Kaiser

Michael Theriault headshot

Economic debates can seem abstract and even bizarre to those of us who have made livings with hammer or trowel in the world of the real and the solid, but they often determine whether or not such livings are possible. Like it or not, we are obliged to engage in them.

Those who argue against construction of market-rate housing in San Francisco – and so against much of the work that has been keeping Building Trades workers employed in recent years and that could employ them in years to come – often claim that such construction itself causes a rise in housing prices and has helped bring about the City’s housing crisis. This turns the usual economic understanding of supply and demand upside-down. By this notion, housing supply does not respond to demand, but creates it.

I have heard this from many a speaker testifying in all earnestness at many a public hearing. I have heard it even from labor leaders whose political allies often oppose our work.

If true, this topsy-turvy version of economics could have a miraculous corollary: In a recession the correct course for housing developers would be to double down and build more, to create demand for their product, and not less; no need to fear losing their shirts.

Banks, by this logic, should be more eager to lend for housing starts in a recession, and investors should pull out checkbooks and sign away freely.

That no one with a dime to spare has ever followed this logic in any recession speaks to its absurdity.

To admit that the usual understanding of supply and demand applies to the housing market even here in San Francisco is not to say, however, that market forces will solve our housing needs.

Neither is it the case that the production of only government-subsidized “affordable” housing –which some in the recent debates over rents and construction in the Mission District have said is the only type of housing that should be built there – will do much to restrain housing costs.

By way of example on all these counts, I give you Oakland.

The San Francisco Business Times reported 9 December 2015 that rents in Oakland had risen 19% over the past year, which made Oakland the fourth most expensive rental market in the country, after San Francisco, New York, and Boston. Uber had not yet announced the relocation of its offices to Oakland when most of this rise occurred and so cannot have inspired it.

According to the 24 September 2015 online San Francisco Magazine, 765 units of housing were built in Oakland in 2014. 75% of these were “affordable units funded with subsidies;” that is, government funding assured that the units could be afforded by families earning less than 60% of area median income. Roughly 191 units of the 765 were therefore market-rate.

Any claim that the construction of 191 units of market-rate housing in a city of well over 400,000 residents could trigger 19% increases in rent citywide would be clearly ridiculous. Construction of market-rate housing did not bring about Oakland’s rent increases.

In fact, developers and lenders were awaiting rent increases before starting construction on projects that Oakland government had approved. The Business Times in February 2015 quoted Michael Cohen, formerly head of San Francisco’s Mayor’s Office of Economic and Workforce Development and now a principal at the developer Strada Investment Group, “Building new residential development in Oakland, particularly highrise, is still very challenging. Costs are essentially the same as in San Francisco but rents are at least a third lower and condo pricing is less than half.”

Just as developers in Oakland were waiting for rising rents to start construction and investors were waiting for rising rents to fund it, so falling rents will give developers and investors pause. If prices turn too far toward affordability, developers stop building. This is why, with limited exceptions, market forces won’t in the short term build us to affordability. (The long term may be a very different story.)

Neither will construction of subsidized affordable housing. This was by far the dominant type of housing built in Oakland in the year prior to that city’s huge rent increases. To build truly substantial quantities of it, quantities that could push down average rents, would require radically higher subsidies, and such subsidies are politically infeasible. Governor Brown recently vetoed legislation that could have increased them just marginally.

And subsidized affordable housing does not usually mean affordability for us in the Trades, because 60% of area median income is well below what most Trades workers earn in an average year.

What the construction of market-rate housing and so our work can achieve is to slow and even stop a rise in housing costs. As in a medical emergency, step one is to stop any bleeding.

Making housing broadly affordable will require a variety of other steps. Mayor Ed Lee’s administration is exploring them by convening a debate among many interested parties, and we must and will be involved in that debate.

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