CityLab published an analysis on Friday in which it concluded that “…new housing in some cities may be finally making a dent in years of pent-up demand.” The question posed was whether the number of new homes built in various cities – adjusted to reflect the number of people they can house – has been in line with the number of new residents. The article is well-written and goes the extra mile to be careful and clear about what it measures but, unfortunately, there is an inherent problem in its approach.
The problem is that the number of new residents does not reflect the demand for housing in a city. When prosperous cities attract more people than they can house, their population growth is all but determined by the amount of new housing built. Seeing as homes can shelter different numbers of people, depending on the circumstances, there is some wiggle room between the number of new residents and added housing capacity over short periods, but over longer periods the number of new residents closely mirrors the new housing capacity.
The CityLab analysis reflects fluctuations in this wiggle room. When cities add more new residents than new housing capacity, the average number of people per unit must increase, meaning that homes have become more crowded. CityLab’s figures reflect the fact that – with the exception of New York City in 2014 – all of the observed cities saw the average home get a little more crowded. The finding that crowding within units is increasing in these cities – all of which are non-coincidentally the central cities of their corresponding metro areas – is meaningful in its own right, but it says little about whether the supply of housing is catching up with demand.
Where does the demand for housing in a city come from? Does it only arise from people who already live in the city? Absolutely not. It comes from the larger pool of people who would live in the city if they could afford to and, crucially, this group includes people who don’t currently live there. When a prosperous city attracts more people than it can house, some of the people who want to live there are turned away, and in a market economy those are people who are less willing or able to pay. The turned-away include people who live in the city and choose to leave it – only to be replaced by newcomers more willing or able to pay – but mostly they include people who live elsewhere and for whom moving to the city doesn’t quite make sense given its cost of living (even when higher earnings are taken into account).
When prosperous cities build new homes they allow some of the turned-away to stay or move in, despite their lower willingness or ability to pay. The result is a city whose price appreciation is weaker and whose population growth is greater. The result is not, by any means, a city whose added housing capacity greatly exceeds its count of new residents over any extended period of time, as the rationale behind the CityLab analysis might imply. Put simply: if more housing is built in a prosperous city then more people will come.
You may not find the notion that more people will come appealing – different people, and even the same people under different circumstances, often don’t. But bear in mind that when prosperous cities build homes, they are inadvertently embracing more people. The same act of construction helps maintain affordability and, in so doing, allows those who are less capable of paying – newcomers and current residents alike – to share in the city’s prosperity.
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