New York’s Affordable Housing Crisis and How to Fix It

New York has a housing crisis. I don’t think anyone would dispute that assertion. Unlike many other so-called ‘crises,’ New York legitimately has an affordability problem. According to one study, the typical NYC household spends as much as ⅔ of its income just on rent. That’s an outrageous figure. Our elected figures have been responsive, since housing prices started rising in the early 1990s every major city politician has promised to make housing more affordable.

Despite these nearly universal promises, prices have continued their seemingly inexorable rise. The continued rise is not for lack of trying. In 2011, less than 40% of New York’s rental units were at their market value. The rest were rent controlled, rent stabilized or owned by the city itself. New York spends billions each year subsidizing housing and paying for the New York City Housing Authority. Despite the billions, only ¼ of New York’s housing stock is affordable to the middle class.

Something is desperately wrong with how the city and state are confronting this critical issue.

 

Supply and Demand

A lot of people have pointed a lot of fingers. Some blame foreign buyers, New York’s high density or new luxury developments or the high costs of housing in this city. In order to gain some perspective, looking at other major (and minor) American cities is beneficial.

The State and City Government of New York spend billions on housing, and in return get a housing market where only one in four homes are affordable. Cities like Dallas, Atlanta and Raleigh spend essentially nothing on affordable housing, yet 80% of their housing stock is affordable to the middle class, despite the fact that all three cities are growing faster than New York. Since there seems to be no link between public expenditure and cheap housing, some other factor must be what makes the cities of the Sun Belt affordable.

There are actually several elements of the Sun Belt lifestyle that should make the suburban sprawl development style of Dallas et al more expensive than New York. Cars are an extremely expensive way to move people around. Single family homes are more expensive than apartments to build and use more resources. Federal and state subsidies for highways and tax breaks for mortgages reduce this a bit, but don’t account for all of it.

So why is the Sun Belt  a cheap place to live?  Because they are allowing the housing supply to grow at a decent rate.

As more cities are analyzed, a pattern begins to emerge, a single fact that unites every expensive city: supply. Not a single expensive city in America is building much new housing. Demographics, density, geographical location and some of the most commonly blamed factors all fall away. New York, San Francisco, LA, San Jose—radically different but universally expensive–-are all short in supply.

It’s almost too simple, the fact that prices increase when demand goes up but supply doesn’t is one of the few pieces of economic wisdom found in nearly every household. The fact that something so mundane and so widespread has eluded the grasp of the City’s top policy wonks is shocking to say the least. The simple truth is that over 300,000 people have moved into New York over the past decade and we have not, unlike the affordable cities of America, built enough new units for them.

So what is keeping the supply of housing artificially scarce in New York City? Almost a century’s worth of bad development-related policy. Policy changes that can be enacted to boost supply can be broken up into three categories: boosting density, cutting red tape and reducing effective taxation.

 

Zoning and Transit

New York is a dense city, one of the most well packed in American and the densest of any city larger than 50,000 people. However there are large tracts of the city that could be far denser, including large parts of the outer boroughs, the area between Midtown and the Financial District  and so forth. Boosting density in these areas would require two policies. The first is obvious: build more transit.

A well-rounded transit network is how New York became so dense to begin with. Trains, buses and even bikes can move many more people per hour than cars. Increasing investment in transit (both in expanding the system and modernizing it) and figuring out why New York has such stubbornly high infrastructure costs would allow the city to support much more density and therefore many more units of housing.

While transit physically limits the density of the city, there are many legal obstacles as well, most notably New York’s extremely strict zoning code. Our height, light and land usage codes are among the strictest in the nation (surpassed notably by San Francisco, one of the few cities more expensive than New York).

Height restrictions forcibly reduce density (a 4-story building can obviously fit fewer units than a 10-story).

Light restrictions (requiring a certain percentage of light to reach the street) do the same, and also make designing buildings more expensive and time consuming.

Land use restrictions increase the strain on infrastructure by forcing people to travel long distances to find certain amenities, therefore reducing the level of density our current system can support.

Codes also distort the market by disallowing building in areas of the city where the market demands it. New York’s zoning code became stricter as time went on. Over 40% of the buildings currently in Manhattan violate the code in some way.

 

Red Tape and Community Boards

Besides allowing the city to support higher densities, the process of building itself should be made easier. There are several elements that conspire together to put a massive amount of red tape between a developer and actually building a new building.

In part due to the size of the city government and in part due to the massive complexity of the zoning code, getting approved to build something in the first place is extremely difficult. Despite City claims that the ULURP (Uniform Land Use Review Procedure) should take around 150–200 days (already a long space of time), getting approved typically takes several years or more. Combined with the complexity of the city tax code and the gargantuan city book of work rules, getting anything done becomes expensive, fast. Money is wasted on teams of lawyers and accountants instead of being spent building more housing.

The community board system is also a major source of red tape. In response to the autocratic and reckless reign of Robert Moses, the community board system was devised as a way to get local input on projects and new developments. The hope was that the system would facilitate good projects, allowing the community to better telegraph its needs to the city and developers and in turn developers and the city could explain to the community the benefits of what they were planning.

The opposite has occurred. Community boards are now overwhelmingly stocked with people hostile to new development, even when such developments have obvious benefits for both the city and the community. Similar to how political caucuses are comprised primarily of extremists who are politically motivated enough to take time off work to schlep over, community boards are filled by people incensed with new developments. Few people show up without some predetermined beef. More ambivalent and positive members of the community usually don’t attend. Punching through the community boards can take years and the fights generated within create hostility between local residents and the city or developers. Community boards have proven themselves irresponsible managers of new development and should have their ability to needlessly obstruct severely limited.

Ultimately, smaller, less resource-rich developers can’t survive the process, leaving only the few developers with the wealth, resources, connections or the stomach to beat their way through the years-long ordeal of getting through both the community boards and the land review process. Developers form a hostile relationship with both the city and the community they are building in, when ideally the opposite relationship would exist. If the land use processes was simplified and the tax, regulatory and work rules codes trimmed, more housing would be built and smaller more community oriented developers would be better able to compete with large, wealthy ones.

 

Taxation and Effective Taxation

Taxes and pseudo taxes are the third and finally area where the city can reform in order to boost supply. New York has some of the nation’s highest property taxes. Property taxes are bad because they penalize development.

If I build a development on my piece of property, or otherwise make my property more valuable (like planting trees or making other improvements) the amount of property tax I pay goes up. The more I develop the more I pay, disconnected from whether or not I actually am making more profit (I could hypothetically be making less profit and still end up paying more taxes). This naturally discourages developers and property owners from building more units or otherwise expanding their holdings, reducing supply.

A better replacement for property taxes would be the unimproved land value tax. Land value taxation charges a tax not on the size of one’s property but on the value of the land that one owns. What this means is that your tax burden will not rise if you decide to build on your land. In fact it encourages development. Empty is taxed as much as land with a building on top of it. If a landowner actual wants to not be losing money by owning a piece of land, they must create some profitable enterprise on top of it, be it an office tower, apartment or commercial center.

Besides actual taxes on property, there are effective taxes on property. Two different forms of ‘effective property taxes’ exist in in New York: Rent Control/Stabilization and Mandatory Inclusionary Housing. Both of these programs reserve a specific number of units within a building for control. Mandatory Inclusionary Housing sets prices based on the local area income for a certain fraction of units (usually about 20%) and Rent Stabilization/Control governs how much the landlord can raise rent in a given year. Both have the effect of preventing the building owner from making money off the fraction of units under the special pricing regime.

Since the late 1940s there has been a broad consensus among economists, Keynesians and Monetarists alike, that the above programs “reduce the quantity and quality of housing available.” Both programs ultimately raise prices by forcing developers to pass the cost of the “lost” units of the building onto the other tenants. Both decrease the incentive that developers have to properly maintain their units (who wants to spend even more money taking care of a unit that they already losing money on). Both decrease supply by putting an effective tax on development.

Rent Control/Stabilization ought to be scrapped completely. The nearly 50% of apartments that are rent regulated (to varying degrees) should be returned to market rates. They benefit the few lucky enough to score a controlled apartment, while thrusting the cost onto everyone else. Worse still, median income of people living in a rent-controlled apartment is greater than that of people living in market rate apartments! Not only are the masses footing the bill, it’s the better off (than average) who are benefiting from these apartments. A better policy would be a system of housing credits on a sliding scale tied to income. It would be more market based, more flexible, less open to abuse by wealthy people who can use connections to get a rent-controlled or inclusionary apartment and it would not put a 20–30% effective tax on developers.

 

National Consequences

Housing, while local in scope, has profound national consequences. Many negative elements of our current economic condition can be traced back to housing, including slowing growth, stagnating productivity, and rising inequality. Boosting supply, besides simply filling the piggy bank of everyday New Yorkers, has the potential to reverse many of these problems.

High housing costs boost economic inequality. Much has been made of the increase in wealth inequality over the past few decades. Much less has been made about the fact that the vast majority of that increase has been due to increasing housing costs. The rise in housing and land costs in big liberal cities has been an unprecedented windfall for land and property owners, a windfall they did nothing to earn besides being in the right place at the right time. Reducing housing costs would reverse some of the damage.

High housing costs worsen the ability of poorer people to improve their economic standing. Working-class people, instead of moving to highly productive and rich cities like New York instead move to poorer and less productive cities like Dallas. This is effectively “opportunity hoarding” by the upper middle class, with wealthy and wealthier than average people exclude poorer people from competing for the best jobs and best schools, trapping them at lower income levels.

The actual fiscal benefits of cheaper housing will also flow to the poor. Working-class people generally spend more of their income on the essentials—food, water, shelter, etc.—so a major decrease in housing costs would most directly benefit the poor of New York.

High housing costs are also a drag on economic growth. Economic growth has been a major political talking point since the term entered the economic and political lexicon. However there has been an increased urgency around the term as of late, as American GDP growth has dropped to historic lows. High housing costs reduce growth because they reduce people’s disposable income and force them to move to the aforementioned cheaper-but-less-productive cities.

“Enrico Moretti and Chang-Tai Hsieh estimate that the U.S. economy (yes the whole economy) would be 10 percent bigger if three cities (San Francisco, San Jose, and New York) had the zoning regulations of the median American city.” By using “data from 220 metropolitan areas [they found] that these constraints lowered aggregate US growth by more than 50% from 1964 to 2009.”

Many negative effects associated with new housing developments also don’t occur in less restrictive housing markets. One of the most infamous downsides of new development, especially here in New York, is displacement: people getting priced out of their homes by risings rents in gentrifying neighborhoods.

Boosting housing supply would go a long way to fighting displacement. While many agree that gentrification is a good thing, many also bemoan the unfortunate side effect of displacement. However there is significant evidence to suggest that displacement only occurs when housing supply is restricted, as it currently is in New York.

When a neighborhood becomes desirable to gentrifiers and new housing supply is blocked from sprouting up to meet that demand, newcomers turn to the existing housing stock. The wealthy interlopers are generally able to outbid the poorer native residents, who are in turn displaced. When new housing is allowed to be constructed to meet the rise in demand, gentrifiers do not try to push out existing residents. The poorer native residents in turn benefit from the increased economic vitality of the area and jobs arise that don’t require a commute to Manhattan. When housing stock is allowed to grow at its natural rate, everyone wins in gentrifying neighborhoods.

Housing is one of the essential goods of life, along with food, water and a handful of other necessities. Making it affordable is essential to the livelihood and productivity of every New Yorker. The best way to do this is not though rent stabilization, publicly owned buildings, community boards, mandatory inclusionary housing or stiff regulations. The best way to provide affordable housing to every New Yorker is to allow the housing stock to grow as close to the rate of demand as possible.

The other cities of America demonstrate this well. Affordable markets are not united by density, geography or demographics but by supply and demand. A massive liberalization of the housing market, combined with housing credits for low-income New Yorkers and more investment in transit, would create a market everyone could rent or own a home affordably in—to the economic and social benefit of the City and the rest of the nation.

New York and the United States would be more equal, more dynamic and much more economically developed if housing was not made artificially scarce.