Gentrification Is Caused by Underbuilding on Expensive Land

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Despite owning over 300 empty lots in the Point Breeze neighborhood, the city of Philadelphia is considering purchasing even more – but this time they want to grab them from active developers using eminent domain.

While the stated goal of the proposal is to build sub-market rate housing on “vacant, blighted and or tax delinquent” parcels, many observers and activists have noted that the targeted parcels are all actually slated to be developed into market rate housing. There is suspicion that the plan is really a ham-handed effort by Mayor Michael Nutter’s administration, via City Councilman Kenyatta Johnson, to try to stave off gentrification in Point Breeze.

If that’s true, it’s hard to see how this could possibly work. Short of intentionally making the neighborhood a less desirable place to live, the only feasible way to slow inflation of market rents is to allow developers to build more market-rate housing.

Building a few dozen sub-market rate housing units isn’t going to help the vast majority of renters. It’s only going to help a very small slice of the renter population lucky enough to get sub-market rate units. That is not a robust affordable housing strategy. If the goal is to bring down the cost of living for everybody, then the focus needs to be on bringing down the market rents.

Reducing market rents will require more housing construction in Point Breeze, but even more importantly, it will require more housing construction in the already-expensive neighborhoods. Too often, what happens is that neighborhoods become gentrified, but then they choke off further development and stop adding housing. Stephen Smith has a good explanation of the political economy:

The first 100-unit rental building with the neighborhood’s first high-quality grocery story is a huge boon, but the hundredth glass tower with the neighborhood’s fifth bank won’t even be noticed. It’s at this point that the price-lowering effect of dumping new units on the market will outweigh the price-raising effect of the new amenities – in other words, prices will start to fall.

The problem with American urban development patterns is that once a neighborhood has its amenities, new development grinds to a halt. Wealthier new residents have more political savvy than the old ones, and they use this to impose a protective NIMBY shield around the neighborhood. Maybe this is the same knee-jerk anti-market sentiment that we see in other sectors of the economy, but the fact that new residents are more likely to own property and have a stake in keeping the price of housing high can’t help. It’s at this point that the cutting edge of gentrification marches onward, with the cycle repeating itself in neighborhoods farther afield. You can sugarcoat this process by talking about “spreading the wealth around,” but at the end of the day most of the poor will be priced out, and those lucky enough to own their homes or have rent-regulated leases won’t value the upper-class amenities as much as they valued their old neighborhoods.

Young professionals are not moving into poor neighborhoods because they want to. They’re moving into poor neighborhoods because they can’t afford to live in the neighborhoods with lots of amenities. Most would choose to live in neighborhoods with more amenities if they could, but the rents are too high. And the rents are too high because the nicer neighborhoods have vocal and politically powerful constituencies in favor of high housing prices, and against new development.

Too much of the reporting on Point Breeze land price inflation locates the source of the problem in Point Breeze, rather than wealthier neighborhoods. If you want to know why land prices are rising in poor areas, you need to look at Center City, Northern Liberties, Old City, the waterfront, and other more developed areas where the pace of housing construction is not keeping up with the increase in land prices. If developers can’t build more housing there, that’s just going to put more development pressure on peripheral neighborhoods.

Some people may balk at this and argue that there’s already a lot of new construction happening in these places, but unless rents are stable or falling, clearly there hasn’t been enough construction.

This entry was posted in Miscellany.

3 Responses to Gentrification Is Caused by Underbuilding on Expensive Land

  1. 45king says:

    Nice analysis.

  2. Great article. I wrote something similar about the development boom in Seattle and how it’s likely to affect rental prices. They’ve been jumping up rapidly the past few years, but with tens of thousands of new units coming online in the next five years they’re likely to level off, or even drop. We’ve even got data from the past 20 years that provides very strong evidence that big increases in building are basically inversely proportional to rental prices. Great stuff!

    My post: http://betterinstitutions.blogspot.com/2012/09/increased-apartment-housing-in-seattle.html