I mean everything, that local government does deconstructs to a decision about which landowners will win, and which will lose.

    Who gets rich, and who doesn’t.

    1. Jack Heape

      A very good point. They (the local govt) also determine the quality of the developments that are approved, along with the required or nor required, infrastructure, such as sidewalks, green areas, roads, water, and sewer. Far too often the developers get away with pocketing outlandish profits and the citizenry get stuck with the costs of building the infrastructure to support the new developments. Developers look at political contributions (aka bribes) as just a cost of doing business.

      1. Steve H.

        Travis had another article that takes your point and goes beyond it:

        Having been created by INDOT, the locational advantage was already there. It was just up to Crider, with its elite knowledge of the road’s plans, to take advantage of it. That they did by going on a shopping spree, ultimately purchasing nearly 500 acres of the land surrounding the road corridor.

        And they got one more thing.

        Not only did they put themselves in the catbird seat through their excellent application of structural speculation, but they put a cherry on the top by getting INDOT to award them with the contract to build the road itself!


      2. Gio Bruno

        The comment about who pays for infrastructure in a city is critical to understanding the “costs” of development. Consider the cost of expanding/constructing a sewer plant: it is paid for by assessing ALL the sewer users for the new construction (Average Cost Pricing). If the developer paid the full cost for the needed expansion (Marginal Cost Pricing) the number of housing units (toilets) would drop (be less attractive).

        Taxing a community via ACPricing is essentially a “giveaway” to developers. Much new development does little to improve the lives of existing residents.

    2. dejavu

      “The underlying land values shredded the plan. ” The underlying land “values” are directly related to the zoning of the land or the potential of rezoning the land. This is pretty basic. In NYC land “value” often exceeds the price at which middle income housing can be built because there are potential purchasers who bank on the rezoning of the land. This is pretty basic economic concept, one not even understand by the economically naive or captured Board of Standards and Appeals (the NYC zoning board) which allows land value to be based upon anticipated zoning free values. Maybe Krugman does not get this either.

  4. wbgonne

    I live in Boston. I am not a real estate expert but I am aware that Massachusetts has a law that allows developers to secure variances if they provide certain amounts of affordable housing. I will just report what I have observed, having been here since the early 80s. Under Mayor Menino, development proceeded at a steady but modest pace. The city retained its essence and avoided the Manhattanization that so many in Boston resisted. Under Mayor Walsh, however, it appears that restraint has been defenestrated: we are in the midst of a monumental building boom, with cranes everywhere and tall buildings sprouting up like mutants even in low-rise neighborhoods like mine. IOW: we are undergoing Manhattanization. I have seen the developments already underway and the project-approvals for more to come. Why is Mayor Walsh doing this? Krugman and the like may provide some theoretical cover but I suspect the real truth is simply that there is a lot of money in real estate development, which is tough to resist (Menino was an admirable exception) coupled, in Mayor Walsh’s case, with his strong affinity toward the construction unions. Money for rich developers and jobs for construction workers. What’s not to like? Nothing, I suppose, if you want Boston to become NYC North. As for the demographic mix coming with the new construction, it seems to me that wealthy newcomers vastly outnumber new middle class (i.e., affordable) residents. Certainly, the new retail businesses suggest this. But those are just my personal observations. I would be interested to see the figures on what is happening in Boston demographically since Mayor Walsh’s construction boom was launched.

    1. Brooklin Bridge

      Interesting observations, but I would add that over the last two decades, South Boston has been “gentrified” in a major way and recently, bringing guests to the North End, we were told that that area is being hollowed out of “original” (or Italian) families by students who are willing to pay more. I say hollowed out, because the appearance is being kept much the same (for tourists?). The little I have seen of development replacing the old overpass going North to South was definitely not affordable.

      In short: Even before Walsh, Boston’s affordable housing stock has been going down steadily. I too am no expert so there may be a lot I am missing.

      The affordable housing law has been helpful, but it has also been used as a way of getting around zoning laws.

      1. wbgonne

        Yes, I agree that gentrification has been ongoing in Boston for some time, especially — as you say — in Southie and even in my ‘hood, the south end of the South End. But the scale of the buildings is different I think. For instance, there is an already-approved enormous development for the Dorchester Avenue/Andrew Square area (where I once lived). This is not a development that matches the scale of the existing (albeit, somewhat rundown) neighborhood in any respect. It is huge. Same for the Harrison Avenue corridor in the South End, where one large project after another is under construction or already approved. The lower portion of Harrison Avenue looks be little more than an extension of Downtown, with high-rises going up everywhere. I imagine Chinatown will be the next target (barring a real estate crash). Boston is losing its character.

        The affordable housing law has been helpful, but it has also been used as a way of getting around zoning laws.

        Yes, that’s what I see and I am curious to know what the aggregate numbers show.

  5. j84ustin

    Simply put, robust regulations and extensive public ownership of housing are the best tools to prevent gentrification. Krugman, per usual, doesn’t get it.

  6. jsn

    This article addresses land use regulations, one frequently sees attacks on building codes as well. All of these laws exist because we once lived in a democratic society and society promulgated these laws. Even what de-regulators like to call “regulations” are laws enacted through democratic process. These laws all came into being for good reasons. Eliminating the law does not get rid of the reason it was enacted. Conditions do continually change which means that well intentioned laws will need to be re-considered in light of the changes, but simple repeal or abandonment of regulatory regimes does nothing to help.

    A well housed population is a public good. In our erstwhile democracy, markets were crafted to encourage this outcome. Massive petroleum subsidies made a grotesquely inefficient form of housing very inexpensive. The massive public investment in suburban infrastructure of all kinds was a public policy that within its framework made the public good of a well housed population possible for 60 years.

    A similar level of public investment will be required to make quality housing for the entire population affordable in a post-petroleum subsidy future. This future is one dense urban cities already embody, but there is no recognition that policy must structure markets for good outcomes. Free markets exist only in Neoliberal propaganda. Markets are made by people for reasons. Their structures are selected to suit those purposes. Our current NY policy is to make developers disgustingly rich while converting the city to a career theme park for the children of the super rich.

    1. Jim in SC

      Cities like Boston, Manhattan, and Charlotte are booming because that’s where the good jobs are. The corporate ladder is slippery, however. Many are called, but few are chosen. I’ll bet that many people return to their hometowns in early middle age, though I have no evidence to support this theory other than anecdotes.

      Much of income and wealth inequality in the United States and Europe comes from the division between those that own real estate in and around these cities and those that don’t. There was a European study, which I couldn’t locate, which says ALL of wealth inequality in Europe is the result of disparities in home ownership status.

      I often think about the difference in attitudes between GIs returning from WW2 and Korea and our current generation of new college graduates and workers. For the GIs, any work was better than getting shot at by the Germans, Japanese, or Red Chinese. Many started businesses with low expectations, a lick, and a prayer. And many succeeded. The cost of trying was low, and there wasn’t so much corporate competition. The chain store wars of the thirties are coming back to haunt us now.

      Today, graduates have high expectations. School is considered such a panacea for employment ills that more is typically considered better. If you can’t find a job with your bachelor’s degree, get a better job with a master’s degree. You can easily pay today, for a hamburger Thursday.

      Workers, too, have high expectations. The whole Left, it seems, is for a $15.00 minimum wage, nearly triple what the minimum wage was in 2007, even though CPI inflation has risen by only fifteen percent since then.

      Slowly but surely expectations and reality are diverging. Instead of getting married and getting a job at twenty-one, you might get married (not necessary), at thirty, and hopefully you’ll have a real job by then. Meanwhile, the likelihood at being employed at your peak salary after age fifty has radically diminished. Changing jobs several times during one’s career is a near certainty, and with those job changes, fifty percent of the time, people empty their 401-ks. Meanwhile, the age for full social security creeps up and up, and the measure of inflation on which it is based is changed to the average person’s disadvantage. In other words, we have a world where, instead of forty years of employment at reasonable income, we have a fraying social safety net, and, for the higher paid segments of society, twenty years max of high income work, and the rest is making do. For the lower paid workers, it is all making do. Their bodies wear out by their early fifties in many cases.

      It seems to me that, as a society, we are imitating poor people thinking. In other words, we’re basing our collective decision making on optimum outcomes rather than probable outcomes. The result may be that we become the way we think: poor.

      1. wbgonne

        I really enjoyed your comment. However, I take issue with this point:

        Workers, too, have high expectations. The whole Left, it seems, is for a $15.00 minimum wage, nearly triple what the minimum wage was in 2007, even though CPI inflation has risen by only fifteen percent since then.

        Your choice to use 2007 as the benchmark is curious. In 1968, the minimum wage was $1.60, which is $10.86 in 2015 dollars.

        Minimum wage since 1938

        The minimum wage is presently $7.25, which is 33% lower than 47 years ago in purchasing power. $15 per hour is $600 per week or about $31,200 annually. That’s not much to live on. And I don’t think it is unreasonable for workers to expect a living wage.

        Apart from that, thanks for your excellent comment.

        1. Jim in SC

          Thanks for your kind words. I rarely receive any. My choice to use 2007 as the benchmark was perhaps to make more of an a fortiori sort of argument. I don’t know what the minimum wage should be. I only know that youth unemployment, and particularly minority youth unemployment, is in a terrible state. Raising the minimum wage, without provisions for a lower minimum for young people, is likely to result in even more youth unemployment.

          The problem is not only the employer getting enough value from the young worker to justify employing them. We have infantilized young people over the past forty years, and have decided that their time is better spent in school listening to lectures than working in the world. When I was a high school student in the ’70s, sixteen year olds drove the school buses for pay. That is unthinkable today.

          I am keenly aware, in discussing the $15 minimum wage, that my wife, who received nine years of graduate schooling post college (masters in one field of psychology, phd in another), makes about $20 an hour as an assistant professor at a small college. I’m guessing she works about fifty hours per week, averaging in the summers, when she keeps office hours of 6-10 hours a week. Leaving the question of benefits alone (even Starbuck’s and McDonald’s employees have benefits), I wonder how does it make sense to pursue thirteen years of higher education to earn 33% more per hour than a fast food worker, assuming the $15 per hour minimum wage is adopted? Of course, if a fast food worker worked as many hours as my wife, their pay would quickly equalize with hers, because they would be earning lots of overtime. We are considering both going to Chik-Fil-a (they have the nicest manners) for 25 hours each if the $15 minimum wage is passed. We could then share both work and elder care duties while enjoying the same amount of income.

          Many lawyers, even in NYC, make less than $15 per hour, with no benefits, doing document review. I have known doctors whose pay has dropped into the $20 to $30 an hour range during bad years (which are more frequent since the passage of the ACA and the electronic medical records requirement). Could it be that the business model of the future is to go to Chik-Fil-A for your chicken sandwich, as well as your educational, legal, and medical needs? Stay tuned.

          1. Felix47

            The problem could be fixed with a decent income tax. I would combine it with a VAT and stock transaction tax as well so that people who hire Ivy League tax attorneys and politicians have as few loopholes as possible.

  7. jim

    Agree with the residential only on second floors. How many millions of apartments have been lost to nail salons, insurance offices etc, while shopping centers have vast numbers of vacancies on pads that could be subdivided into small offices.

  8. Alejandro

    The language of “affordability” obscures and somehow “rationalizes” the disproportionate distribution of resources. It’s one thing to not have the resources available to improve the standard of living of everyone, but it’s another to deprive and obstruct access to many for the extreme excess of a few, through their appropriating the power to ‘disrupt’ the effective coordination between the fiscal and monetary…

    “Affordable? Trickle-down?”-M. Yass

    1. washunate

      Yep, the taboo topic in establishment leftist conversation. Thou shalt not speak of the distribution.

  9. washunate

    Great read.

    What intrigues me about these kinds of social issues, though, is how much effort people put into addressing symptoms of problems rather than the underlying issues.

    The solution to a jumble of public-private partnerships so complex that no one understands them is not to do more, to continue tweaking the system in ever more convoluted ways that create ever more unintended consequences. Rather, the solution is to change what we do. The present model is based on incentivizing developers to work around the obstacle of inequality instead of removing the obstacle itself. This has three fundamental problems: 1) policy makers are not perfect in their design of the incentives, 2) the development projects skim a significant amount of the overall public investment, and 3) sometimes policy makers are purposefully trying to help their developer friends in carrying out number 2. There is big money in the FIRE sector.

    If we actually want affordable housing, we should end our entire neoliberal hodgepodge of trickle down programs (from QE to Section 8, from TIF to LIHTC, from TANF to SNAP) and replace them with universal unemployment insurance: direct cash payments to people in need. Cut out the middlemen.

    It would also be nice if MMT advocates dealt more directly with the question of why things like housing, healthcare, and higher education have increased in price so much.

  10. Art Eclectic

    We have plenty of housing. What we don’t have is plenty of housing near good jobs that pay a living wage. That’s the disconnect. Cities and local governments need to strategically plan business districts and job centers scattered outwardly more so that people can live closer to their jobs. The more jobs cluster in one area, the higher housing costs are. Spread those business districts out through zoning and long term planning.

    1. dejavu

      Ah yes. The new 100 story condominium buildings in NYC are located so that the new owners are conveniently located to their places of employment (for the 5 days a year they are occupied.)

    2. Jim in SC

      Government’s record of strategic planning for business is dismal. A city near me with a very activist government is promoting a public private partnership to bring ‘tech’ jobs to their city. The project appears to me to be 90% real estate speculation, 10% tech jobs. And what ‘tech’ means is very much open to interpretation. I don’t believe technology, in the venture/venture capital sense, will ever be a big job creator anywhere where failure is stigmatized, as it definitely is around here.

      When I was in business school I took a course in venture capital–this was prior to the ’90s boom–and technology venture capital was part of the program. I noticed, however, that our speakers primarily made private equity (then called leveraged buy out) investments in going concerns. I asked one speaker why this was so. He said: ‘When we started out we made fifteen traditional early stage venture capital investments. Thirteen of those failed. Two broke even. That’s when we started with the LBOs.’

      Our county made a $6 million investment in the 1980’s to build a minor league baseball stadium as anchor for a large technology park. Thirty years later, there are four fairly small businesses in the whole park, despite terrific infrastructure, access to the interstate, and (20 min) proximity to a major city. They just tore down the baseball stadium and sold the property for $30,000 an acre to a large corporation, which also bought the private portions of the park out of bankruptcy (for $24,000 an acre). Yep. The gummint. That’s who you want for your partners. They’re great long term planners too!

    3. ozajh

      Cities and local governments need to strategically plan business districts and job centers scattered outwardly more so that people can live closer to their jobs.

      That “cure” can often produce worse results than the “disease”. I live in a city (not in the U.S.) where this concept governed the planning processes (and where for several decades the planners had ABSOLUTE zoning authority). What we finished up with was a decentralised city with large career employers in all the nodes. And massive (relative to the size of the city) numbers of people with long commutes, because they LIVED in the suburbs surrounding one node, but WORKED in another.

      There are also the examples like Detroit, where the central-area factory employment vanished. The overall area centred on Detroit (but perhaps not individual wealthy and politically significant exurbs) would benefit from a large RE-centralisation of employment.

  11. Effem

    When i learned economics, artificially holding the price of something down increased the demand for it. It seems unavoidable to me that subsidized housing increases demand which will increase overall pricing. Yes, a few lucky low-income folks will win a housing lottery and get subsidized housing. But that gain in utility for them must be weighed against the loss in utility for the 99% who applied for subsidized housing and didn’t win the lottery – to them the system just feels less fair and more arbitrary. Not to mention the hours spent filling out applications, waiting in lines, being frustrated when you hear the inevitable stories about someone gaming the system.

    Yes, it seems cruel that NYC is in demand and prices go up – but there is no other solution consistent with economic logic other than to increase supply and/or decrease demand. Price caps worsen that equation.

    1. tegnost

      I will posit that the “cap” is currently placed on the downside, land prices were not allowed to fall to market rates. At the same time a semi gov’t entity gave what amounts to unlimited access to cash and that is no cap, naturally. This is the engineering that supposedly ended the recession. Bankers teamed with developers bought distress cheap, razed and developed, built towers of unaffordable units but who cares because by the time the units are renting the developer and banker have been fully paid and moved on to the next project.. Speaking of construction jobs is silly really because these things go up in no time flat, most of the money for these developments never hits the streets, indeed never leaves nyc i real terms. Your portrayal of “lucky low income folks” reveals your thinking. 1 in 100 low income “folks” have rent that is a reasonable percentage of take home pay from available jobs. That 1 in 100 may be “lucky” simply means that they achieved an unlikely result. How to make a likely result that a person can live locally within their means is an objective that in the current circumstances requires the same sort of engineering that allowed wall st. and the developers to make massive profits out of the certain doom that allowing prices to fall to market rates would have imposed upon them.

  12. annie

    i moved to nyc in ’65, married a brooklyn-born man. my nostalgia for the city i came to and raised children in is endless. but what good is that? i taught at brooklyn college, lived in the east and west village (noticed wall streeters only on the subways, standing with briefcases, always exiting at penn and grand central), bought a house in the slope for 50,000. my children could go through public schools, thanks to p.s. 321, hunter, stuyvesant, midwood high. there was also a scholarship at st. ann’s. one way or another most of these schools are all but closed today to even very bright kids. (st. ann’s is now only for legacies, children of employees–and donors! big donors.) schools are one of nyc’s great problems. classroom size, teacher’s salaries.
    i live again in the village, more and more a potemkin village of facades, a disney version of the 1830s or 1870s. the nyt writes about a rich man walking his dog down gansevoort and wondering why it too is not yet developed–and so he doing something about that. because he can! there’s no reverence for the decrepit–no thought to take care of it so it can stay worthy of reverence.
    krugman is enchanted. he just bought in. (he’s given housing?–maybe a no-interest loan for a second home or is that sort of perk quashed now?) (and yes i know he’s not at the un-neighborly n.y.u.) he likes his city clean and policed with museums that cost $25 so poor people have to scrape by to take two kids to the natural history–people not in the know enough to know they could spend 25 cents for same entry. he probably can’t fathom those of us who hate it this way.

    1. annie

      yes i know, inflation. but point is i went to work at bc, working on dissertation, as adjunct (not title then, i think), teaching 3 courses, paid $7500 year with health care. yes i know inflation–but it was a Living Wage, plus i opened a Savings acct. and the point is that Teachers could buy houses.

  13. Cafefilos

    Krugman’s economic training interferes with his thinking. Housing supply and demand is affected by many non-market forces, the obvious ones are various land use regulations. A more interesting set of forces are mortgage rules.

    Steve Keen, the post Keynesian economist, has an idea to prevent future housing bubbles that I think has implications for gentrification. He suggests that maximum mortgages allowed for a house (or condo) should be based on its potential rental income, maybe 10 time the annual potential rental for the unit. Keen’s goal is to limit leveraged speculation, but this would also have the positive effect of keeping housing from inflating so much.

    1. tegnost

      Also maybe shorten the allowable terms for mortgages as a 30 year mortgage someone has pointed out places all the time risk on the borrower, 30 years comprising most of an individuals earning years, just as when fanny/freddy price jumbo loans and create an incentive to meet the model price. I’m feeling there are some holes in this argument but hey gotta start somewhere…

    2. washunate

      How about instead of replacing one calculation with another, we simply stop subsidizing mortgages in the first place?

  14. Context

    In Toronto where homes are taxed based on value, a high land value means that the ‘ungentrified’ area still has a jump in land value and hence a substantial jump in tax rate. An area that is not gentrified is still commanding $500K+ property values and with that comes $500K+ property tax rate. The residents will be taxed out of their homes and the area becomes gentrified regardless. In this scenario, it is better to have the land of 10 homes ($5 million in value) become home to 300 units. 30 people in the same land or 450? Homes for the top 1% or the top 15%? The residents of the whole city are better off with the increased densification, the lower per-capita tax rate, access to better amenities and services. For Toronto, I see this as a supply problem where an increase in rapid transit (we use it) combined with an increase in density helps alleviate the affordability issue and suppresses the pressures of gentrification.

    1. Gio Bruno

      Housing densification is only usefull if appropriate transportation and social amenities (parks/meeting places) are also nearby and of a quality/quantity that allows for healthy living.

  15. sd

    Los Angeles is going through a downtown boom. Downtown LA has extremely flexible zoning that started in the 1980’s under Adaptive Reuse which allows live work in lofts. Please note that live work and lofts are not apartments and are not treated as such nor do they have the tenant protections that apartments have.

    So along came the real estate bubble. DTLA properties changed hands almost weekly. There is a modest set aside for low income housing but few qualify – it’s really for disabled on high fixed income though no one comes right out and says that. “Artist housing” is beyond what most working artists can actually afford. SRO’s are getting converted into lofts left and right. There’s a volatile situation developing as the developers push the areas long term residents further east along Julian and 7th.

    What makes this particularly interesting. That homeless guy? He’s been on the same corner for 30 years. That hipster sipping on the terrace of the new wine bar? He moved in last week, and he’ll be out in two years off to the next fashionable neighborhood. So the “desirable” tenants are actually transients and the so-called transients are actually long term members of an established community that’s over 125 years old.

    1. Gio Bruno

      Yes, the long-running legacy of Skid Row is (to my mind) the reason LA city council modified the downtown land use regulations: they wanted skid row to disappear (How wrong they were!)

      LA has the worst homeless problem in the U.S.

        1. sd

          DTLA = Downtown Los Angeles (this is not a new name)
          The area between South 3rd to South 7th and the east side of South Main Street to Alameda has been known as Skid Row since the 1800’s

  16. two beers

    S&D models break in high-end asset bubbles. The higher the prices go, the higher the demand gets, until the assets are eventually priced too high as the hockey stick goes vertical, buyers get spooked, and the pool dries up. You know the pop is near when lending standards are lowered, and the assets are marketed to the wider public.This was clearly seen in the last two asset bubbles.

    Doesn’t Minsky say something like this?

    In a bubble, you can’t lower housing costs by building more luxury housing: luxury housing is the fuel for the bubble. It sounds tautological, but in the short term, the only way to make housing more affordable is to build affordable housing. In the long term, the best way to keep housing affordable is to prevent asset bubbles. However, the plutocracy thrives on asset bubbles, so here we are.

  17. Plutoniumkun

    Among many failures in mainstream economics, the failure to truly understand land and property economics is one that directly affects ordinary lives. The great majority of economic writing I’ve seen on domestic property indulge in simplified assumptions that simply don’t match reality. To take the obvious example of London – there is a huge shortage of property for purchase and rental – but there are actually more bedrooms available than there are people in London. Increasing supply in those circumstances is pointless unless you address the issue of distribution. And its not just a case of stopping the rich owning 5 bedroom houses – its a matter of trying to ensure the distribution of appropriate uses right through a city – that is exceptionally difficult.

    To take the example of Ireland. In the 1990’s there was a huge increase in property prices. This was driven by, we were told, a shortage. There almost certainly was a shortage, as the population was increasing significantly faster than the housing supply. But by around 2002, by any measure supply had matched demand. Then it exceeded it. But prices still went up until 2007. Nobody seemed to ask the question what had happened (and yes, of course, now we know).

    In Ireland there is now a situation where despite property values being at around the historic average in terms of a percentage of rent/income, houses have become unaffordable. They are not being built, simply because the construction cost of a typical house is higher than the mortgages banks are willing to offer people on regular incomes. The reason is not just that the banks don’t have the money – it is that in a zero inflation/deflationary environment, banks know it makes no sense to lend too much – real interest rates are too high for people to afford (even when nominal rates are low), and without inflationary expectations to reduce debts, they will only lend sensible amounts. But this leads to a shortage of property, a mere 8 years after the country was littered with empty ghost estates.

    The macro financial situation in Ireland is now similar to what was historically the norm in low inflation countries, most obviously Germany. But in those countries of course there has, of necessity, been a tradition of public housing, co-operatives, etc. In other words, active interventions in the market.

  18. Plenue

    Krugman is wrong about a lot of things. And sometimes he gets frustratingly close to the truth, only to fall short. What’s most exasperating is that he has an undeserved reputation of being some kind of progressive renegade, and many people read him as if he meaningfully bucked the neoliberal economic consensus.

    1. Lambert Strether

      Krugman is a Democratic hack. It didn’t seem like that in the Bush years, when he has the only, literally the only voice of sanity, all the other Democrats having rolled over on their bellies, whimpering, but as it turns out, it is so.

  19. James Dang

    I live in Singapore, where land is owned by the state and excruciatingly managed. Even with extensive government intervention in markets, public subsidies, and substantial new construction, the general consensus here is that the solution must be to restrict immigration relative to the slowly increasing supply of housing. Easily done in a city state. In San Francisco, I’m not sure land use restrictions and zoning will be sufficient if there is such tremendous increase in demand due to such amazing job opportunities for Americans living in other states. Most countries would kill to have the world conquering industries SF has in their own cities. Maybe some amount of historical conservation along with designated zones for massive new construction (like Canary Wharf in London) can mitigate the prices.

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