The DSB argument

One anti-YIMBY argument is that “slowing growth or declines in rent are often signals to stop building new housing. Rather than encouraging housing suppliers to continue producing new units, decreases in rental prices put a halt to new supply.” In other words, building new housing is self-defeating because as rents decline, new units become less profitable and construction ceases, which in turn means that rents don’t go down anymore. I think of this as the “developers will stop building” (DSB) argument.

What’s right with the DSB argument? It does make sense to me that if rents go down far enough, new construction might not be profitable. For example, if construction costs are $200,000 per house and a new house will sell for $150,000, there will not be much new construction. (Even then, there will be some construction because developers might think prices will eventually go back up).

What’s wrong with the DSB argument? First of all, it assumes that rents will go down to some extent due to new construction- which, if true, would be a huge win compared to the status quo of ever-escalating rents. Let us suppose that in neighborhood X, rents have escalated to $2000 per month, but that developers will stop building if rents go below $1500 per month. First, this means that rents will go down 25 percent until developers stop building- which would be a very good thing.

Second, if developers will stop building when rents go below $1500, this means that they will start building when rents go above $1500. So this means that, in the absence of other factors limiting construction or raising construction costs,* rents will never go back up again. As soon as rents go up, developers will start building again to curb the rent increase.

By contrast, under the “business as usual” scenario (in which government limits construction to cater to the desires of local homeowners) rents keep going up and up forever. So even if the “developers will stop building” argument is correct, zoning deregulation will cause a decline in rents that will be far better than business as usual policies. The only unknown fact is how significant the rent decrease will be: because zoning exists everywhere (at least in the United States) we do not have any real-world examples.

To draw an analogy to climate policy: let us suppose that some policy would magically freeze carbon emissions at slightly below current levels. Would this be ideal? No. Would this be better than business as usual? Of course!

*Obviously I am oversimplifying here because often such factors exist: for example, Kevin Erdmann has written extensively about the impact of tight lending policies on housing markets.