So there’s not perpetual motion - just the ability to keep making money as long as there’s pent-up demand, like in every other part of the economy.Īnd it doesn’t violate laws of supply and demand if Oakland built more houses, this would lower the price of housing everywhere except Oakland : people who previously planned to move to NYC or SF would move to Oakland instead, lowering NYC/SF demand (and therefore prices). But it can’t do this forever - at some point, it will exhaust the pool of Americans who want to move to big cities (you’ll know this has happened when housing prices are no higher in big cities than anywhere else).
Since existing big dense cities are all very expensive, most likely in current conditions the first effect would win out, and Oakland would become more expensive. So if Oakland became bigger, it would become a more appealing destination for these people at some rate (making it more expensive) and get more supply at some rate (making it less expensive). The fact that big cities remain more expensive than small villages suggests that there are many of these people and they’re currently under-served. As new cities become “big” (by these people’s criteria), they’ll move to those cities, increasing demand. Right now, more Americans prefer to live in big cities than there are housing units in big cities, so prices go up and these people can’t afford their dream. One common pattern is to prefer any big city - they would be happy to live in Seattle, or NYC, or the Bay, if the opportunity came up. These people have various combinations of preferences and requirements. But if becoming just as big as Manhattan or London would make Oakland more expensive, shouldn’t we assume that a little step in that direction would make it a little bit more expensive? Wouldn’t the alternative be some kind of highly unparsimonious pricing function like this?:ġ who are looking for new housing (or who might start looking if the right situation presented itself). I don’t see why Oakland being able to tell a different story of how it reached Manhattan/London density levels (“it was because we were YIMBYs and deliberately cultivated density to lower prices”) would make the end result any different from the real Manhattan or London. But Manhattan and London have the highest house prices in their respective countries, primarily because of their density and the opportunities density provides. So I don’t understand why Matt believes that building a few new apartments in some city - a very small move along that spectrum - would do anything other than make local prices go up.įor example, if my home city of Oakland (population 500,000) became ten times denser, it would build 4.5 million new units and end up about as dense as Manhattan or London.
So empirically, as you move along the density spectrum from the empty North Dakota plain to Manhattan, housing prices go up. This induced demand effect is so strong that it overwhelms the fact that Manhattan has millions more houses than the empty North Dakota plain (or lower-tier cities like Des Moines or Cleveland). They moving there because they want to be in a big city - with friends, jobs, museums, and nightlife. But nobody moves to Manhattan for the harbor. Manhattan has a few extra natural amenities, like a river and a good harbor. There are plenty of little islands off the US East Coast - Maine alone has dozens - and none of them are as expensive to live in as Manhattan. Stripped of its density, Manhattan is just a little island off the US East Coast. But equally obviously, it isn’t the full effect.
Moving from intuitive thought experiments to real data, we find that indeed, the denser an area, the higher its house prices:Ĭould this be reverse causation - ie New York is very dense because its prices are so high (which incentivizes developers to squeeze the most out of every parcel of land)? Yes, obviously this is part of the effect. House prices in giant empty plains in North Dakota are at rock bottom. But let’s say for the sake of argument that it’s a giant empty plain in the middle of North Dakota. The least dense US city, ie the city with the lowest housing supply, isn’t really a well-defined concept. These are also the 1st and 3rd most expensive cities in the US. The two densest US cities, ie the cities with the greatest housing supply per square kilometer, are New York City and San Francisco. When you do that, he has to be wrong, right? But I find looking for tiny effects on the margin less convincing than looking for gigantic effects at the tails. I’m nervous disagreeing with him, and his studies seem good. He presents several studies showing that, at least on the marginal street-by-street level, this isn’t true. Matt Yglesias tries to debunk the claim that building more houses raises local house prices.
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