"Luxury apartments and condos are a good thing, my friend"

As you may have guessed by the title of this post, I recognize that this is a touchy subject whose message can come across as insensitive, bourgeoisie, or worse. Snarky Mitt Romney reference aside, concerns about neighborhoods being overrun with high-income apartment towers and condos are sometimes justified. Gentrification is a real thing, and its negative effects tend to be focused on the most vulnerable citizens, those that are least prepared to cope with rapid changes to their community.

Despite this, luxury apartments and condos deserve to be defended. They don't need to be promoted (the market provides enough incentives for them on its own), but neither should they be reflexively attacked simply because many people can't afford them.

Here's why:

First, people with high incomes have a lot of options when it comes to where they choose to live. If they want to live in the suburbs and commute to work in a car they can afford to do so without being significantly burdened by transportation costs. And depending on the boundaries of your respective city, county, or region, living in the suburbs may mean not contributing significantly to the tax base of the major city in the area (usually the only place where land values would justify building apartments or condos more than a few stories tall). Look to Los Angeles County if you need an example.

If higher-quality housing--housing that fulfills the desires of wealthier families and individuals--isn't provided in sufficient quantity in the city, the choice has already been made for potential residents. Those tax dollars are going somewhere else, usually spent on less efficient infrastructure and government services, and for no good reason. If these people want to bring their dollars to our (often higher-tax) cities, who are we to say no? Affluence need not be synonymous with 3,000 sq ft homes, three-car garages, and half-acre lots.

Second, higher-income people are less likely to use transit. But, if they live in denser areas, particularly in the central business district where homes and businesses are very proximate to one another, this is less true. Transit and walking are both far more convenient where luxury apartments tend to be located, so this is an opportunity to get those least likely to use alternative transportation out of their cars and onto the streets and sidewalks. It might also be nice to have more moneyed interests on the side of alternative transportation, not against it.

According to the below chart from the APTA, households earning over $100,000 a year make up about eleven percent of transit ridership in cities with populations over a million people, but less than two percent of ridership in cities below that population threshold:

From the American Public Transportation Association [PDF].

Also from the chart, the ratio of rail use relative to bus use increases drastically as income rises, and rail transit is far more likely to be located in dense city cores where luxury towers are also usually found. Those making less than $15k a year use the bus about 2.5 times more frequently than they use rail; at $100-150k income the reverse is true, and at greater than $150k income bus ridership is almost non-existent.

Rail has a well-documented psychological appeal compared to buses at all income levels, so while building rail just to appease rich people would be wasteful, bringing them into the fold while improving the transit experience for everyone else as well has a lot of appeal.

For a graphical representation of the impact of income on transit use, Sightline has the following chart (focused on the Pacific Northwest):

From "The Demographics of Transit" at Sightline.org.

This chart also reflects the impact of population discussed above: the Seattle metro has a higher population and density than Portland, and it is more robust against the decline of transit use as income increases.

Another issue, not directly related to transit or housing but important nonetheless, is that when rich people live in economically diverse areas (rather than, for example, the high-income single-family-home enclaves dotted throughout the 'burbs), they appear to become better people. According to a study by the Chronicle of Philanthropy, living in economically diverse areas has a huge impact on the amount of money affluent families donate to charity.

In zip codes where wealthy filers (>$200k income) are surrounded by other rich people they dedicate a very small percent of their income to philanthropy, less than 4% in each of the most homogeneous zips. Regions where wealthy filers are members of communities with diverse incomes donate far more to charity, upwards of 30% of their discretionary income in the most giving neighborhoods. Presumably, personal and daily contact with those less fortunate has a humanizing effect, while living with a bunch of other richies leaves you more concerned with keeping up with the Joneses.

From "Study Reveals The Geography of Charitable Giving" at NPR.org.

Again, this isn't to say that we should go out of our way to accommodate wealthier residents in our cities, but the beauty is that we don't need to. Developers want to build that housing. We just have to let it happen. As the above chart makes clear, we also don't want to go overboard and turn our central neighborhoods into vertical gated communities. There is a balance to be struck, but it's clear that as long as we have people like Councilwoman Letitia James of Brooklyn complaining that we shouldn't get rid of excess parking because "[t]hey would turn it into luxury housing," we've still got a long way to go. We're seeing the same problem in Seattle this very week, where city councilmembers decided to stick it to rich people by turning down increased height limits in the South Lake Union neighborhood, and the $10-12 million for affordable housing that came along with the deal. Take that, fat cats.

Striking that balance also becomes more difficult when height limits, parking minimums, floor-area-ratios, and other regulations put a hard cap on the total amount of building capacity in an area, often far below the actual demand for living there. When these limitations are in place, it really does become harder to provide sufficient housing at all income levels. Matt Yglesias at Slate describes the problem aptly:

Think about other major classes of widely owned durable goods like cars and refrigerators. Obviously luxury cars and Sub-Zero fridges are a real thing. But the bulk of new car and new fridge production is targeted at a mass middle-class customer base simply because there are more customers there. But if you made the refrigerator industry abide by tight production quotas, all that mass market fridge building would vanish and everyone would make super-expensive high-end fridges. Middle class people would face a crisis of fridge affordability and need to subsist on used luxury fridges, very small fridges, or make substantial financial sacrifices in order to get a decent-sized properly functioning fridge. The Japanese auto industry did in fact face import quotas to the United States in the 1980s, which was the impetus for Honda and Toyota to develop the Acura and Lexus luxury sub-brands.

He goes on to discuss the problem of gentrification and its more positive corollary, filtering:

If a ton of new luxury apartments get constructed in a city, then at least some of their residents will be abandoning homes in other structures elsewhere in the area. Those homes are now free to be occupied by some less-rich people. And over time newer even more luxurious buildings will come on the market and yesterday's new luxury construction will age and filter down the socioeconomic ladder. When you see the gentrification trend outpacing the filtering trend, with higher-income families replacing lower-income families and lower-income families moving to worse-and-worse locations, that's a consequence of excessive restriction on new construction. In a healthy regulatory climate you should see more filtering than gentrification, lower-income families moving into houses that have been abandoned by the rich as rich people move into fancier and fancier new buildings. Of course in the worst case scenario you get filtering without construction—"white flight" and the like—as affluent families simply leave the area and your tax base collapses.

Filtering also helps resolve the issue of mere benefit versus dependence. Sure, we're all better off when wealthier people are persuaded to use public transportation (benefit), but lower-income people are often dependent on it. If we have to choose who should be able to live near transit, lower- and middle-income workers have a stronger claim. When we're debating between 65 and 85 foot height limits in a technological era where quarter-mile towers are possible, however, we shouldn't have to choose. Cities need to be zoned such that the supply of housing at all income levels can actually approach demand and everyone has the opportunity to live near frequent transit if they want to.

Building more luxury towers in the city isn't going to be the difference between a successful city and a failing one, but it can make a positive impact. Built alongside housing for the rest of us, high-income, high-density housing can improve the financial health of cities, utilize public resources more efficiently, increase transit ridership and political support, and encourage connections between people that benefit everyone. For those set on coming to the city regardless of supply, it also provides a place to go instead of bidding existing residents out of their homes and apartments.

The overall message is that all types of housing should be promoted, regardless of target demographic, as long as there is demand for it. As part of a complete growth plan for cities, luxury housing should be welcomed, not scorned.

*Addendum (04/04/13): Two good articles that somewhat address these issues just happened to be published today, here and here. One big takeaway, and something I didn't address sufficiently in my own post, is that failing to build this housing does nothing to reduce the demand for it. If the appeal of an area increases you can either accommodate it with additional density, replacing three-story buildings with eight-story ones for example, or you can wait for wealthy people to just come in and replace lower-income renters and renovate existing units, driving up rents even further because supply isn't actually increasing.

The only way you can deal with increased demand is to either meet it with supply or make the area a less pleasant place to live such that demand decreases. Doing nothing just leads to a sort of "gentrification sprawl" where instead of new residents being located on the relatively small footprints of apartment and condo towers (or just taller buildings), they instead spread out more widely into a greater number of buildings with lower densities.

Property tax deductions, like mortgage interest deductions, are unfair to renters

This is a fairly minor follow-up to the post I wrote a few months ago about the pointlessness of the mortgage interest tax deduction. This is about the property tax deduction. Like the MITD, the PTD does a poor job of achieving its supposed policy goals, and in some cases actually works at cross-purposes to those goals.

Just as with mortgage interest, property owners are able to deduct state and local property taxes from their taxable income. Rental property, like owner-occupied housing, is also subject to this exemption. The goal of mortgage interest and property tax deductions is nominally to encourage homeownership, but by it's very nature this can't happen with rental property. Instead, all we end up doing is taking money out of the pockets of renters and handing it over to the (on average, richer) owners, with no social or economic policy victories to speak of.

Here's why:

Rents will usually be set by landlords at whatever level the market will bear (i.e., the highest level at which they can still rent all of their units). Unless competition for renters is extremely fierce, these property owners will be charging rents that cover their costs--not just their mortgage, but also repairs, landscaping, cleaning, taxes, and hopefully some profit. Renters, although they don't receive the actual bill, are the ones paying the property tax as part of their rent checks. Despite this fact, however, the property owner is the one who gets to write it off.

This means that if the property tax bill on my rental unit is $2,000 every year, I end up sending that money to my landlord (who then forwards it along to the city and state) and he deducts it from his taxable income, saving him upwards of $500. That's a pretty steep middleman's fee. The deduction is very clearly not succeeding at its goal of "encouraging homeownership". After all, I'm still renting. Maybe if I got to keep that extra $500 myself I'd be a little closer to owning a home. At the very least, we're clearly operating under an unfair system when only homeowners can deduct their property taxes even though both renters and owners pay them.

This isn't the fault of the property owners and I am not writing this with some kind of vengeance in mind for them, but if the deduction isn't helping to encourage homeownership* then why does it exist? From a government policy perspective, property and mortgage interest tax deductions are already of very questionable value for owner-occupied housing; in this case it's nothing more than a giveaway to rental property owners with nothing in return for the renter or society more broadly. No good is achieved.

As I wrote in November, there's no need for any additional incentive to purchase a home. Unless we want to find some way to ensure that the deduction finds its way into the hands of the person who actually paid the tax, we're better off getting rid of it entirely.


(I'd be interested in anyone's thoughts on how we might pass along the property tax directly to renters, or more likely give them the option of doing so. At first glance it seems too complicated to be worthwhile, and just getting rid of the deduction seems like a more realistic solution. But maybe there are some good ideas out there.)

*Other than in some perverse "force renters to overpay on their taxes until they wise up and buy a house" fashion.

Parking-free apartment buildings aren't enough

In Portland some developers have recently started constructing apartment buildings without parking (a practice that is illegal in most cities), angering some neighbors who complain that the tenants still own cars, and that they just park them on the street instead of in privately owned spaces. And they're right. According to an article in the Oregonian:

[The city] found that 73 percent of 116 apartment households surveyed have cars, and two-thirds park on the street. Only 36 percent use a car for a daily commute, meaning the rest store their cars on the street for much of the week.

Frankly, this is pretty damning evidence that parking-free apartment units don't actually discourage car use. Not enough, and not by themselves, at least. Of course, only 73% of households owning a car is far below the average rate of car ownership in most cities, but it's still the majority of the tenants. What I found most significant here was the fact that only 36% use their cars for commuting--half of the households that own a car. The implication, of course, is that with the right incentives many of the people who don't commute with their vehicles could be encouraged to get rid of them. In the age of ZipCar and walkable cities, owning a car in this type of environment is more a matter of inertia than genuine need.

What might those incentives look like? One option might be for property managers to offer access to car-sharing, as is being done in a few places throughout the country. This might also be something cities themselves, or a non-profit of some kind, could administrate. For example, in exchange for donating your car you might get a five-year membership to a car sharing service with up to 20 hours of use a month. The value of getting people out of their cars is so high for cities--less congestion, pollution, and carnage, and considerably more money spent locally--that subsidizing some of the cost of car sharing might even be worthwhile.

Another obvious incentive is appropriately pricing our existing public parking spaces. In my old neighborhood of Capitol Hill, and many of the busier areas of the city, a parking permit is required to park on residential streets during the day, and costs $65 every two years. On commercial streets we're currently asking drivers to pay up to $4 per hour to park, but our residents aren't even paying $4 a month! And as far as I can tell there doesn't even seem to be a limit to how many you can purchase beyond, presumably, the number of cars you own. We set prices for commercial parking to ensure that those willing to pay can always find a space, but don't adhere to this philosophy when it comes to residential parking.

The same residents paying effectively nothing (usually actually nothing, for most neighborhoods), are demanding that developers--and hence the residents of those new developments--foot the bill of $10-20k (and upwards of $50k in some places) per parking space, usually underground. In other words, only existing residents get free parking, and everyone else has to pay the full cost. Even those who don't drive end up paying, in the form of taxes used to build and maintain the public roads being used for car storage. At a time when we recognize that reduced car use is good for cities and good for people, why are non-drivers subsidizing the cost of vehicle storage, and single-car households subsidizing multi-vehicle households?

A drastic increase in the cost of parking permits would raise considerable revenue, but I'd be perfectly content if it was dedicated to nothing but road maintenance. The real goal is a resolution of the Tragedy of the Commons, wherein un-priced public goods (in this case parking spaces) leads to vast overuse, harming everyone in the process. Revenue is simply beside the point. Even if a change in parking permit prices was offset by a slight decrease in, say, local sales taxes, making it completely revenue neutral, it would be a huge boon to the awful parking situation in the city, and to our economy.

The point of all this is that it would also discourage people in the densest, transit-oriented parts of the city from owning cars that they only use for occasional trips. For current residents who own a car and don't want that purchase's value completely destroyed by the increased cost of parking, the trade-in for a ZipCar-like subscription could help mitigate that loss. This, or another creative means of positively incentivizing a switch to a car-free or car-lite lifestyle, would be a valuable and perhaps necessary complement to increasing long-term parking costs. 

Even if all the new developments in the city provided enough parking for their residents, there's a critical point at which our roads simply can't handle any more traffic. We need to pair strategies for reduced parking in new apartment buildings with strategies to reduce car ownership and, especially, reduce the need for it. Doing just one or another won't be enough.

Increased apartment housing in Seattle likely to stabilize rent prices

It's a common refrain among urbanist types who are savvy to land use issues that increasing the amount of housing in a region can lower rents, or at least slow their rise. The reasoning is straightforward: if you have more demand than supply, prices will increase; if you increase supply to meet or exceed demand, landlords will be forced to compete with one another for renters and prices will decline.

This sounds really great. When you combine it with all the other great things densely-built, transit-oriented development can bring (more walking, bicycling, and transit use; more efficient use of energy and infrastructure; greater diversity of shops, restaurants, and entertainment; more spontaneous interactions with other members of the community; etc.), it sounds even better. But is it true? Do rents really decline just because more units of housing get built? I wanted proof.

After reading this article at the Seattle Times on the boom in apartment building in the Puget Sound region and the effects it may have on rents, I felt like I was on the right track. Unfortunately, the most conclusive statement contained in the article in support of this idea was the following:

[T]he regional apartment-vacancy rate has stopped dropping, both Dupre + Scott and Apartment Insights say, and it should start inching up next year as a bumper crop of new apartment projects comes to market.

That means “rents will basically have to flatten out,” said Mike Scott of Dupre + Scott.

Great news! Not exactly a scientific proof, but I'll take it. Near the end of the article, however:

Even so, 73 percent of landlords responding to that company’s survey said they plan to increase rents over the next six months.

Okay, not so good news. Most of the 35,000 units planned for the next 5 years haven't opened yet though, so maybe landlords are just getting what they can while the gettin's good. Soon enough, the thinking goes, the balance of power is going to tip back toward the renters, and prices will moderate. And a good thing too, since in-city rents for 20+ unit apartments in Seattle have increased by almost 7.5% in the last year (most of that, 6%, in the last 6 months). Has this actually happened? Thankfully, the Times article led me to the answer.

In an article Dupre + Scott Apartment Advisors have produced to accompany the aforementioned survey, they clearly describe some of the trends in the region and break it down into sub-regions with some nice charts. I really encourage you to read the whole thing--it's not too long. But first, and most importantly, I'd like to show you the following two charts from the article:

What I hope you'll appreciate when looking at these charts is their opposing nature. When vacancies are low, rents go up; when vacancies are high, rents go down. That's right, they actually went down! Next time someone tells you it's not possible, and asks you how building new, usually more expensive housing will lower rents, just point them here. It works. And just to be clear, I believe these prices are in nominal terms, not inflation-adjusted, which would explain why prices tend to increase by higher percentages than they decrease. If you provide enough housing to affect vacancies (i.e., enough to meet or exceed demand), prices will go down.

Now I'd like to point out one more chart:

Note how many apartment units were opened in 1999-2002, and then take a look at the vacancy rate for 2001-2005 in the earlier chart. We built a lot of units in that time period, and it seems that this had a significant impact on the market vacancy rate. If you know of something else that accounted for this difference please let me know in comments, but for now I'm going to stick with the sensible conclusion that the supply increased beyond demand and we ended up with a bit of an apartment glut. Prices went down and all was right with the world (for renters, at least). Now look at how many units are planned for 2012-2015. Many more! I suspect that demand for urban living has increased since the early 2000s, but nonetheless this bodes very well for apartment prices in the coming years. And just to drive the point home, note that it took a year or two after the apartments started coming online for prices to start declining. That shouldn't be surprising since the first to open probably only served to soak up the existing unsatisfied demand for living in the regions--it took an excess of supply to actually start bringing prices down.

One more thing to look forward to, renters: besides the large addition of apartments we're experiencing, the real estate market is also improving. That means many people who were forced into renting, or delayed buying a house until they were certain the real estate market had hit rock bottom, are going to start exiting the rental market. So look for this to remove some of your competition as well, driving prices down even further.

So three cheers for providing more housing in Seattle! It's efficient, it's in demand, and it helps keep housing affordable. What's not to like!?