In his article, The Curse of Econ 101, law professor James Kwak argues that the oversimplified rules taught in basic economics classes are misleading and give rise to bad economic policies. He writes that while concepts like the law of supply and demand are simple and easy to remember, they fail to account for many real-world situations that render such models useless.
Kwak writes, "The idea that a higher minimum wage might not increase unemployment runs directly counter to the lessons of Economics 101. According to the textbook, if labor becomes more expensive, companies buy less of it. But there are several reasons why the real world does not behave so predictably."
Though he focuses on the minimum wage in this piece, it is easy to extrapolate his arguments to the housing market, which is a chunk of the real world that does not behave predictably.
For the supply-and-demand argument as applied to housing to work, one must make several assumptions.
1. If there's one behavior that YIMBYs incorrectly predict, it's this one: according to YIMBYism, people who can afford to do so will vacate their older apartments and move into the new ones, freeing up housing stock for people who are lower on the income scale. The problem with this assumption is that human beings are not gas particles that disperse simply because they've been given new spaces to move into. Human beings are, well, humans.
There are any number of reasons why renters may choose not to move into new buildings.
Moving is stressful, time-consuming and expensive. Why move when you don't have to?
Apartments are homes. Once a person has made a home somewhere, they may be reluctant to leave it.
The new construction may be too expensive.
Their current apartment is closer to work, school or family.
The new construction is bland or ugly and renters don't want to leave behind older buildings that have more character.
None of these reasons can be accounted for by a formula that reduces human behavior to a simple graph.
2. The glib economics of YIMBYism assume that landlords who own older buildings won't upgrade them or raise rents. For new market-rate or luxury housing to free up space in older, less expensive buildings, those older buildings have to stay the same. However, many landlords who own older properties are putting in granite counter tops and stainless steel appliances and charging higher rents as a result. The older building doesn't become to lower income people after all; on the contrary, long-time residents find themselves unable to stay in the homes they've known for years. Why does this happen? The same speculation that brings developers into our neighborhoods also convinces landlords that "investing" in their properties will pay off.
Human beings are not gas particles that disperse simply because they've been given new spaces to move into.
3. YIMBYs love the "invisible hand" theory. Just leave the market to its own devices, and the invisible hand will guide it to an equilibrium where there is housing for all! The truth is far more complex than this theory assumes. The invisible hand only works in a true free market -- one without price controls or taxes. New construction raises property values and taxes for everything around it. That makes rents in older apartments go up. We could get rid of property taxes and see if the invisible hand comes to the rescue, but if we did that, we wouldn't glean any tax money to put toward affordable housing, which is why YIMBYs argue for market rate housing. They believe the property taxes generated by luxury condos will fund the creation of affordable units. This is in direct contradiction to their "invisible hand" arguments.
The first time I heard someone justify all the new construction using a supply and demand argument, I felt like I'd been knocked back on my heels. Economics has never been a favorite subject of mine. I took a quarter of it in high school but didn't pursue it beyond the basics. Yet, these economic arguments in favor of new construction seemed to contradict my actual experiences as a renter. I wondered if I needed to take a few advanced economics courses.
The real world does not behave so predictably. -- James Kwak
Now, thanks to James Kwak's insights, I realize that I am not the one who needs a better education. Those who would sell our city to developers at the expense of the people who live here -- they are the ones who need a crash course in how the real world works.