October 1, 2021 | OPINION | By Andy Fresen | Photo by Sierra Romero

The United States is in the midst of a housing crisis. Average rent soared by 9.2% in the first half of 2021 and home prices have increased even more. Research shows that continual housing shortages caused the economic growth rate to  33% from 1964 to 2019.

Right as America is trying to get back on its feet after the COVID-19 recession, rising rent has been shown to lengthen periods of unemployment, especially for Black Americans. With the economic damage comes a human toll, as Americans across the nation suffer unnecessarily trying to make ends meet just to have the dignity of a roof.

It may sound counterintuitive, but there is a possible solution: build more “luxury” apartments to lower rents. The housing shortage has gotten so extreme in most cities that all market rate housing is considered luxury. Implying the “natural” price for housing, a good that we all need to survive, is a luxury might be the most indicative failure of current housing policy.

Many people assume a causal relationship between the building of luxury apartments and higher rents, thus leading to increased homelessness. Some argue that luxury apartments start gentrification by increasing the desirability of a neighborhood, increasing demand. This, in turn, induces the production of more luxury apartments and creates a cycle until low-income neighbors are pushed out onto the streets.

It is undeniably true that higher rents are the main cause of homelessness. At some point the rent in a neighborhood, or any neighborhood nearby, becomes too high for a person’s income to support. Communities where people spend on average more than 32% of their income on rent experience rapid increases in homelessness

The long-term solution to providing the right of a home to meet everyone’s needs to be based on lowering median rents. However, people falsely make conclusions about the relationship between the new market rate, or “luxury” apartments, and rents.

More housing, with luxury apartments being the usual scapegoat, does not induce demand but acts to soak up demand. Even the highest-end apartments help by diverting demand from cheaper housing options. 

Imagine you’re a high-income new resident of a city and there are no high-end apartments left or the rent is so outrageous that you’d rather downsize. You’d likely just move into a middle-income apartment. But then the middle-income apartments run out or rents increase. So, those residents then look down the housing brackets and move into the low-income apartments. Low-income residents are left optionless, and often homeless, as their tier of housing is priced out from above.

The lack of upper-level housing eventually puts pricing pressure on lower-level housing, exacerbating homelessness, and all the other negative side effects of a housing shortage.

But does this theory live up to the data? Most research says yes. A new study by Kate Pennington adds to the scholarly literature by looking at rents around new apartments in San Francisco. Pennington found that within 200 meters of new construction, rents fell by 2% and risk of displacement in low-income neighborhoods fell by 17%.

A 2019 study by Xiaodi Li found that only new “luxury” units, not low-income ones, made rents fall. In a real-world case study, Japan builds one million new homes a year, while the U.S. –– with double the population –– only averages 1.25 million. Rents in Japan have been stable for the past 20 years, while rents have been rising precipitously in the US. The answer is clear: Just build it!

It’s valid to ask why developers only want to build luxury apartments and why those apartments aren’t usually built in high-income neighborhoods. The answer is: it’s the current incentive structure set by the special interest that profits from higher rents and homelessness. The special interest is us: the majority of Americans that own homes. Homeowners have come to expect their real estate investments to appreciate and thus use regulations to protect their investments. 

Regulations, like zoning laws and lot minimum sizes, have a long, dark history of racial and economic exclusion. The strongest regulations tend to be in the higher income neighborhoods with more political capital. All these associated regulatory costs make luxury housing the only worthwhile devolvement.

Building only market-rate and luxury apartments won’t completely solve the housing crisis. A more wholistic answer is a complete regulatory overhaul that incentives denser building of all housing classes. 

However, when studies estimate that the U.S. is short 3.8 million housing units, we should just build anything and everything. Maybe, if we allow people to have their right to housing and economic opportunity, we will see that those forced onto the streets today will live in the luxury apartments we build tomorrow.  

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