Chapel Hill regards itself as a progressive community due to past policy choices and symbolic stances on numerous environmental and social issues. Yet when it comes to housing policy, the town has embraced “trickle-down” economics to a degree that would make Ronald Reagan blush with pride.
Town leaders recently have steered Chapel Hill from a path of deliberate development onto one of rapid growth – a shift embodied in the mushrooming across town of high-rise, high-rent apartment towers. By one tally, the town has approved since 2007 the construction of 6,059 housing units, of which 2,171 have been or are being built. Constructing all of remaining 3,888 approved units alone would increase the town’s housing stock by 17.5 percent over the 2010 level.
The rationale for this change in direction is that the town’s housing supply must expand if there are to be homes affordable to low- and middle-income households. And the way to ensure that is, counter-intuitively, by encouraging the construction of high-end housing units.
Anyone who has taken a basic microeconomics course recalls that, all else equal, an increase in the supply of a good should lower that good’s price. What people forget is that this dynamic applies to normal commodities traded in competitive markets. A normal commodity is one that is uniform in nature, and a competitive market is one in which no one actor can set the price.
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Housing exhibits neither trait because the underlying supply of land is finite and heterogeneous. A parcel’s value thus hinges on its locational advantages relative to those of other parcels. Ordinary buyers, meanwhile, value a housing unit not simply in financial terms, but in respect to non-monetary uses like community life. Moreover, because the local land supply is fixed, landowners collectively enjoy a monopoly and can set prices through harmful monopolistic competition while often engaging in rent-seeking behaviors that are individually lucrative but economically unproductive.
Consider, now, the mechanism through which an increase in the supply of high-end housing supposedly lowers prices. Because housing is not a uniform commodity, the housing market really is a collection of linked submarkets. When, say, a new high-end rental apartment complex is built (assuming constant demand), the residents of the former top-end complex should move to the new one. To maintain profitability, the owners of the now second-tier complex should cut costs – typically by reducing maintenance – to attract residents from the next-lowest tier. This filtering continues until everyone moves into comparatively better housing at relatively lower prices.
Unfortunately, there is no guarantee this filtering will happen. First, existing owners may respond by upgrading their properties and raising prices. Second, for prices to fall, the supply must increase faster than the demand; if demand rises due to an influx of new residents, prices can rise. Lastly, policies that promote filtering can produce such undesirable outcomes as the deterioration in housing quality, a decline in property values, and the creation of slums.
Disruptions caused by new supply sometimes spark short-term price declines as existing owners determine how to respond. Yet over time, a singular focus on expanding high-end supply is apt to push housing prices higher across all submarkets. In fact, considerable academic research into North American housing markets has found little evidence of filtering yielding meaningful long-run housing benefits, especially for low-income households.
Chapel Hill’s faith in more high-end housing to solve other housing problems likely will exacerbate those problems. As with “trickle-down” approaches generally, any benefits probably will flow to a small set of privileged actors and bypass the larger community – an outcome inconsistent with the progressive values on which Chapel Hill prides itself.
John Quinterno is a principal with South by North Strategies, Ltd. in Chapel Hill and the author of “Running the Numbers: A Practical Guide to Regional Economic and Social Analysis.” The opinions in this column are his own.