Housing Costs Could Damage Austin’s Economic Growth

A conversation with some friends recently reminded me that the “why” of affordability in cities is rarely discussed.  Sometimes when I lament the fact that working class people are being driven out of Austin, the response is an acknowledgement that it sucks but really, people can just move elsewhere right?  Should we really be basing housing policy around people without much money who just want to live in a “cool city”?  Why should we care?  I think the answer is actually pretty simple: people deserve access to the Austin job market.

One caveat: I am not a libertarian and I never will be.  I support using the market to benefit the greatest amount of people, but there is an economic floor to what the market will solve.  People with income or disadvantages that put them below that floor need government intervention to support them, and no amount of supply side economics is going to solve that.  Reagan sucked and luxury towers are not going to house the homeless.  That said, let’s talk housing economics in Austin.

Let’s start with the fact that Austin’s economy is absolutely booming.  Data from U.S. Bureau of Economic Analysis showed that in the entire country only San Antonio was growing more quickly than Austin, so it’s clear the Central Texas economy has been doing quite well lately.  Austin’s tech sector has grown along with a nationwide tech boom, and the oil price drops that have affected Houston have left Austin largely unscathed.

So who is benefiting from that economic growth?  Well, anyone that can afford to live in Austin or nearby.  The unemployment rate is an astonishingly low 3% in Austin right now, and there are no indicators that it will be rising any time soon.  The structural barriers to being successful in the United States and economic inequality definitely still exist in Austin, but for the most part if you can be a part of the Austin labor market there are relatively good opportunities.

But what is seemingly the simplest part of the equation, living in Austin, has become the most difficult.  Rather than worrying about what skills to acquire or what careers to choose in Austin, many people wonder if they can afford to live close enough to participate in the city’s growth at all.  Nearly a third of Austin’s jobs are located in the urban core, and that number is only increasing.  But Central Austin is also where housing costs are highest, so lower income and younger residents are being driven out to the suburbs.  A new job that pays better is great, but is it worth it if you have to commute in traffic 90 minutes a day instead of spending time with your family?  Maybe not.

Which brings me to one of my favorite articles about the problems facing San Francisco, Austin, Portland, and so many other growing cities right now.  Ryan Avent writes about “The Spectre haunting San Francisco”, and that spectre is housing.  Avent points out that the biggest cost of increasing the supply of housing is “rent”, but not what you pay your landlord every month:

rent, in the economic sense of the word:

Economic rent is the cost of non-produced inputs or advantages; the result of natural or contrived exclusivity.

The “natural or contrived exclusivity” that applies here is being an existing landowner in a place where there is high demand for housing.  A homeowner in Central Austin is the beneficiary of a lot of exclusivity, most of it gained during the economic growth of the past two decades.  The land underneath houses in Central Austin wasn’t nearly as valuable twenty years ago, but recent job growth and proximity to those jobs has made that land much more desirable. The defining characteristic of many homeowners in Austin that oppose new development is that they have been there longer than people that would occupy newer housing.   It sounds a bit like feudalism, but existing Austin landowners are using local regulations to limit supply and to extract outsized gains from their investment in land.  As Avent points out,

“the structure of local politics tends to magnify rent-seeking, generating enormous social costs…Zoning restrictions are a tool of the oligarchy, effectively. I’m only one-fourth kidding. But they are; they are a means by which owners of capital extract an outsized share of the surplus generated by job creation.”

The last bit is important too.  There’s nothing that Austinites love to sneer at more than the new tech arrivals fleeing San Francisco, but a UC Berkeley economist found that one new tech job supports an average of five local service jobs.  It makes sense: high earners have more disposable income to spend on local services, so more bars, restaurants, spas, and the like open up that will gladly accept money from those high earners.

But that job creation doesn’t happen if the everyone, including high earners, has to spend a large proportion of their income on housing, as has become true in San Francisco.  And in Austin’s frequently ill advised attempts to not become San Francisco, it is actually following very closely in SF’s footsteps.  Austin housing costs are growing rapidly, and they are eating up more and more of the income of Austinites.  Eventually, the things that make Austin appealing to those Californians may not hold true anymore.  Part of Austin’s job growth is due to a competitive advantage: living in Austin has always been much cheaper than Northern California and many other regions.  When that’s no longer true, what incentive is there to start a company here?  Austin has a very educated population and some other advantages, but relatively low cost of living has always been a selling point of Austin and Texas more broadly.  If there is one threat to the amazing job growth Austin has experienced, it’s the cost of housing.

The incredibly sad thing about this issue is how artificial the housing shortage is.  This debate shouldn’t be happening.  Housing isn’t oil.  We’re not running out of materials to construct housing, and it doesn’t hurt the environment to build more housing in existing cities.  In fact, it’s better for the environment than building in places that aren’t already urban.  People should be allowed to live where they want if they are not hurting anyone else, and housing developers should be allowed to provide housing that people want.  It’s really that simple.  But selfish, rent-seeking behavior from landowners is preventing it, and they are politically powerful enough to get their way.

And finally, there’s issue of equity.  Labor markets in big cities should not be limited to existing landowners.  Access to high paying jobs allows social mobility, and high paying jobs are increasingly clustered in central cities, including central Austin.  Whether someone is a software engineer or a bartender, they deserve the opportunity to live in Austin.