Gentrification and Housing Supply

chancellor row

Robert McCarthy’s rundown of the impact of gentrification on the DC mayor’s race is interesting, if a bit under-proven, but I think he ends on an analytical mistake:

Ironically, gentrification won’t be a pressing issue in the first part of the next mayor’s term, because the recession has stalled real estate development in the city. However, as soon as the business cycle turns up again, gentrification and demographic transformation will return to the top of the agenda. The social and economic trends are unstoppable. People increasingly dislike the suburbs because commutes are so long, and many young people coming to the region prefer a lively, urban lifestyle.

The association in people’s minds between real estate development and the kind of gentrification in which “working-class citizens, mostly blacks, are concerned that rising rents will drive them from the city” is a classic case of people confusing correlation and causation. If a given location becomes more desirable—because of new transportation infrastructure, because of improved schools, because of reduced crime, because of changing tastes—then two different things happen. One is that rents in the area increase. The other is that because housing in the area is now more valuable, real estate developers act to increase the supply of housing. Both the new development and the increased rents are driven by the same thing—the increased desirability—but the development doesn’t cause rent increases, it tends to mitigate them.

The problem for urban areas experiencing quality of life improvements is that it’s generally impossible for the market to respond to increased demand for housing in Neighborhood X by dramatically increasing the supply of housing in Neighborhood X. Limits on density and other practical and regulatory barriers mean that you see some new housing and also some big increases in rent that tend to “push” people into other neighborhoods. If a global financial crisis comes along and increases the practical impediments to large-scale real estate development by tightening the availability of credit for entrepreneurs interested in long-term mildly risky undertakings then that’s going to make the problem even worse.

I think it’s important for people to understand this correctly, because poor people in supply-constrained areas are currently caught up in a kind of perverse catch-22. They and their children lack economic opportunity because they live in communities with bad schools, high crime, and few jobs. But if the schools get better and crime goes down and more businesses open, instead of enjoying improved opportunity they face rent increases and need to move someplace with a lower quality of life. If you want to improve the situation facing poor city-dwellers, you need to pair efforts to improve living conditions with efforts to ensure that increased demand is met mostly with increased supply rather than mostly with higher rents.