Dec. 13 (Bloomberg) -- On many economic issues, such as the minimum wage, there is a trade-off between freedom and equality. When it comes to San Francisco’s high housing costs, however, libertarianism and egalitarianism are on the same side. And San Franciscans who are angry about these costs should be fighting for less government -- or at least for more freedom for developers -- because the surest way to a more equitable housing market is to reduce the barriers to building.
Life is harder for U.S. renters in general, as a new report by my colleagues at Harvard University’s Joint Center for Housing Studies shows. The number of renters is increasing and rents are rising steeply in professionally managed apartments, as public housing assistance is reduced and renters’ income has decreased.
The situation is extreme in San Francisco, where real housing prices increased by 385 percent from 1970 to 2010, while real wages there rose only 38 percent during that period. This week, a group of protesters decided to fight gentrification by blocking a privately operated bus shuttling employees from downtown San Francisco to Google Inc.’s headquarters in Mountain View. The protest’s organizer, Erin McElroy, said she opposes “a system where San Francisco is being flooded with capital, and creating a technology class where other people can’t compete.”
The city’s limited housing supply has turned growth into a zero-sum game.
The Google bus riders represent two trends: the post-2006 rise in renting and a longer-term dramatic rise in reverse commuting.
The most attractive U.S. urban areas, such as San Francisco, Boston and the New York borough of Manhattan, have emerged in the wake of declining urban crime rates as consumer cities -- places to play, even for people who work elsewhere. These cities provide abundant resources, drawing young and wealthy people. This increasing allure explains why housing prices have outpaced wage growth.
Housing supply differs radically across the U.S., which explains why some metropolitan areas grow in population as others grow more expensive. For example, the sprawling Houston and Dallas metro areas led the country in issuing housing permits in 2012, allowing for 43,000 and 35,000 new units respectively. With relaxed regulation and abundant land, supply is elastic. The San Francisco Bay area, by contrast, permitted fewer than 15,000 units.
In the middle of the 20th century, California was a builders’ paradise. From 1940 to 1960, the state’s population more than doubled. By the early 1960s, California accounted for one of every five building permits issued in the U.S. But from 1970 to 1990, California’s housing prices jumped to 140 percent above the national average.
Environmental activism in the 1970s played a big role in the increase. The Friends of Mammoth case of 1972, for example, required environmental impact reviews for all major developments in the state, delaying permitting and increasing the cost.
The environmental advocates didn’t foresee the consequences of a rigid housing supply paired with the accelerated wage growth of San Francisco’s highest-skilled workers.
The city’s relatively fixed housing stock means the rich and poor compete for limited housing units. The less affluent residents of the city have lost more from seeing their rental costs increase than they have benefited from the increased demand for local services.
The protesters who blocked the Google bus may have chosen the wrong target, but they have a point. Rather than attacking buses, they should be demanding reform of housing policies.
The most obvious change is to fix the one-sided environmental review process. A fair environmental impact assessment would compare the effect of a new project with the alternative -- what would happen if the project wasn’t approved.
Another option is to tie state aid to San Francisco to local permitting policies in dense areas. The “not in my backyard” sentiment can be fought by making urban density more lucrative for developers. Areas would have a permitting target based on their density levels to encourage building in areas with the lowest density levels and the highest prices. Areas that exceed their permitting targets would receive state aid allocated from funds received by the areas that underperform.
Local housing supply also determines the efficacy of housing policies meant to ease the burden of high rents. Demand-side policies, such as federal Section 8 housing vouchers, are effective when the housing supply is elastic. Recipients can afford more with public support and there is little offsetting impact on prices. In areas with restricted supply, though, subsidizing demand pushes prices higher.
In constrained cities, supply-side policies such as the Low-Income Housing Tax Credits are more likely to make an impact. Even if new buildings don’t house the poor, they will alleviate the pressure to gentrify, expanding affordable housing.
Another change is even more drastic. For decades, Massachusetts has allowed the builders of affordable housing to do an end run around local zoning rules if the locality doesn’t have enough such units. A similar policy in California would prod expensive localities to loosen their rules and impose state-mandated deregulation if they don’t comply.
If San Franciscans are serious about wanting to reduce housing costs, they need to support measures that make a difference, not engage in meaningless protests.
(Edward Glaeser is an economics professor at Harvard University. He is the author of “Triumph of the City.”)
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