Fairness and market equilibrium

This post was intended to be published on urbdp598 prior to the February 9th class.

It seems to me that the conversation about the need for affordable housing is amplified during a multi-family real estate development boom. Rents are rising and new apartments are being developed across the city. People often seem angered by the new apartments being built and they get even angrier when they find out how high the rents in these new apartments will be. There should be new apartments with lower rents being built as well, because it is not fair. However this is the worst time possible to build “affordable” housing. Land costs are rising along with the costs of construction. Unfortunately it costs nearly the same to build an apartment with high rents as it does to build one with lower rents. Most market rate apartments are built as cheaply as possible. The only real premium thing about new market rate apartments is the “new”. It seems to me that the ideal time to create new affordable housing is only when the market rate development is in a downturn. Land and construction prices will be significantly lower at this time.

However I wonder if the market equilibrium, that occurs after the market rate downturn, can also resemble a level of fairness in housing affordability. The equilibrium rental rates tend to come down until the desired vacancy rates return(based on a boom ending when vacancy rates rise and rents can no longer be increased). The highest rental rates will remain with the newest apartments. Theoretically the individuals with the highest incomes will have moved into the newest apartments, and many of them will have moved from an older apartment with a lower rental rate. What I am envisioning is that the new apartment stock creates the ability for rental income classes to be able to shift upward, freeing up more affordable units in the middle range that were occupied by individuals who could afford higher rents. The middle range units tend to have a demand that greatly exceeds supply. This middle range may not typically qualify as affordable housing however this is likely the rental range that a large percentage of the population who’s incomes are at or below area median income can afford. Perhaps the public outcry for “affordable” housing is quieted when a larger number of these middle range units become available. I can’t help but think that market equilibrium and fairness could be correlated.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s