Public Comment

Many speakers at the last Zoning Adjustment Board hearing regarding the towering apartment building at 2211 Harold Way, most of them young and prodded to attend by the Bay Area Renters Federation (BARF), spoke in favor of building the proposed luxury apartments that they themselves could not afford. One young woman was very frank: if the rich live in the new building, then she will be able to afford the less expensive apartments they abandon. This is another way of stating the trickle-down theory of housing, the idea that any housing will increase the supply, and if the supply increases, prices will fall. That theory failed the Econ 101 test when I was in planning school in 1969, and it still fails it. 

Those who provide a commodity will do so only if the price is high enough make it worthwhile to provide an additional amount. George Bernard Shaw explained this nicely nearly 90 years ago in his “Intelligent Woman’s Guide to Socialism and Capitalism,” using coal mining for his example. But housing is the same. The price of housing will always rise to the “marginal cost” of building the next unit rather than stay at the “average cost” of all housing. Let’s say that today in Berkeley the cost of building a new apartment building, including the land, materials and labor, architects and engineers, permits and inspections, construction loans, long-term financing, and reasonable profit for the developer, will result in a rent for a one bedroom apartment of $2,500 a month. Now consider the owner who already has an apartment building that was built five years ago and for which the costs would have resulted in a rent of $1,500 a month. Will this owner keep his rent at $1,500? No, it will be raised to $2,500 because that’s what his old project is now worth. The value of the building and the land its on have gone up, and rents will go up based on these new values as long as there are renters to pay.  

If all the housing units in a market area were owned by one giant corporation, then in theory the rents could be based on an average between the old housing built for less and the new. In a sense this is what a big owner like the University of California does. While it charges more for its newest and nicest dorms because they’re newer and nicer, it also averages costs so all dorms remain more-or-less affordable. But in the open market there are many owners, and all operate under the same economic principles: the cost of housing will go up to the cost of building the next unit.  

Of course the apartments at 2211 Harold Way will rent for more than those, say, in the new building at University and Martin Luther King (over the Trader Joe’s). But that’s because they will have gangbuster views of the bay or hills instead of an 8-foot wide light well. The views, of course, are a gift from the city to allow such a tall building, but the developers, I’m sure, think they are deserved for all the trouble to get city approval.  

Perhaps this explanation is not convincing, but a little web searching brings up some reinforcements. This is from “The Source,” a commercial real estate blog by the National Association of Realtors. 

…[Our] research divides workers into three socio-economic classes — highly skilled knowledge, professional, and creative workers, and less skilled and lower paid blue-collar and service workers — and takes into the account the wages and housing costs borne by each. 

Our main takeaway: On close inspection, talent clustering provides little in the way of trickle-down benefits. Its benefits flow disproportionately to more highly-skilled knowledge, professional and creative workers whose higher wages and salaries are more than sufficient to cover more expensive housing in these locations. While less-skilled service and blue-collar workers also earn more money in knowledge-based metros, those gains disappear once their higher housing costs are taken into account… 

The trickle-down effect disappears once the higher housing costs borne by less skilled workers are taken into account. The benefits of highly skilled regions accrue mainly to knowledge, professional, and creative workers. While less-skilled blue-collar and service workers also earn more in these places, more expensive housing costs eat away those gains. There is a rising tide of sorts, but it only lifts about the most advantaged third of the workforce, leaving the other 66 percent much further behind. 

Yet another reinforcement, this one from the California Planning & Development Report by William Fulton, considered by many to be the guru of California planning.  

… [S]upply and demand get intertwined in peculiar ways, as is happening up and down California today – and, indeed, as is occurring in desirable locations across the country and throughout the world.  

The traditional economist’s assessment of the current situation would be pretty straightforward: Housing prices are going up because demand is outstripping supply. So if you create more supply, prices will come down (or at least stabilize) and the market will approach equilibrium... 

This, in turns, leads to the typical argument of the building industry…which is that overregulation in California – especially the California Environmental Quality Act – has suppressed supply and screwed up the market. 

All of this is true as far as it goes, but it doesn’t explain why people who are concerned about the high price of housing are against the construction of more housing. That’s happening because the interplay between supply and demand is more nuanced than traditional economics would suggest, and because the interplay between the market and politics isn’t always rational.  

The problem is that under some market conditions, more supply doesn’t lead to market equilibrium because it actually creates its own demand. You can see this wherever the world’s uber-rich decide to buy houses – New York, London, or, … Santa Barbara… This throws the supply-demand equation out of whack; if you build more houses, the result might just be more uber-rich folks from out of town showing up to buy them, and that doesn’t help ordinary folks. In fact, for a while the debate in Santa Barbara centered on encouraging construction of certain types of housing that uber-rich wouldn’t want to buy, such as small rental apartments on busy streets. But given the revival of urban living, I wouldn’t even bet on that strategy working. Look at what’s happened to Charleston, which has rapidly become a second-home haven for people from New York. 

And once the uber-rich throw the supply-demand equation out of whack, there’s a ripple effect... 

Something similar is going on today in San Francisco and Santa Monica. These places are hotbeds for cool jobs. The folks taking the cool jobs may not be uber-rich, but they have tons more money than everybody else, and so they drive prices out of sight. Build more market-rate housing, and you’ll just accelerate the cycle – more smart kids will show up wanting to work for tech start-ups, and that means you’ll have more tech start-ups, and pretty soon demand will rise faster than supply – in large part because you increased the supply. To a local community activist, it feels like a no-win. 

The solution isn’t easy – or, at least, it isn’t simple. Yes, you need to build way more new housing than we’ve done in California. But that housing needs to come in more types, forms, and even tenures than we have seen in a long time. Yes, some needs to be market-rate – but we need to recognize that this will be snapped up by highly successful folks and won’t necessarily bring about market equilibrium. 

The full article is worth reading and can be found at http://www.cp-dr.com/node/3765. It doesn’t make a case for opposing 2211 Harold Way or other new development in Berkeley, but it does make clear that willy-nilly support of this project merely because it provides upscale housing makes no sense. It won’t help BARF to achieve what its members purport to want, which is more affordable housing. At the risk of being facetious, BARF’s argument is a bit like saying the luxury buses Google provides for its employees living in San Francisco can be justified because they reduce crowding on Muni and BART trains that the rest of us must use.