February 2021
By many measures, the post Second World War American Dream of widespread home ownership has been cracking. The number of new homes built per year has been trending down, so the average age of the housing stock has been increasing, ensuring that operating these energy inefficient old buildings remains a leading contributor to climate change. As economics would predict under these circumstances, home prices have outpaced inflation, so it should come as no surprise that the median age of first time home buyers has been increasing as first time homebuyers struggle to come up with the cash for a down payment.
And all of this leads to a general lack of dynamism in our cities. While Shanghai and Dubai have risen from nothing over the past 30 years, cities like San Francisco look much as they did 50 years ago.
San Francisco in 1970 or 2020?
A key underlying cause of this disfunction is that vast swaths of the population are incentivized to vote for policies that are designed to drive ever increasing property values, but in a suboptimal way that continuously exacerbates the aforementioned disfunction.
The failure here is perhaps easiest conceptualized as a series of prisoners dilemmas. Voters are incentivized to set policies in a way that benefits existing property holders at the expense of newcomers, yet in a way that’s suboptimal for all. It’s zero sum in a way it needn’t be.
Zooming in on one prisoners dilemma, the aggregate value of the land on a centrally located block would be maximized if people collaborate to build more housing since multi-family zoned land tends to be more valuable than single family zoned land, as it can provide housing for more people. The problem is that when your neighbor builds a multifamily property on his property, the value of your property decreases since housing prices are a function of supply and demand. What this means is that when you hold demand constant, if the supply of new housing units increases, irrespective of whether the units are designated "affordable", then the value of each unit of housing in the area decreases.
This should make intuitive sense as a renter has a greater ability to negotiate terms, including rent, with landlords when there are more available rental units than there are renters in a given location, than they are when there are more renters who want to live in a given location than there are available rental units.