Market Fundamentalism in the Mission?

There’s a proposal to place a moratorium on all market rate construction in the Mission District, one of San Francisco’s most rapidly gentrifying neighborhoods. Needless to say the proposal has sparked a debate. And Dan Ancona’s Putting Market Fundamentalism On Hold is another rock hurled into that particular fray. But in trying to take the anti-moratorium/pro-supply camp to task, it falls into the same unproductive bomb hurling we’ve been watching now for years. The following are a few thoughts on some of the points Mr. Ancona makes in his recent piece.

Talking Past Each Other

The first point is about a fundamental misunderstanding of the motivations behind the moratorium. Mr. Ancona makes this mistake, but so do the exasperated anti-moratorium/pro-supply advocates he quotes at the beginning of his piece.

Hint: The moratorium is not about lowering housing prices.

To be sure, the anti-moratorium camp wants lower aggregate housing prices throughout San Francisco and the entire region. The indisputable way to accomplish this goal is by building more housing. And as far as the anti-moratorium camp is concerned, this includes plenty of  below market rate (BMR) construction to mitigate some of the distributional effects of development.

For the pro-moratorium camp, however, this doesn’t cut it. Lower aggregate prices are not their goal. Their goal is keeping the existing population of the Mission intact and in place. Even a 70/30 ratio of market rate development to BMR construction wouldn’t do that. There would still be demographic churn and this is specifically what they want to avoid. For the pro-moratorium camp, lower housing prices are all well and good, but not if that means the dispersal of the existing community in the process.

The Mission District

Searching for the Endgame

The second issue is that there’s no endgame for the pro-moratorium camp. Mr. Ancona seems to think there is, but doesn’t go into detail. Here’s what I see.

Pressuring developers for a larger percentage of BMR housing is a no-go. 35% BMR is about where a project’s commercial viability dies and it’ll take way more than that to prevent demographic churn. And without the market rate development that the moratorium would stop, it’s not clear where funds to buy up the available properties and develop exclusively BMR housing would come from.

Now, if you were to put the moratorium into effect…and massively urbanize San Francisco’s western neighborhoods as well as all the peninsula cities…and skimmed the cream off of all that construction to massively develop the Mission with BMR infill…then maybe you have a shot.

But herein lies the problem. Not only do those two areas have no reason to go along with such a plan, they have every reason not to. The higher housing prices climb, the wealthier homeowners in either area become. And because of Prop 13, property owners don’t pay more in taxes even when their holdings appreciate. Why would homeowners accept unwanted change in their neighborhoods when they not only don’t have to but get wealthier by fighting for what they prefer anyway? If demand stays high and wealthier areas aren’t forced to build, relatively poorer areas get gentrified. And with the state’s peculiar tax laws and the region’s insane land use policies, we see this dynamic on steroids.

Addressing Inequality

There’s a third argument that Mr. Ancona makes which I thought warranted a response. Regarding inequality, he writes:

If California was some godforsaken European socialist hellscape (you know, where lots of people make roughly $70k a year and people take month long vacations and have time off to take care of their kids and are basically just happy), we wouldn’t be having this problem at the scale we are. Landlords are able to jack rents and developers are building luxury-everything because there’s a large-ish group of people who are willing to pay for it. If we were taxing marginal income above, say, $200k at 80% or something, there’d be a lot fewer people willing to throw this kind of rent around.

This, I must say, is a fascinating policy prescription. It’s essentially a call for active demand management via marginal income tax. It’s a terrible idea. But it’s still genuinely fascinating that someone would see a particular industry being too productive as the problem.

The issue here isn’t that tech people make too much money. It’s that as they create more wealth, real estate becomes infinitely more expensive because the supply of built space is so inelastic. The more wealth that the industry creates, the more it has to pay in rents for the privilege of being in the Bay Area. This puts everyone else in the unenviable position of being in a bidding war for housing with the most dynamic sector in the economy.

If we were serious about addressing material inequality–and we’re not–we would allow the housing supply to become more flexible. We’d focus taxation on land rents and away from productive labor and capital. And we’d directly subsidize individuals in need instead of trying to price fix away all of society’s ills.

The Likely Future

Last night, the San Francisco board of Supervisors voted down the moratorium. That means the pro-moratorium camp will try to put it on a city wide ballot for an up or down vote in November. If they succeed, it’ll be that much less development in San Francisco, but more significantly, other neighborhoods may follow suit in establishing similar bans.

To the extent that these measures slow down construction, prices will continue to climb. The only hope for a real reprieve would be a general slowdown in the tech industry. And with the Fed talking about hiking interest rates, that’s a possibility. But if that happens, it’ll be like giving a drug addict one more hit. Insane prices are the only thing that’s changing land use policy. If that impetus goes away, we’ll slide right back into blissful complacency. And it’ll just be a matter of time till the economy heats up again and we’re right back where we started.