The High Cost of Rental Housing

by Reihan Salam

In light of recent anti-gentrification protests in San Francisco, Harvard economist Edward Glaeser offers a roadmap for making the city more affordable. He proposes, among other things,

(1) revising environmental impact assessments to take into account not just the environmental impact of building a given project, but also of not building it (e.g., if housing isn’t built in San Francisco neighborhoods with decent access to mass transit, it will presumably be built in outlying regions that are more auto-dependent, and/or in regions with climates that necessitate more artificial heating and cooling and the energy expenditure that comes with it);

and (2) tying state aid to local permitting policies — permitting targets would vary across municipalities (the highest permitting targets would be set for cities with high housing costs and low density levels), and cities that meet or surpass their permitting targets would receive the aid forfeited by cities that fail to do so.

Glaeser also observes that (3) demand-side housing policies, like federal Section 8 housing vouchers, work when housing supply is elastic, but when it is inelastic, subsidizing demand drives up prices. Federal policy needs to be sensitive to this effect. Low-Income Housing Tax Credits, in contrast, can help encourage more supply.

Glaeser’s recommendations relevant not just to San Francisco but to supply-constrained jurisdictions across the country. Roughly 35 percent of U.S. households live in rental housing, and 21.1 million households paid more than 30 percent of their income for rental housing in 2012. This reflects sluggish household income growth, to be sure, but it also reflects supply constraints. Demand for low rent housing vastly exceeds demand. Gentrification critics often insist that this is a case for restraining the development of high rent housing and focusing exclusively on housing that aims to meet the needs of low-income households, yet as Glaeser reminds us, new buildings that target the high end of the market “alleviate the pressure to gentrify, expanding affordable housing.”

The cost of rental housing might have potential as a political issue, as younger Americans are far more likely to live in rental housing than older Americans, and measures that reduce housing costs by encouraging supply can be seen as part of a broader effort to improve the life chances of aspirational voters.