Affordability Trade-offs

Bad solutions are often introduced with the word "just." A proponent will suggest, "Let’s just…," or ask, "Why don’t we just…?" implying that their proposal is simple, obvious, and effective. If only!

In practice, policy decisions generally involve complex trade-offs between diverse goals and impacts. It is planners' responsibility to considered this complexity. Affordability planning is a good example.

Many attractive and economically successful cities (e.g., New York, Seattle, San Francisco and Vancouver) are unaffordable; many households must spend more than 45% of their budgets on housing and transportation, leaving insufficient money for other essential goods such as healthcare, food, education, and fun. These high living costs prevent many responsible and hard-working families from living in desirable communities and make it difficult for employers to attract the talent they need for economic development. Virtually everybody benefits if any family that wants can find affordable housing in attractive and economically-successful cities.

However, many strategies for increasing affordability involve complex trade-offs between various goals and impacts. They may reduce some costs but increase others, or benefit some people but burden others. It is important to account for all of these impacts to identify the truly effective and optimal solutions. I summarize examples of these trade-offs below.

Affordability Versus Other Planning Goals

Development decisions can have many direct and indirect impacts. Compared with sprawled development, compact infill (i.e., Smart Growth [pdf]) tends to reduce transportation costs, reduce traffic accident risk, increase public fitness and health, improve economic opportunity and  mobility, reduce per capita land consumption, and reduce energy consumption and pollution emissions [pdf].  There is also good research indicating that more compact development tends to reduce public infrastructure costs, and increase economic productivity [pdf], business activity, innovation, property values, and tax revenues. A study by economists Hsieh and Moretti estimates that allowing more affordable infill development in these highly productive cities could increase aggregate national economic output by 13%, more than $1 trillion annually, equivalent to several thousand dollars per worker, and improve economic opportunity to economically disadvantaged workers.

Planning implications: Affordability strategies should be evaluated based on their impacts on other community objectives, including economic opportunity, public safety and health, economic development, and environmental protection.

Affordable housing advocates sometimes oppose demolition of old, cheap housing stock, in order to maintain affordability, although such housing is often expensive to maintain, energy inefficient, unsafe due to fire and earthquake hazards, difficult to access, or located in areas with concentrated poverty. More comprehensive analysis considers lifecycle costs, which tends to justify more demolition provided that the new buildings include some affordable units.

Housing Versus Transportation Costs

In the past, affordability was usually defined as households spending less than 30% (or sometimes 32% o 35%) of their budgets on housing, but since households often make trade-offs between housing and transportation costs, many experts now recommend defining it as households spending no more than 45% of their budgets on housing and transport expenses combined, which recognizes that a cheap house is not truly affordable if located in an isolated, automobile-dependent area with high transport cost burdens, and households can rationally spend more for housing located in an accessible, multimodal neighborhood where transport costs can be minimized.

Planning implications: This implies that most affordable housing should be located in walkable urban neighborhoods where residents can minimize their motor vehicle ownership and use. This favors compact, multimodal development over sprawl.

Low- Versus Middle-income Household Affordability

Affordability planning often focuses on the needs of very low income households, such as the lowest income quintile, but in attractive and economically successful communities many middle-income households (second- and third-income quintile) face excessive housing and transport costs. Low-income household affordability often requires subsidies or inclusionary zoning (regulations that require a portion of new housing to be rented or sold below market prices), although this tends to increase prices and reduce development of new middle-priced housing. For example, if 10% of housing units that cost $400,000 to develop must be sold for $200,000, the nine unsubsidized units' costs increase by $22,222 ($200,000/9), a modest increase for million-dollar units but a major increase for the lowest-price units.

Planning implications: Considering middle-income affordability supports policies that increase moderate-price housing production in addition to subsidized housing for low-income households.

New Versus Existing Housing Affordability

Affordability advocates often oppose new market-priced housing because, they argue, the new units will be unaffordable. However, considering only new housing prices ignores the effects of filtering: the increase in lower-priced housing units made available as existing occupants move into the new middle-priced units and over time as the new units depreciate in value. New houses typically depreciate at 1-3% annually, depending on the amount of new housing that is built: more supply increases depreciation rates. In fact, most low-priced housing consists of middle-priced housing that has aged; housing unaffordability occurs in cities that failed to add middle-priced housing supply during recent decades.

Planning implications: Considering future as well as current affordability favors policies that increase middle-priced housing supply. Even if the new units are not initially affordable, they help reduce housing price escalation in the short-term, and contribute to become the future supply of affordable housing.

Existing Versus New Renters' Affordability

Considering only current renters, rent controls increase affordability, although by discouraging new rental property development it can reduce future rental housing supply and affordability.

Planning implications: Considering only current housing favors preservation of older housing stock, even if it is lower density and quality than optimal. Considering future housing favors replacement by better and denser housing, provided some is affordable.

Incomes Versus Housing Costs

Income increases or supplements are often recommended to help solve unaffordability problems, but if lower-priced housing supply is constrained, this will contribute to housing price inflation, so households that gain income will outbid those that do not, and much of the additional wealth will capitalized into housing values.

Planning implications: Housing supply increases are important for increasing affordability, even if wages and incomes increase.

Analysis

The following analysis calculates affordable monthly housing expenditures for the three lowest income quintiles (fifth of total households), assuming that housing and transportation costs should total no more than 45% of household budgets, and that transportation costs range from 5% of budgets in walkable urban neighborhoods to 20% in automobile-dependent areas.

Affordable Monthly Housing Costs (2016 U.S. Consumer Expenditure Survey) 

The following table calculates the maximum house purchase prices that would have rents or mortgages that are affordable to the three lowest income quintiles, assuming 5% interest over twenty years.

Affordable New Housing Purchase Price

The table below indicates the new housing price that becomes affordable to the three lowest income quintiles after a decade, assuming that in competitive markets, houses depreciate in value at about 1% annually.

New Housing Price That Becomes Affordable After a Decade

These represent lower-bound values, since wages are 10-20% higher in economically successful cities like New York, San Francisco and Seattle than the national average incomes used in these calculations.

Using the narrowest definition of affordability, which only considers current housing costs for the lowest income quintile households, and related issues such as homelessness, affordability requires heavily subsidized housing. From this perspective, affordability policies are primarily concerned with maximizing housing subsidies. However, a broader definition recognizes other planning objectives such as health and economic opportunity, the trade-offs between housing and transportation costs, considers middle-income affordability, and recognizes the tendency of housing to become more affordable over time, and so supports policies that result in much more development of medium-priced housing, in the $200,000 to $400,000 range, which can initially be affordable to middle-income households and become affordable to lower-income households as it ages and depreciates in value.

Summary

Affordability policy debates often define the issue narrowly, considering only the current housing needs of a relatively small number of low-income households. More comprehensive analysis considers a broader range of policy trade-offs, including additional planning objectives, transportation as well as housing costs, middle-income as well as low-income families, and future as well as current affordability. Comprehensive analysis tends to favor more integrated solutions that encourage much more development of moderate-priced housing in walkable urban neighbourhoods, rather than focusing only on a smaller number of subsidized housing projects designed to serve households with special needs.

In my experience, middle-income affordability is often overlooked, resulting in targeted solutions that benefit a relatively small number of low-income households that qualify for subsidized housing, while overlooking the need for structural reforms that could greatly increase the number of moderate-priced infill housing developed in attractive communities. More comprehensive planning is more challenging, but offers the potential for building a much larger and stronger political coalition. For example, a narrow affordability goal might be to provide low-priced housing for 500 low income households, which would gain support from social advocates, but a broad affordability goal, which tries to build more low- and medium-priced housing, can gain support from thousands of middle-income households, and the hundreds of businesses that want to employ them.

Many policy reforms can help increase affordable infill, including zoning code changes to allow more affordable housing types (multiplexes, townhouses and low-rise apartments), increased allowable height and density, plus reductions in setback and parking requirements in residential neighbourhoods. These can increase development of market-priced housing affordable to middle-income households, and the number of units built with a given subsidy budget suitable for lower-income households.

Useful Resources

Cherise Burda and Mike Collins-Williams (2015), Make Way for Mid-Rise: How to Build More Homes in Walkable, Transit-Connected Neighbourhoods, GTA Housing Action Lab. 

Spencer Gardner (2017), The 5 Immutable Laws of Affordable Housing, Strong Towns.  

Daniel Herriges (2018), Why Are Developers Only Building Luxury Housing?, Strong Towns.

Daniel Hertz (2015), What Filtering Can and Can’t Do, City Observatory.  

Todd Litman (2015), Affordable-Accessible Housing in a Dynamic City, Victoria Transport Policy Institute.

Missing Middle, describes compact and affordable housing types.

Portland (2014), Infill Design Project, Portland Bureau of Planning and Sustainability.

Sightline Institute (2018), Legalizing Inexpensive Housing, Sightline Institute. Also see, Talking Housing Affordability: Getting From “Me” To “We”.

Ken Szymanski (2018), Can We Revive Real Meaning of ‘Affordable Housing’?, Plan Charlotte.

Mac Taylor (2016), Perspectives on Helping Low-Income Californians Afford Housing, Legislative Analyst’s Office.

Up For Growth National Coalition represents a diverse coalition that promotes vibrant, walkable communities with housing close to jobs, transportation and amenities.