Which comes first: Housing supply or demand? - Metropolitan Planning Council

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Which comes first: Housing supply or demand?

Chicago Transit Authority via Flickr

Logan Square, pictured here in 1968, has been a hotbed for debates on supply, demand and displacement

If I told you that the key to minimizing displacement of long-time, working-class residents is to build housing that’s not for them, would you believe me?

If not, you’re not alone.

Recently I was on a panel about neighborhood change. Following three committed leaders at community-based organizations that are facing gentrification pressures, my role was to provide the city-wide perspective that while displacement in those areas is of great concern, across the city communities in concentrated poverty constitute four times the number of gentrifying communities. I noted that we are increasingly a city of residents in either concentrated poverty or concentrated wealth, our areas of overlap are distressingly few, and the loss of middle class residents since 1970 is alarming.

Does what makes sense to economists really translate to the neighborhood level?

When it came time for Q & A, someone asked for panelists' thoughts on debates in areas like Logan Square, where longtime residents have protested recent dense new construction projects near transit as hastening a "new normal" of high-end, expensive apartments to the detriment and displacement of longtime residents. This is the question of the hour, with a new report out from California’s Legislative Analyst’s Office arguing that “construction of market-rate housing reduces housing costs for low-income households and, consequently, helps to mitigate displacement in many cases.”

These findings stirred the pot for economists and neighborhood-based stakeholders, to say the least.

The Washington Post initially reported on the findings by highlighting the importance of high-end units for “filtering” more affordable units for the poor, then more recently hosted a print debate among academics and practitioners whose reactions to the findings ranged from supportive to incredulous.

At the panel, which took place before this research came out, I threw both sides of the argument out there: One, such as offered by community groups like Somos Logan Square, contends that new development “will cause rents, property taxes and real estate speculation to skyrocket across the neighborhood.” The idea here is that new development fuels more interest and thus more displacement of longtime, lower-income residents.

The other stance is the supply and demand argument, that when people are competing for scarce resources, those with more money outbid those with less and drive prices up. More supply provides some slack in this tension, providing newly attracted outsiders with places to live, while preserving more affordable, existing housing for existing residents who rely on it. In this way, the theory goes, supply helps manage demand.

A fellow panelist weighed in: "Well, I think their supply is causing our demand."

So, what to make of all this? Is, as my fellow panelist suggested, developer supply causing upscale demand? Does what makes sense to economists really translate to the neighborhood level?

I’d suggest we start by revisiting how we’re framing the problem in most gentrification discourse. In a recent discussion with MPC staff, DePaul professor John Joe Schlichtman pointed out that we often view gentrification as a cause rather than an outcome. This means that when we see or experience displacement by rising property values, we say that gentrification caused this problem.

"I think their supply is causing our demand."

In fact, what is playing out in this scenario is that in a given area, people with more means than the traditional population have decided that they want to live there too. Because the newer, higher-income set has more resources at their disposal, if the number of units available stays static, they will simply pay more to live there. Gentrification didn’t cause this process, gentrification is the outcome of this process.

Let’s time travel to when Michael Jackson’s "Thriller" topped the charts for another way to think about it. Back in 1984, Damaris Rose argued that:

“the terms ‘gentrification’ and ‘gentrifiers’... are ‘chaotic conceptions’ which obscure the fact that a multiplicity of processes, rather than a single causal process, produce changes in the occupation of inner-city neighborhoods from lower to higher income residents.”

Gentrification is the outcome of this multiplicity of processes.

The reason this seemingly small distinction matters is that it focuses our attention on the desired outcome. Often when people are protesting new development, they say a version of the idea that they want their neighborhood to stay as it is. I get that, especially when you’ve fought to create a vibrant place that feels like home and, most importantly, is one that you can afford.

But if you find yourself saying that, it means the forces are already underway. Not building more units cannot freeze those forces. As SPUR’s Kristy Wang pointed out in the face of a proposed moratorium on new construction in San Francisco, “a moratorium on new units will not make the neighborhood less desirable, nor will it reduce demand on the housing that already exists.” UC Berkeley’s Enrico Moretti calls it a “common misconception that new market-rate housing causes higher rents.”  Higher demand, he argues, causes higher rents.

If rising housing costs and displacement are happening, the neighborhood is not going to stay as it was. My top questions then become, How can we shape the outcome of a process that is happening? How can we keep as many longtime residents as possible? And most fundamentally:

How do we more effectively get out ahead of these processes in the future?

These are especially pertinent questions for Chicago because this research is premised on the condition of a housing shortage. Unlike New York City and San Francisco, Chicago is losing population or barely breaking even. While  55 percent of residents are housing cost burdened, 60 of 77 community areas lost population in 2010 and some areas on the south and west side are severely depopulated. North Lawndale’s population, for instance, is down 71 percent—from 124,937 to 35,912—since its peak in 1960. As I've written about before, a 2014 UIC Voorhees Center study found that just nine community areas have gentrified or are gentrifying since 1970. Thus, while there is a definite shortage of affordable units throughout the city, only a select few neighborhoods are in such demand that there is a housing unit shortage regardless of income. Overall, we still have more city than we have people.

The truth is that the majority of low-income households receive no rental assistance and are paying well over 30 percent of their income on housing. With cuts to federal HOME funds and Community Development Block Grants, this is not likely to change dramatically for the better anytime soon.

While the City’s 2015 changes to the Affordable Requirements Ordinance (ARO) were an emphatic improvement, even in cases where Aldermen mandate the full 10 percent or more of affordable units onsite, the impact will be small. In fact, back to the Legislative Analyst’s Office report for a moment: Whether or not the new construction they studied triggered on-site affordability mattered little to the end result of decreased displacement.

Higher demand, not new housing, causes higher rents.

As someone who has championed changes to the Affordable Requirements Ordinance mandating on-site units and applauds Aldermen who enforce the full 10 percent or more on-site, by no means do I think this finding should discourage inclusionary housing. We need to use each and every tool we have, but also need to understand their limits. As Daniel Hertz calculated last year at the height of Somos Logan Square’s protests against new development, even if the Affordable Requirements Ordinance mandated 50 percent on site affordable units instead of 2.5, more than 90 percent of housing in Logan Square would still be priced by the market.

So most neighborhoods in Chicago are not growing, and our tools for affordability are inadequate and shrinking. Again, what is the outcome we want? We need more neighborhoods to be in growth mode. And we need more affordable housing in all 77 community areas.

As I’ve argued before, there is a role here for increased proactivity on the part of the City. I’d like to see the City appoint a Demographic Guru, someone who works with forecasting data to zero in on which areas are expected to face dramatic changes and thus likely to need preemptive intervention.

We still have more city than we have people.

For instance, in areas indicating early-stage rapid land value appreciation, could the City set aside a certain portion of its Low-Income Housing Tax Credits, Chicago Low-Income Housing Trust Fund, Affordable Requirements Ordinance in-lieu fees and Chicago Housing Authority partnerships to proactively encourage affordable development? The City’s backlog of projects and shrinking federal funds makes this kind of nimbleness challenging; all the more reason for creative solutions in the meantime.

An example: the proposed Xavier building in the old Cabrini Green neighborhood combines dense new construction—240 units plus retail—with 10 percent on-site Affordable Requirements Ordinance units and 10 percent public housing units. This example combines all arguments: we need units in high-demand areas to keep rents from escalating further and to encourage the growth we need as a city, and we need creative solutions to provide as much affordability as possible.

MPC has been talking about how we need to grow as a city. For the few parts of the city that actually are in demand and growing, it is imperative that we shape that demand and growth to lead to the best outcomes for all.


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