Does Building Luxury Condos Create More Affordable Housing?

In good leftist fashion, we’ll first answer the question by challenging its premise. New market-rate homes are rarely “luxury condos.” Only 5 percent of multifamily homes are condos, about the lowest rate in 50 years. The issue at hand concerns housing

that does not receive subsidies to cover rent for low-income households. In California, nearly 90 percent of multifamily rental units are market-rate, and about 90 percent of low-income households live in market-rate homes.

As for “luxury”—don’t believe what the landlords tell you. The scarcity of available apartments is what drives high housing costs, not stainless-steel appliances or a small fitness room. And that scarcity is real; Contrary to what you may have heard, American cities do not have a vast supply of apartment towers held vacant as investment vehicles. In fact, our rental vacancy rate is at a historic low.

The best way to end a housing shortage is by building more. New research, made possible by previously unavailable, fine-grained data sets, shows that market-rate construction makes affordable housing available via “migration chains.” High-income people move into new housing, middle-income people move into the housing previously occupied by high-income residents, and so on—all the way down the income ladder. In this way, building more “luxury condos” frees up low-cost housing for low- and middle-income households.

Displacement is real, but building market-rate homes does not increase displacement pressures. While scholars have long known that building more homes reduces prices at the regional scale, more recent research reveals that market-rate home-building reduces rents and evictions even at the neighborhood level. Removing restrictions on home-building in urban areas also reduces racial and economic segregation, greenhouse gas emissions, and homelessness. Furthermore, landlords find it harder to discriminate against potential tenants with housing vouchers in a loose housing market.

While those members of the left who are opposed to building market-rate housing sometimes deride pro-development theories of affordability as “trickle-down economics,” they’ve got it exactly wrong. The bogus thesis of trickle-down economics says that by cutting taxes on the rich, you’ll spur economic growth that eventually benefits everyone. Trickle-down boosters believe that supply (of investment capital from cutting taxes) generates its own demand (for consumer goods and jobs). We’re saying the reverse: Demand (for homes) should drive a supply response (constructing more homes).

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