Tuesday, September 21, 2021

Cage match continues on development

This is Joseph.

So one piece of the ongoing housing debate is that nearly everyone agrees that housing prices are becoming a crisis and there is no shortage of simple solutions. However, what I like about London, Ontario as an example is that no simple solutions are able to be easily proposed. It is a web of problems, working together. Why is the web intractable?

I think it is because of incentives. Government, which heavily regulates housing, has incentives at all levels to push up asset inflation. Matt Yglesias took on the issue of Somerville, which is in liberal Boston and is getting both less dense and more expensive. Housing prices in all of Canada are continuing to go up and I expect that this will accelerate to some extent, as small apartments are less desirable in the context of pandemic restrictions on things like malls, coffee shops, and indoor entertainment (if you think indoors is not important in Canada then I invite you to visit Saskatchewan in January). 

We know that housing wealth makes people more likely to spend and may compensate for things like stagnant wages. We also know that housing price collapses cause underwater mortgages with horrible effects on labor mobility and bank solvency. Imagine if the prices in London, Ontario reverted to the long term mean -- people who had bought houses in the past 5 years would be destroyed and many, many loans would go bad.

So you have an incentive on all parts to increase asset inflation. People like having their houses become worth more money and making a large profit. They like plentiful parking and low levels of local traffic. They generally like affluent neighbors. Cities like taxes and keeping wealthy citizens happy. National governments like to keep the banks solvent and try to use low interest rates to stimulate the economy. Yes, even in the face of a housing bubble so large it might crack the economy open. 

So the reason I am YIMBY sympathetic is that, no matter how daft their ideas are, they at least are not conspiring to inflate assets further. This is less of a crisis in the United States but nobody can look at the Canadian housing market and feel comfortable

So this really is my reply to Mark: at least the YIMBY are trying to find a solution. His analysis of Krugman suggests that they are not doing a good job of it, but at least they are identifying a real problem. In my view, the emerging link between housing prices and homelessness is a bit of crisis for low income Canadian and American residents, and it needs to have some solution. Stopping asset inflation would be a good place to start. 

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