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Government-Inspired Gentrification

For affordable housing and real growth, cities should nix rent control and harmful regulation.

New York City's East Harlem neighborhood

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At a recent Atlantic Media panel on global urban issues, Amanda Burden, New York City’s planning director, discussed how challenging it has been to make housing affordable in that city.

“What we haven’t figured out,” she said, “is the question of gentrification.”

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Her term referred to the displacement of New York’s poor residents by the professional class that is moving into Harlem, certain neighborhoods of Brooklyn, and elsewhere. This has increased rents, uprooting many households and sending people in search of cheaper neighborhoods, sometimes outside the city altogether. The term “gentrification” points to the class problem that increasingly consumes not only New York, but also much of urban America. Whether it’s the exodus of Mexican Americans from San Francisco or of African Americans from Washington, D.C., or the dilution of many cities’ Chinatowns, the pattern is always similar: Traditional ethnic or working-class areas become attractive to white progressives, who move in and overhaul the culture. This has earned “gentrification” notoriety as a symbol of capitalism’s destructiveness.

But what the term really represents is government’s failure to let capitalism function properly, based on changing consumer demand. This was reflected in Burden’s response to charges made at the conference by economist Paul Romer, who argued that gentrification is really a problem of housing undersupply. “We had every year almost 30,000 permits for housing,” Burden countered. “We built a tremendous amount, and the price of housing didn’t go down.”

To begin with, 30,000 annual permits is not a significant number in a city of 8.3 million, and one that is anticipating a million more residents in coming decades. More important, that number clearly has not satiated New York’s high demand for housing, as evidenced by extremely low vacancy rates. But the addition of new units has long been discouraged by policies that make construction difficult and expensive.

The main problem is zoning. Originally meant to separate industry from residences, zoning regulations now control everything from a given building’s design to its air rights to the number of units it may contain. New York’s code is particularly archaic — it was written in 1961 by planners who had an anti-urban bias. The code encouraged now-outdated architectural styles and allowed only industry in many areas, even though many industries were in obvious decline even then. To her credit, Burden, with Mayor Michael Bloomberg, has rezoned much of the city as residential. But this zoning is still quite restrictive, preserving neighborhoods much the way they are — and only allowing new buildings below 100 feet — throughout much of Brooklyn and even Manhattan. Perhaps sensible in some cities, this shows a glaring lack of resourcefulness in one that is centered on a small island and that has long inclined toward the vertical.

Meanwhile, the housing that zoning does allow is faced with substantial barriers. New developments must pass through the planning commission, the city council, and often-reactionary community boards, and undergo environmental and code reviews that last years. Economist Randal O’Toole says that this approval process, which goes hand in hand with substantial lobbying by developers, adds $312,000 in costs per home. Such “planning penalties” — defined as the price of navigating bureaucracy — are major expenses alongside New York City’s already-high land and construction costs.

To address this, officials have imposed various price controls on developers that practically every economist — from Milton Friedman to Paul Krugman — agrees are counterproductive. Rent control, an imperishable World War II policy, has led to widespread apartment under-maintenance by landlords who see minimal potential profit. Requirements that developers receiving height bonuses provide affordable units, so as to be “inclusionary,” force them to either raise prices on market-rate units or demand government subsidies, to cover losses. Both measures discourage supply: Rent control does by preventing tenant turnover, thus delaying the replacement of old buildings with new ones; affordability mandates do the same by lessening profits, a strong recipe for inaction. 

The net result is New York’s housing shortage. Meanwhile, San Francisco, with similar policies, has in the last two decades built only 1,500 new units annually. This helps explain why a global center — one that is experiencing a tech-boom — is now the nation’s least affordable city. Such gentrification also prevails in other in-demand but heavily regulated cities such as Boston, D.C., and Portland. The solution would be simply to allow more housing — an arithmetical notion that officials either don’t understand or don’t implement owing to political pressure.

Where does this pressure come from? Often from neighborhood locals, whose resistance to development is, if not reasonable, certainly understandable: For them, having more buildings nearby means more traffic and noise, while having fewer might mean that their own housing values increase from the artificial limits.

It’s not only neighborhood locals who resist development, though. A broad array of residents in U.S. cities do as well, and this reflects something deeper. For decades, cities have been overwhelmingly liberal, granting monopoly control to local Democratic parties. Taken to extremes, this ideology has engendered suspicion of, if not outright scorn toward, business and economic development. When new skyscrapers rise in New York, for example, one hears predictable complaints about how this will harm small stores, displace the poor, and globalize neighborhoods. This link between new developments — which often include tall, glassy towers housing major corporations — and oncoming gentrification exists in other liberal enclaves, creating a hostile growth climate across urban America.

When communities do accept housing growth, they usually do so only while agreeing to some degree of government oversight. This doesn’t necessarily mean that urban residents seek government-run projects — although plenty still exist. It does mean that they tolerate the present hodgepodge of rules, regulations, and price controls for their cities. Even if they recognize the problems this creates, they don’t seem to think that unleashing the free market is the solution. Rather, free-market approaches are as foreign and untested in today’s New York as socialism is in the conservative Sunbelt.

This is unfortunate, because in cities where housing is market-based — as it is in the Sunbelt — affordability problems are minimal. Houston, a city criticized for having no zoning, has long achieved the rare combination of rapid population growth and low costs, with median single-family home prices about a third of New York’s. The reason is that the city actually allows necessary new construction. The same can be said for low-regulation cities such as Nashville, Charlotte, and San Antonio. While their northern counterparts stagnate, these cities have become melting pots for immigrants and the middle class. Places like New York should adopt their mentality if they want the same kind of growth. Or they can accept the status quo and remain havens for the rich and the ever-shifting poor. 

— Scott Beyer is traveling the U.S. to write a book on revitalizing major cities. He blogs at BigCitySparkplug.com.



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