Levi Thatcher: Why it’s fine for developers to build luxury housing

Steve Griffin | The Salt Lake Tribune SALT Development has begun construction of Hardware District, a $275 million mixed-use development, pictured here, that will include 466 luxury multifamily units and 260,000 SF of office space. This comes concurrently of them completing construction of the adjacent $100 million 4th West Apartments in Salt Lake City Wednesday June 28, 2017.

Members of the Salt Lake City Council have admirably focused on addressing the housing affordability crisis. As in most cities, they’ve tackled this by increasing the supply of rental units — which is sorely needed — while also artificially keeping rents lower via inclusionary zoning.

Effectively, developers are rewarded with loan assistance or relaxed height restrictions if certain percentages of the units are offered at a significant discount from market rent. Locally, density has increased and many of the units are affordable — so far so good.

Currently, that progress is in serious danger due to an ongoing debate around adding density to certain neighborhoods. The City Council and others seem to be struggling with the economics of why additional densification makes sense.

The confusion comes from the fact that most new apartments have expensive rents compared to the housing they directly replace. This makes sense. These new buildings often include pools, exercise facilities, in-unit washer/dryer, etc. The question then becomes, why should we knock down old structures when the new rent won’t be affordable by most residents?

The answer is fairly simple: the tech yuppy. In fast growing cities like Salt Lake City, there are thousands of ambitious young transplants streaming in who work in software, finance or health care.

As Noah Smith of Bloomberg View explains, if we don’t build enough new transit-friendly fish tanks to catch these yuppies as they move to Salt Lake City, they will be forced to look for a place to live among the older housing stock, where they’ll compete directly with working-class residents, service workers and disadvantaged minorities.

These folks, by and large, don’t want to live in these new luxury apartment buildings or can’t afford them. Without the new market-rate housing, the yuppies will bid up rent and house prices in more working-class areas, causing the displacement that the council worries about.

Locally, there’s a fear that, with new construction, you are trading less-expensive housing for more-expensive housing. This is a simple misunderstanding of economics.

As Scott Sumner of George Mason University states, “By far the most effective way of providing ‘affordable housing’ for average people is to get upper middle-class people to vacate their existing homes, to free them up for middle-class people to move in. If high-rise luxury buildings are built in a (low-rise) gentrifying Seattle neighborhood, then it will become more difficult for lower middle-class people to live in that particular neighborhood. However, it will also reduce the overall price of housing at an aggregate level, and thus help working-class people in aggregate.”

In other words, new luxury housing enables more supply even for those with below median incomes. As upper middle-class folks move into a new building, there’s a filtering effect in that lower-cost units free up as households fill the vacancies caused by the first moves (which puts downward pressure on prices in aggregate). You might be thinking that, OK, this is theoretical. Does this actually work? Yes!

A recent study from Evan Mast, an economist, leverages tenant history data for 52,000 residents across 12 U.S. cities to examine moving patterns surrounding new developments. He finds that “a short series of moves connects new construction and low-income areas,” such that “100 market-rate units create 45-70 equivalent units in below-median income tracts” within roughly five years. “This suggests that new construction reduces demand and loosens the housing market in low and middle-income areas, even in the short run.”

In summary: Yes, building new luxury developments helps affordability overall.

Levi Thatcher

Levi Thatcher is a member of the Sugar House Community Council and works as a data scientist in Salt Lake City. Views are his own.

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