Exporting California's Housing Challenges? Michael Storper & Patrick Condon Correct the Record on Out-Migration

Patrick Condon: The New York Times article repeats a common fallacy: that adding new housing supply will automatically lower prices. Sadly housing is not a commodity like peaches, where supply factors influence purchase price. 

Why not?  

Because urban land is what is bought and sold in the housing markets, not buildings. The cost of a square foot of building has not inflated substantially in recent decades, but the price of urban land has increased in certain parts of California by over 500% in only seven years. As the old saying "buy land because they are not making any more" suggests, urban land is a monopoly commodity and behaves very differently in the marketplace than peaches. 

Urban land passively absorbs the value created by both wage earners and entrepreneurs of vibrant cities, eventually absorbing the capital value of all that civic action into the price of land, reflected in increasing home price and rent, up to the point where the most vulnerable are forced to couch surf, live their lives in shelters, or live on the streets. 

Author Conor Dougherty trots out the tired YIMBY trope that it is a nefarious alignment of the boomer NIMBY hordes and low income residents of gentrifying neighbourhoods that stand in the way of a new dawn of housing affordability nirvana. Where in California is there evidence to support this contention? I myself have the honor of being an American who has worked in Vancouver Canada for nearly 30 years and have carefully studied market trends in that west coast city. Vancouver has North America's highest housing prices (when measured against average incomes). And yet Vancouver has added density faster than any other city in North America. It is now one of North America's densest. Most of that new density was added in the last 30 years. Vancouver's housing starts have exceeded population growth demands every year over the same period, hitting a new record in 2019.  If adding new density would reduce prices our housing should now be affordable. But in that same time period our cost of housing measured in price per square foot of interior space has increased by 300% and the value of city land increased by over 100 billion dollars (over 20%) in  just the year 2016. If adding supply reduced prices you would expect both land and home prices to go down. Sadly no. 

And yet the prescription offered by Dougherty and his YIMBY allies is more of the same. More building of overpriced condominiums valued as assets rather than as homes for wage earners, more increases in land value that do nothing but line the pockets of land speculators, more gentrification that adds to the housing precarity experienced by front line workers.  

It's fair now to ask what is the better way? The better way is not to assume that building more housing will lead inevitably to increased affordability. It is to insist on it. Local jurisdictions can insist that density increases should be conditional on ensuring new housing is permanently affordable (in the form of co-ops, non profit housing corporations, or other forms of non market housing). This mitigates land price inflation while ensuring social benefit. Cambridge Massachusetts has recently made such a demand through new zoning measures, so has Portland Oregon. California municipalities can certainly follow suit. 

Assuming that is that they break free of the undue influence exerted by land speculators and the "supply and demand" zealotry or their YIMBY minions. 

Michael Storper: I will not repeat Patrick's excellent points, which with I entirely agree.  But allow me to add some context.   Dougherty's piece comes at a time when they are all citing the net outmigration from California as evidence of California's failure at virtually everything. 

Even liberal columnists like Ezra Klein and Farhad Manjoo are in this chorus.  The context of course is that over the last 70 years, every time this has happened, there is a piling on of "California is washed up," and in today's context, "Democrats can't govern, California is the poster child of why they are wrong about everything."

Without ever claiming that we are good at solving our problems, the net outmigration requires context.  The people coming in are different from those leaving.  Those entering are, on average, high skilled, and those on average leaving are lesser skilled, mostly without college degrees.  They are indeed leaving in part in order to find cheaper housing. The skilled come in spite of expensive housing, because the numbers show that even after housing costs are accounted for, the skilled have higher real incomes in California than most of the rest of the country (except for other big skilled cities).  That's because there is a "wage premium" for college graduates in big skilled cities that even other college graduates do not receive when they locate outside these Superstar metro areas. So, we are not driving away the skilled (except for perhaps a temporary blip in pandemic times, and that will end).  

Now, turning to the outflow of the others, they face an entirely different situation.  This is because for people with less than a 4 year college degree  (about 65% of Americans), wages have flattened across the country — there is no wage premium for them in LA or SF or NY etc).  This is how the more unequal income distribution in the USA over the last 40 years translates into geography.  The kinds of jobs for which they qualify are spreading out.   So, there is no wage advantage to staying in places like coastal California, and housing prices are cheaper in the rest of the country, so they get a real wage elsewhere.  

But, and here is the main point:  most of this has to do with the geography of jobs and wages, and is not caused by housing prices.  Housing prices reflect and follow this reality, they have not caused this new geography. 

Underlying the chorus of critics of California is an old but incorrect notion, that the measure of success of a region is whether more people are coming into it.  It's not an irrelevant variable, but it ignores the quality of economic development.  Lots of places with high levels of inmigration are poorer than California because their jobs are worse and they attract the less skilled.   In the specific case of California, moreover, we are not even close to the position of long-declining old manufacturing states and cities and rural areas, but rather a readjustment of the internal migration dynamic to reflect something that is structural, i.e. the geography of jobs and wages, where California is at the top of the food chain because of our place in the knowledge economy, entertainment, etc.  Finally, our population is not declining!  Because we have demographically vibrant immigrant populations, we have natural population increase; hardly a picture of demographic stagnation.

Returning to Patrick's analysis:  there might be some supply issues with respect to the generally young, skilled population, but the bigger problem is the rest of our population and workforce, for which additional market-rate housing will not have a beneficial effect, because the core assumption of the supply-based models of housing, that there is a strong filtering (trickle down) mechanism, is  pretty much wrong, at least in the short-to -medium run.  Any aggregate increase in housing that is tilted toward the luxury market will simply better house those that can already afford to pay, and it might even completely backfire by attracting even more high-skilled people into California and totally defeat even the marginal price-supply effect at the top of the market.