San Francisco has Really Screwed Themselves this Time

supply & demand in san francisco

A city needs housing, especially if it’s growing.

That’s just how it works.

No housing equals no incentive for individuals to come fill jobs, which means no growth.

No housing also mean the poor get screwed.

If a city is in need of affordable housing you can be sure that their poor are facing increased rates of homelessness.

This is true for San Francisco. They’re a growing city with a severe lack of affordable housing. And it’s not getting better.

Politicians have a horrible track record of ignoring problems or making them worse. In this case, they’ve made it worse, and they’re ignoring it.

It’s gotten so bad that the notion of supply and demand seems to be lost on the city of San Francisco.

But it goes beyond no understanding of economics. There’s more to San Francisco’s housing shortage. And it’s an important lesson in economics, specifically supply and demand.

Why is San Francisco Suffering from a Housing Shortage?

Frankly, it depends on who you ask.

Some would say sharing economy services like Airbnb are partly to blame. Others say high eviction rates that are used to replace long time renters with rich occupants is the problem.

Some people even say that the misguided application of supply and demand is what’s creating the housing shortage.

As plausible (or ridiculous) as these reasons sound, they don’t give you the bare bones explanation.

They’re all biased in some manner or another. The real reasons, however, are much simpler.

  1. Population Boom

The population of the city has been growing over the past few decades. As new tech businesses make the city their home, they attract more workers to the city.

It’s the age old “jobs attract job seekers” effect. And the city is feeling the expansion.

San Francisco has grown by 100,000 people, since 2003. The city is now nearing 1 million residents with over 837,000 inhabitants.

  1. Restrictions on Housing Construction

Since 2003, the city has built around 24,000 units of housing (remember, 100,000 people have moved into the city, since 2003).

The approval process for building new homes accounts for most of it. The approval process for new housing units can take years. One housing project on Valencia Street has been in the approval process for years.

It’s also been under attack from community opposition for its height, lack of parking, and cost. Its housing units were reduced significantly, which was labeled a victor by the neighborhood.

A combination of byzantine approval processes, NIMBYs, and strict zoning regulations have attributed to this housing shortage.

  1. Misguided Policies & Views

According to some San Francisco residents and figures, supply and demand doesn’t apply to the city.

That’s right. The age old law of economics is being ignored on the grounds of a few inaccurate statistics.

What’s amusing is that the city has never come close to building enough housing units to allow people to make the argument that increased production will drive up prices.

This denial of basic economics is so prevalent that one member of the Board of Supervisors is pushing for a moratorium on housing projects in the Mission District.

Instead of building more houses to meet demand, these deniers say the city should regulate cost control. As one theorist argues

“What works in San Francisco are policies designed to control housing costs and conversions, and the development of publicly funded, permanently affordable housing.”

This is in light of the fact that if the city were to publicly fund enough housing units to meet the city’s needs it would cost around $25 billion.

The city doesn’t have that kind of money.

Supply & Demand in Action

This is a classic example of supply and demand.

It’s also a classic example of how asinine supply and demand deniers can get.

The situation is pretty simple.

You have an influx of people coming into San Francisco. Jobs are attracting them. In addition, you have a small amount of housing units; the blame falling on local regulations.

You know that when demand rises, and supply stays the same, prices rise.

Merging it all together, now…

People are creating the demand for housing

The current housing units are the supply

Jobs are the causing the demand for housing

Local regulations are the causing the low/static supply in housing

It’s a simple case of supply and demand.

High Demand & Low Supply and a Result in High price

Now, how should San Francisco fix their housing shortage?

The Fix to San Francisco’s Housing Problem

A few solutions have been put forward.

The supply and demand deniers say the fix to the housing shortage is to control housing costs and build more public housing units.

The idea behind it is that with public housing units the city will be able to better control how much affordable housing is available.

This still brings into question how the shortage will be dealt with.

If they had a housing cost problem alone, then their plan might hold water. But costs alone aren’t the problem. There’s not enough houses. Controlling the cost to rent or buy won’t fix that.

So that plan is out the window. What’s next?

Ideas on how to fix the problem are in no short supply. It’s just a matter of wading through all the junk to find the golden egg.

Ideas range from playing Robin Hood with wealthy tech companies, to eliminating the opt out that allows developers to get away with not offering affordable housing units.

The Robin Hood idea deals with getting wealthy tech companies to pay for their employees’ housing. Or at the very least, build housing units for them.

The opt out option is even less helpful.

It would prohibit developers from paying a fee to not price 12% of their housing units below market rate. If a housing project has 10 or more units, the developer is required to place 12% of them under market value. That is, unless they want to pay the fee to opt out.

Getting rid of this fee would result in more negative incentives for developers not to build new housing units. It doesn’t deal with the shortage at all.

Another idea is to incentivize developers to build more affordable housing units by reducing density levels in projects that consist of more affordable housing.

Then you have the stereotypical “make the landlords pay” solution. Simply put, this would require landlords to subsidize any tenant they evicted

“Landlords would have to pony up the difference between the controlled rents and whatever the going market rate for that apartment would be for the equivalent of two years.”

Another horrible idea that sidesteps the actual issue.

All these solutions are complex and involve regulations upon regulations. But as always, the best solution is the simplest one.

Just build.

That’s it. That’s all you have to do.

Just let developers build more and more housing projects. Open up the approval process. Make it easier to get zoning laws changed.

Make it easier for developers to build homes. Period.

You’ve got to meet demand. And the only way you’re going to do that is by creating supply.

Building more houses is how San Francisco will create that supply.

Let the private market do its thing.

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About John-Pierre Maeli

Keeping it simple and crystal clear, because anything else is useless. I'm here to not only inform you, but to also connect with you. That's what The Political Informer is all about. Feel free to follow me on either Twitter or Google+ Let's talk!

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