The Economics of Housing Supply and Demand and the Cost of Housing

#cityforall

It’s a cliche to say that Denver’s housing is becoming increasingly unaffordable to average working-class people. Having participated in the Denveright process over the last three years, I have repeatedly heard the concerns over involuntary displacement and gentrification. In this part of my #cityforall series of posts, I’d like to focus on some common themes in this discussion.

One common thread is blaming the rapid growth in Denver for increased cost of housing. At the first glance it seems that development drives up the cost of housing as existing residents get pushed out for the benefit of more affluent populations who move here from out of state. So if we stop development, people will stop moving here, right? No, unfortunately this is not correct. Unless we build a wall around Denver and start requiring visas, people will still move here. The amazing quality of life and economic opportunities will always attract migration. But without additional housing supply, existing homes and apartments will become even more expensive. Limited supply of housing will drive up housing costs and soon the only people who will be able to move or stay here will be the extremely wealthy. San Francisco, and locally Boulder, are good examples of places that limited their development through various land use regulations and created a severe home shortage causing prices to skyrocket.

Another popular idea is rent control. We can limit growth and keep Denver affordable if we regulate rents, right? Wrong again. Not only is rent control prohibited at the state level in Colorado, but also it does very little to make homes more attainable. In fact, the rent-controlled cities are some of the least affordable in the US. Simply put, rent control increases demand for housing as more people are able to afford to live independently but does not address the supply. When demand grows and supply stays the same, it creates a housing shortage. Rent-regulated apartments have a low-to-none turnover rate (people hold on to them despite their need for housing space changing over time). So low supply and low turnover make affordable housing unavailable to most. And places like New York are unaffordable despite a long tradition of rent regulation.

This week’s “architectural doodle” explores (in section) how multi-unit structure addresses the street and alley.
Sketch of how multi-unit structures address the street and alley

So what can we do to make Denver more affordable? In a market economy, if the supply meets the demand prices stabilize and housing becomes more affordable. While this is probably an oversimplification and we will always need subsidies to provide below-market-rate housing for some demographics, building more housing makes housing more attainable. The trick is to provide diverse housing options for diverse populations so people of all backgrounds, lifestyles, and incomes can choose where and how to live.

For decades, our urban neighborhoods in Denver have been limited to a specific building type—single family homes. Through single-unit zoning (SU), we limited supply of housing in these areas. As a result, these neighborhoods become unaffordable and subject to redevelopment with large McMansions that cater to the most affluent residents. Providing more supply of housing in the neighborhoods will make them more affordable. To accommodate anticipated growth and prevent further displacement, Denver should consider eliminating single-family zoning. Instead, the zoning code should allow multi-unit structures that are respectful of the scale and historic urban design patterns of the neighborhoods.

By |2019-03-18T14:01:31+00:00March 6, 2019|Categories: Attainable Housing, Urban Form, Zoning & Regulation|9 Comments

9 Comments

  1. […] “If we stop development, people will stop moving here, right?” No. If Denver curbs new housing, “soon the only people who will be able to move or stay here will be the extremely wealthy.” (Denver Urbanism) […]

  2. Will Kralovec March 6, 2019 at 5:16 pm

    You are so spot on Gosia!…Denver frankly needs more housing, period. Well, more precisely it needs more non-luxury housing.

    We have not only a lower-income housing problem (below 60% AMI), but also a significant under supply of middle market housing. The vast majority of new housing being built in Denver is of the “luxury” category.

    Land use regulatory reform that allows more diversity of housing types in ALL neighborhoods would be one stellar way to address this issue.

    This dilemma is why I’ve taken to using the term “income appropriate” housing to replace “affordable housing” when talking about Denver’s housing challenges. Simply put, we need a wider spectrum of “income appropriate” housing options in Denver!

    Keep up your great articles Gosia.

  3. Freddie March 6, 2019 at 6:24 pm

    Good post. Every word is true. I’m afraid though that the majority of Denverites will continue to blame rising housing costs and gentrification on “allowing developers to run rampant.” I don’t understand how it’s possible so many people are having trouble conceptualizing supply and demand. It makes me worry that it’s only a matter of time before we end up with an anti-development mayor and city council — which will only make the problem worse, and change Denver, demographically, into something unrecognizable.

    A friend of mine (who happens to be a very intelligent guy but blames developers for rising rents) recently pointed at a building under construction while we were walking to breakfast and said, “There’s gentrification for ya.” In that moment I didn’t have the energy to come up with a clever rebuttal so I just said something like, “Dude. There’s a housing shortage. We need more supply.”

  4. matthew March 6, 2019 at 6:38 pm

    Preach.

  5. Jason Lewiston March 7, 2019 at 4:13 pm

    Excellent article as always from Gosia – clear, concise, and to the point.

    To dive deeper into the weeds of this:

    Denver is going to grow exponentially over the next 100 years, since it is literally the moderate temperature ‘high ground’ of our country.

    Ironically the same small but very vocal group of white conservative Baby Boomer ‘natives’ who vehemently detest population growth here are the same people who contemptuously ignored warnings about CO2 emissions for the past 40 years, which will ultimately cause the mass migration (among other factors).

    In the lifetime of Millennials, millions of Americans will be displaced from coastlines due to sea level rise (prices are already dropping in many areas), and from Texas and Arizona, where it will be 125 degrees in the summer, and many will move to Denver.

    We had better start planning NOW. It is unsustainable to say the least to push these people out to ever more distant ‘suburbs’ and force them to drive into town.

    And right now in the City of Denver we are pushing almost all new development into 1/3rd of the City.

    It is not a ‘coincidence’ that virtually all higher density zonings, thus future population growth, has been pushed to the minority neighborhoods created by redlining 100 years ago. Before you call me names for that statement, look at a Denver future land use map for multifamily and compare it to a redlining map of the 1920s. It is no less racist.

    So instead of having 2 and 3 story multifamily buildings everywhere, as suggested by Gosia’s article, we have tall 5+ story buildings in (formerly) minority neighborhoods, thus ‘gentrification’.

    As a GC I can tell you that wood frame 2 and 3 story buildings are a lot less to build per square foot than 5+ story steel frame buildings with structured parking. But the developers can only build density where they are allowed.

    So do NOT blame developers for the current housing crisis. We do not create zoning laws, your elected politicians do.

    And at their next meeting our elected politicians can adopt a plan to truly address the climate crisis (and gentrification crisis) by rezoning the entire city multi-family, require net zero construction, AND substantially decrease single passenger car traffic through vastly improved mass transit and congestion traffic policies.

    God knows I wouldn’t hold your breath waiting for them to find the courage to do it. They will go on with ‘business as usual’ while our planet is destroyed for future generations. Millennials didn’t go to Woodstock and drop acid, they’ve had acid dropped on them.

    It will require a ballot initiative by the people of Denver (and a lot of other cities) to accomplish the above.

  6. Bernie Mac March 7, 2019 at 4:20 pm

    Lots of variables to consider here beyond the concept of multi-unit structures. To truly get to the “root cause” of the housing issue is to include discussions about jobs training/education, transportation infrastructure, globalization of the economy and “location, location location”.
    In terms of locations in Denver “they ain’t making any more of them” so where are you proposing to build these multi-unit structures? Denver is already full. We don’t need to relax the zoning codes (which were just recently revamped, BTW) but rather relax our geography and spread out more because we have plenty of space outside of Denver proper. Also, again you fail to even mention the ETU B and ETU C zone designations that already currently address the multi unit designation that you propose.
    So thanks for the HS economics lesson Gosia, but attended class that day. Sorry if you were out in the parking lot having a safety meeting 🙂

  7. Ryan March 10, 2019 at 2:23 am

    Denver’s apartment vacancy rate was 6.3% in 2018. The national average is 4.5%.

    Tell me about this “supply and demand” again?

    Thankfully there are people out there studying these issues who bothered to read past the opening paragraph of their high school Intro to Economics text book. I’m sure these individuals are less inclined to blurt out silly statements about rent control policy without first considering average rents in expensive cities would actually be even higher without it. They’d probably also say it’s not the best look to cite tendentious articles by supply-side shills who advocate for something called “Market Urbanism,” which might be the most ridiculous euphemism for gentrification I’ve seen yet.

    This website deserves better researched and more thoughtful writing.

  8. Nam Henderson March 14, 2019 at 4:33 am

    As I’ve argued elsewhere I agree we need more housing and more than just single-family. We particularly need more missing-middle, of which Denver has many contextual, historic and sensitive examples. In my own neck of the city (Park Hill) this includes; on Olive (2 story courtyard apts right behind Famous Philly Cheese Steak), on Jasmine (1 story courtyard apts near Haiwatha Rec) or just down the street from me on Pontiac (same). Towards Colfax, off Ivy (3 stories) and Kearney (again 3 stories). Or a bit further afield “Poet’s Row” aka The Sherman Historic District in Cap Hill. However one option that isn’t even mentioned above and that I also have sympathy for, would rather than simply buying into the “market” ideal of supply & demand suggest a radical rethinking of current model(s). Aka “How can we solve the housing crisis? Simple: have the government build more housing.” https://jacobinmag.com/2018/04/affordable-housing-crisis-peoples-policy-project

  9. Jimmy Z April 16, 2019 at 1:08 pm

    You left the impact of population growth out of the equation. Denver can’t create more land to build on, so, with a growing population, the only two options are to grow out and/or to grow more dense. Part of what makes Denver attracive is its current density, its current neighborhoods. While adding density to existing neighborhoods is certainly possible, at some point, the neighborhood does change. Replacing block after block of single family housing with multi-story, multi-family structures WILL let more people live within the city limits, but it won’t be the same city . . .

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