While this may sound good, lets think clearly about its effects: mandates reduce the profitability of new development. This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate. In the former case, fewer new developments would be built; in the latter, lower-density development would take place. Either way, this represents a decrease in supply. A decrease in supply would increase price, exacerbating the very problem--expensive housing--that it was designed to ameliorate. (And don't forget that density is green.)
Housing markets are also subject to what is known as "filtering," apartment rents tend to go down as the apartment building ages. So today's expensive housing is tomorrow's affordable housing. This implies that a reduction in the supply of expensive housing today, will reduce the supply of affordable housing tomorrow.
These kinds of zoning restrictions are popular because they drive the price of existing housing above replacement cost, benefiting Nashville's homeowners. But they come at the expense of renters and new residents. As the Financial Times put it:
They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions.
Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder.The effects of affordable housing are similar to price gouging laws that in Mississippi prevented generators from reaching the Gulf Coast after Katrina. Similarly, affordable housing mandates will prevent new housing from reaching Nashville. The market wants to help, so let it.
OK, if mandates won't do it, how do we increase the supply of affordable housing in Nashville? Here I think Nashville could learn something from New York. In New York, the affordable mandates are triggered only by a relaxation of zoning. For example, a developer buys up a block of houses and asks the planning commission to re-zone it for a multi-unit apartment complex. In exchange for the zoning change, the developer agrees to set aside some of the units for lower income tenants.
The crucial difference is that in NY, affordable mandates are triggered only by development that increases supply. In contrast, the proposed change in Nashville would reduce supply.
[REPOST from 2015]
please read the legislation. http://www.nashville.gov/mc/ordinances/term_2011_2015/bl2015_1139.htm
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DeleteMaybe I am missing something, but this seems to be the relevant part of the statute:
ReplyDeleteA. In preparing the rules and regulations for implementation of this chapter, the planning department shall set a goal of requiring at least fourteen percent of the units in all residential development in Davidson County, including new construction and renovation be reserved and used for Affordable Housing and/or Workforce Housing.
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ReplyDelete“the art of economics consists in looking not merely at the immediate but a t the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups”(Froeb et al. 2014 p18). This Quote from the text Managerial Economics fits in well with this post. There are clearly two different ways to look at government policy and how it is impacting housing development in two different cities. The big questions comes down to what do the people want? In Nashville with the consideration or requiring that a certain percentage of units be priced as affordable, will ultimately reduce development. Oppositely, NYC offers re-zoning to developers in exchange for an agreement of affordable housing for lower income, thus spurring development. In looking at the long term effects for all groups it looks as though Nashville doesn’t really want to increase affordable housing availability.
ReplyDeleteFroeb, L.M., McCann, B.T., Ward, M.R. & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: Southwestern Cengage Learning.
Economics, ESC FALL 2015
ReplyDelete“If politicians set prices instead of markets, prices would not convey the information that provides incentives for buyers to conserve and for sellers to increase supply” (p. 106). The mandates or zoning laws represent an “uncontrollable factor” or, something that affects demand that a company cannot control. (p.97).
One way to increase supply is to remove barriers that reduce construction cost and delays. Zoning codes could be reformed to allow for additional housing, increasing the supply. Nashville’s existing homeowners would not be in favor of certain zoning changes because it could reduce the value of their home. There will always be a demand for affordable housing. Supply goes up, demand continues to rise as our population increases. If supply and demand both increase, the equilibrium quantity rises but the equilibrium price is unknown.
I think the problem is, we don’t know what the price of the housing will have to be, and it could cause “affordable housing” to become… not quite so “affordable”.
Froeb (2014). Managerial Economics: A Problem Solving Approach. Cengage Learning
Politicians passing laws that intend to get them re-elected by bribing voters will never substitute market-driven business decisions. Once the "affordable" housing is sold, the market will simply consume them. Meaning, people who want (and can afford) these sub-standard units will buy them and make the improvements they want such as extensions, pools, etc. Sure, in light of this the laws try to compensate by requiring a certain number of years residency, forbid building permits for improvements, and many other completely Un-Constitutional restrictions. The government should strive to provide one, and only one thing: opportunity. That opportunity should be equally attainable by everyone.
ReplyDeleteThe article focuses the direct and deliberate requirement of creating affordable housing as a market driven factor of supply and demand. It would appear by reading the points highlighted that if more higher priced housing is provided that eventually the supply and demand will reach equilibrium. This market equilibrium, where quantity supplied equals the quantity demanded leads to a point where there is no price pressure. However, the existing, aging housing should be considered as part of the market. This "older housing is provided at a lower cost based on age and condition. Nashville should consider such preferred zoning and development ideas as "Quality Neighborhoods" utilized by Bellevue, WA (Bellevue, 2006). Quality Neighborhoods include ranking the City based upon six performance measures. These measures include, an attractive, well-maintained and safe neighborhood; a neighborhood that supports all families; and Convenient access to day-to-day activities (Bellevue, 2006). These quality measures incorporated into existing neighborhoods and stressed in new development will support all housing as a single market. This single market can then be developed without government intervention where supply and demand will equalize. In this equalized market price and cost burden will be equally shared.
ReplyDeleteBibliography
Bellevue, C. o. (2006). City of Bellevue. Retrieved 10 26, 2015, from City of Bellevue: http://www.ci.bellevue.wa.us/quality-neighborhoods-dashboard.htm
In the September 2, 2015 blog “What Nashville can learn from NYC,” Froeb shares that the Nashville City Council was considering requiring that any housing development with more than 5 units include a percentage of units as “affordable housing.” Froeb tells us mandates reduce profitability and lead to less new development or smaller developments to avoid the mandate. So it will decrease supply and increase price. These types of mandates slowed development in San Francisco and London, but worked in New York because the mandate wasn’t a penalty, but rather an incentive. So, if a developer wanted to purchase a block in NYC and have it rezoned for apartments, if they agreed to set some units aside for lower income tenants, their re-zoning application was approved.
ReplyDeleteI sat on the board of directors of a small rural hospital. I remember how government mandates crippled our budget and ability to be nimble and affective. In the short time I served there were mandated upgrades to the sprinkler system, full mandated changes to technology systems, and mandated services. We spent more time trying to figure out how to make budget and payroll while money poured into mandates, and we were dying between reimbursements from the government and insurance providers. How do organizations survive that? Simple. Costs go up and up.
In an article “How government regulations made healthcare so expensive” by Mike Holly (2013) he says, “The U.S. health care cost crisis didn’t start until 1965. The government increased demand with the passage of Medicare and Medicaid while restricting the supply of doctors and hospitals. Health care prices responded at twice the rate of inflation. Now, the U.S. is repeating the same mistakes with the unveiling of Obamacare.” We know excess demand exerts upward pressure on price for the industry, so when demand is increased exponentially like in the case of mandated healthcare or a sudden availability of surplus affordable housing, the overall industry price will rise; as opposed to allowing the supply and demand to reach equilibrium organically.
Holly, M. (2013) Retrieved from: https://mises.org/blog/how-government-regulations-made-healthcare-so-expensive
While Nashville's plan to stimulate affordable housing appears to be a responsible concept at the present time, the Nashville City Council is failing to understand or predict market industry and it's changes. The topic of this chapter explains to readers the importance of sound business decisions as well as the sustainability of such decisions.
ReplyDeleteWhile the Nashville City Council's plan would surely be popular amongst voters, the impending results are more likely to pose a negative impact down the road. Unfortunately, politicians seldom concern themselves with future sustainability in their decision-making capacities. Unlike businesses, politicians make decisions that benefit them now, and in the near future. Political figures are concerned more with winning votes and less with sustainability, as the pending or future results of their decisions are usually the problem of their predecessor.
Politicians that have had the most success in building or rebuilding their regions are those who run local government like a business. A perfect example of such an individual would be the last New York City Mayor, Michael Bloomberg. A savvy, successful, and well distinguished businessman, Mr. Bloomberg ran city government like a business. While his decisions may not have always been politically popular, the results of his work speak for themselves. At a time when our local economy was suffering, the City of New York continued to sustain and at times even thrive financially.
MANAGERIAL ECONOMICS, ESC FALL 2015
DeleteI agree with your post, Vincent, in that government should be run as a business. The best decisions are often made by weighing the facts and numbers associated with the problem and making an unbiased, non-partisan related decision. Unfortunately, this is not always the case and as you stated, politicians and government officials often have trouble when it comes to future sustainability of their decisions.
While Mayor Bloomberg was able to learn the ins and outs of the NYC housing market, Mayor Bill de Blasio is now facing trouble with Bloomberg's solutions no longer being sustainable.
New York City has the problem of being the largest and most densely populated city in America. This has created a lack of supply and demand that the city cannot keep up with. Due to this, prices keep getting driven higher and higher, with studio apartments easily going for an excess of $2,000 a month. That is more than some people making each month making it near impossible to live in the city. This problem could be solved easily enough if the city was able to build new housing developments based of either the premise of including some affordable units within a development, or an entire development of affordable units. Unfortunately though, there is nowhere within the city to erect new construction.
Alcindor, Y. (2015, March 26). NYC mayor faces tough market for affordable housing. http://www.usatoday.com/story/news/2015/03/26/nyc-mayor-faces-familiar-problem-with-affordable-housing/24732691/
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