Whatever one might think of the Seattle Times editorial board, there is one story that the paper is running this week that confirms that their reporters are at least in touch with reality. The headline—Apartment boom in Ballard comes with risk of overbuilding—is a little bit odd and displays some of the basic prejudices held by many about density, housing, and affordability. Reading the headline one would think “overbuilding” was a crisis for Seattle. But the story simply confirms what many of us have been arguing for a while now: if you want lower housing prices, allow the construction of more housing. The only people hurt by too much supply are developers.
The article by Eric Pryne reads like a primer in the economics of housing supply and demand.
Developers are building [apartments] because demand has risen, led by a demographic surge of young adults who prefer in-city living, at a time when there’s little new supply.
Few projects were built during the recession. The last new complex in Ballard opened more than two years ago.
Because of the economy—it is harder to buy a single-family house these days—and the appeal of living in the city younger people are opting for living in Seattle rather than other places. This is exactly what transit advocates, sustainability and smart growth proponents all want to see happen. But all these people need a place to live, and the market is responding by building more housing.
What does that do to the price of housing in the Seattle market?
Owners of new rental projects, with loans to pay off, will do whatever it takes to fill units, Gardner says, and that will put pressure on other landlords to cut rents or offer concessions to keep up.
“By the end of 2013,” he says, “it’s going to get ugly.”
Ugly for whom?
Because there is so much demand for the apartment housing product developers are building more of it. Yes, they are trying to “cash in” on the trend of people wanting to live in the city. They figure if they can get their projects out of the ground fast enough they can ride the wave of demand, profitably supplying all those people with housing.
But if they “overbuild” the chief beneficiary are the people looking for housing. What’s “ugly” for developers is a boon for people looking for affordable housing. What happens next, though, when developers see prices dropping and demand staying steady?
Such concerns already are influencing some developers’ decisions. Pillar Properties had planned to break ground on a 124-unit complex in Ballard this fall.
A few months ago it put the project on hold.
Pettit says he looked at all the other projects under way in the neighborhood — including AMLI Residential’s 304-unit complex, just across the street from Pillar’s site — and decided “that’s just not something I’m prepared to compete with at this time.
” At lease-up, we were all going to be cannibalizing each other,” he says.
Yes, developers start to cannibalize themselves! Imagine that, granting more building permits for housing helps lower housing prices and creates competition between developers. As the developers fight over new tenants the prices go down, and eventually they decide to quit building. When they stop building, and supply stays the same, prices will go up again. It’s called a housing market, and like other markets it is, indeed, affected by supply and demand.
(Does unleashing supply with more building permits mean that no subsidies or incentives are needed to create housing for people who are very low income? Of course not, because there are some people who simply can’t pay enough rent to generate enough of a return for land lords and developers to offset the cost of housing. When a person can only afford $500, for example, a month for rent in some Seattle neighborhoods, then those tenants and developers could use help to bridge the gap between rent revenues, development costs, and other costs of living. You can read my post on where rents come from to get an idea of why rents end up being what they are).
So there it is. In places like South Lake Union the answer to the affordability problem is to build more housing. As in Ballard, the glut of new apartments, condos and other options will have a beneficial effect on price. Plus all that housing construction leads to jobs and new sales tax revenue on construction. The best thing the city can do is encourage more development, especially now, when prices are dropping. We simply can’t lose by allowing more housing. And if you happen to be one of those people who don’t like developers, allowing them to overbuild might be the best revenge.