Trickle down?

Over the last few weeks, the topic du jour for me lately seems to be growth in Austin and specifically the abundance of new luxury condominiums being built downtown. It seems that everyone I know has either been talking about it or have joined in the conversation at some point (well, I guess we "Southies" have never taken kindly to development...). I first got turned on to this topic from a post where I questioned a statement made by Austin's City Manager Toby Futrell in response to a City Auditor's report that was critical of her's and the City Council's development plans. To summarize, in the report, the City Auditors:

"presented an audit that found that Austin does not have an "overarching vision for growth" or anything that ties together a patchwork of smaller city-planning efforts."

To which the Ms. Futrell, who disagreed with 3 of the 4 city auditors who authored the report replied:

"In fact, the City has a vision and it is widely recognized. Our vision is for 'Austin to be the most livable city in the country.' "

I linked to a few indicies that refuted that claim and the post got a few comments, but none seemingly more vocal or condescending than M1EK, but he did put me on the path to research his claims which eventually led me here.

Now, M1EK's been making a claim that by building luxury condominiums downtown, by the mystical force of "trickle down," Austin's housing market will actually become more affordable (btw, he has never linked to anything that would support this point of view). I've seen this comment of his on mine and a few other blogs (actually highlighted here) and I still have serious problems with this assertion.

The vehicle that M1EK is using for this argument is now called supply-side economics. In his example, by adding more supply to the market, no matter what the price, it will eventually bring lower prices long-term to the whole market, not just the luxury segment where the current supply is being increased. While that may be true in general terms, I'll put forth that the supply isn't the greatest determining factor in this "affordable housing" scenario; I feel the demand in this limited market segment will be the more important quality as that will drive up the existing outlying property prices and will not, as M1EK asserts, increase affordability for the general public. Below, I hope to show that while in theory, M1EK's premise is generally correct for most things, there's not enough places (or plans) to build the sheer number of condominiums needed to make his assertion true in this case.

The Parking Lot

In M1EK's example:

"The only thing worse for affordable housing than building a bunch of high-priced condos downtown and continuing business as usual everywhere else is: NOT building high-priced condos downtown and just continuing business as usual everywhere else.

Trickle-down sucks in tax theory but it works like gangbusters in real estate. I own a moderate condo unit near (not in) downtown and I can tell you that it's fairly easy to observe a depressing influence on the rent I can get for it thanks to the indirect influence of those downtown units. Some folks who used to live in high-end housing in that neighborhood (Clarksville) now live downtown; some people who used to bid up the price for moderate housing like mine moved up to previously high-end condos in Clarksville."

So to begin, let's use a thought exercise... My premise is while I agree that we have to start building at some point, we're not going to get affordable housing only building luxury condos. Where I work, there are approximately 200 parking spaces in the parking garage and across the street from the building. If you're a manager, you get a reserved space otherwise, it's first-come, first-served. Out of the 200 total parking spaces, approximately 50 of them are reserved. There are about 300 employees (250 regular employees and 50 managers) in my department so on any given day, probably 250 or so show up for work and require a parking space (not everyone drives a car in; some bus, some ride bikes, some car pool, some are sick, etc). We already have too many people for the available spaces so demand has already outpaced the supply for the freely available spots (much like the overall housing market here in Austin).

Now, let's start adding new employees, say 5 per quarter (20 per year), 4 regular employees and 1 manager. We already have 250 people trying to snag one of the available 150 parking spaces so the demand is already at a premium. Now, when the new employees start, one of the freely available parking spaces becomes assigned for the new manager, decreasing the available supply for the regular workers while at the same time, increasing demand for those freely available spaces. Does this help the available supply for the regular workers? Of course not. The supply of parking spaces for them hasn't increased (this is like the current situation for affordable housing; there's only so much available within the city. And between rising property values and homeowners that are fixing up their current properties, more properties are moving out of "affordable" and into more exclusive markets).

So management decides to do something about it. They authorize redeveloping the small area where the dumpsters are right next to the building (for an additional 3 places) but they're all reserved for the CxOs, as they are ultra-swanky, shaded, cars-washed-by-virgins spots. The spaces are only for the CxOs and no one else. So here's M1EK's premise; the 3 reserved spots that used to be occupied by the CxOs have now been freed up for additional managers (the 1-for-1 property tradeoff) but did building the addtional spaces help the rank-and-file employees by increasing their supply? No. The old parking spaces remained reserved for management. So, in the next 3 quarters it takes to fill the old reserved spots with new managers, my department has now added 12 more people to the first-come, first-served spaces further decreasing the available supply where they can park. The only thing that will help relieve the demand for the rank-and-file employees is new spaces where they can park or new spaces in their segment.

So seeing that their available parking spaces have now shrunk to about 140, the rank-and-file employees submit a protest to the City Council who sympathize and decide to redevelop the field adjacent to the building (cutting down the landmark 300+ year old oak tree, mind you [look for "Rainey" on the page]) and put in an additional 50 parking spaces. But when completed, they decide that the spaces are only for City Council and management and, additionally, they deem that 40% of the spaces are only to be used by their families. No one else can park there which leaves most of the spaces unused most of the time (this is downtown development and the 2nd home thing which I'll get to below). Is this unfair to the rank-and-file employees who are still fighting over the ever decreasing spaces? You bet. Are they upset? Beyond belief. Can they do anything about it? Absolutely not.

So is this experiment wholly accurate? Of course not. In real life, the City Council would open up the new parking to tolling... ;) Actually, the only thing that is really left out of the experiment is some influx of "affordable" housing but it will be in the less desirable areas of Austin (in the situation above, those spaces would be located blocks away from the building) and since M1EK's assertion is that building downtown luxury condos will increase affordability for the average citizen, the model above is accurate enough to get the point across. But, model aside, let's try and determine some real numbers.

The Numbers (with links!)

Using M1EK's example that seemingly the only people looking to move into these downtown condos already live in Austin (a 1-for-1 property tradeoff and I know he's generalizing...), one can make the argument that demand for these downtown luxury condos will be limited to a very small percentage of the current Austin population (the current total Austin population is 690,252) and thus, will not have the effect of lowering the prices of the individual units downtown or the surrounding areas. A quick run of the numbers shows of those that can afford an average downtown property cost of over $300k, based on the 29% rule, the target buyer must be making at a minimum, $65k/yr and would probably have to make a bit more than that for credit card bills, recreational and living expenses, etc. The median income in Austin is $68k/yr so, working in *very* general numbers, we'll say 50% of the current residents in Austin that could afford the property and of those, another smaller percentage would actually be looking to move (even though this logic is a bit flawed -- median income does not evenly correlate to population -- but this is just for fun). I'll just pull a number out of the air here as I haven't been able to find this number anywhere so I'll be generous and say that 2% of the Austin population are looking to move of the 50% that can afford it . So, we have a maximum of 12,580 people in Austin who could currently afford the minimally priced condos and who are currently looking to move (not all of these properties downtown will be available at the $300k level).

Now, based on national statistics, 40% of all housing transactions last year were for 2nd homes. So let's remove from the equation 40% of the available downtown properties because these people already have primary residences somewhere else and generally speaking, the properties won't be available to those looking to move from the periphery (except maybe as rentals at some point but couldn't find a figure for how many 2nd homes become rental properties). The Council wants 20,000 eventual downtown residents so let's average 2.4 people per residency, we need about 8,400 individual properties minus the 40% that are second homes which leaves 3,360 total residential units available on the market. So, this year, we now have 12,580 current Austin residents looking to move into the eventual 3,360 average priced properties downtown.

And this figure does not take into account those people who don't currently live in Austin and are moving down here (based on census data, Austin's population grew 10,000 per year over the last 3, so we can add roughly another 5,000 additional home seekers per year divided by 50% who can afford it = 2,500). So until developers build at least 15,000 individual residences downtown and then add 2,500 additional units per year, the demand for those properties will not go down and the prices will remain where they are and will probably creep up over time.

So where do those people go who want to live downtown but the demand for that prime property has forced them to look elsewhere? They go into the adjoining neighborhoods, like Clarksville and Barton Hills, and drive up the price of the current properties due to the demand and not down by supply as M1EK surmises. Generally speaking, Austin is being influxed with new residents from places other than Austin. These residents, usually coming from places that have higher property prices, don't balk at a $300k downtown condo like some of us long-time Austin residents. I think we'll find that most people who are moving downtown into the luxury condos will generally fall into three groups:

• Professionals from outside of Austin who don't currently own any Austin property
• Professionals that bought the condo for a 2nd property (I would argue that this figure will probably be a bit higher than the national average in this case as we're primarily talking about condominiums in a now cosmopolitan and hip city, further increasing the demand)
• M1EK's scenario of upwardly mobile Austin residents

So while there is some merit to M1EK's premise, I feel it's not the driving factor for greater affordability throughout Austin.

Here's another example. M1EK's premise depends on the total number of available properties in Austin to gain eventual affordability. But just like with Ferraris, unless you add tens of thousands to the supply, they will have a minimal impact on the prices of the rest of the cars on the market. And this exactly what we have here. The developers are adding more Ferraris and relatively few Camrys. Sure, the price will fluctuate a bit for the Ferraris in their own luxury segment (due to demand, exclusivity, etc) but this price will be unaffected by the supply of Camrys as the target consumers are not the same. If the market was suddenly flooded with Camrys (affordable housing), there would have to be a helluva lot of them to have any impact on the Ferrari prices (luxury units) as the buyers of Camrys and Ferraris are in different market segments. People who can afford to live in a $300k condo, generally speaking, are not looking for $150k Clarksville condos or Barton Hills duplexes unless that's all the market has to offer.

M1EK's example may have happened twice (once by his anecdotal evidence of talking to his neighbors and I'll give him another one just because) but, generally speaking, that is not what is going on. If things really did work the way M1EK thought, we'd all just start out living on the periphery of downtown and with no further increase of income, over successive moves inward, we'd have the ability to keep moving centrally until we got to dead-center of town where only the super-rich dwell (as remember, his premise is that by building properties downtown, expanding the total supply, the surrounding properties will fall in price). It's the market in reverse and I just can't see the market working this way. Generally speaking, the market works the opposite way where property values increase dramatically downtown and the property prices increasingly ripple out into the surrounding neighborhoods. In this scenario, no matter how many luxury condominiums you build, it doesn't decrease the affordability of the surrounding areas (Ferraris and Camrys).

Additional Factors

Now, in addition to what I've outlined above, there are other factors which will drive the price of these properties up and in my opinion, will do so even more than the demand. One of those factors, gentrification, would also contribute heavily to an increase in outlying property prices. As I mentioned in my post:

"Yes, M1EK, I did *a lot* of research into your property value claim (the same lame "my Clarksville condo" rant I've now seen on no less than 2 other blogs). Over the last few weeks I've read numerous density articles, affordable housing scenarios, case studies (Portland, Seattle and New York), blogs and comment threads and even the city's development plans (like the City Auditors, I wasn't impressed). I even went so far to talk to 2 MBA's (one in real estate). I couldn't find a *single* sentence or person that supported your "trickle down" assertion (building luxury condos leads to increased supply which leads to more affordable housing citywide). The overwhelming theme I gleaned from those articles and my research is that there is no direct link between building downtown luxury condos and the lowering of property values from previously higher priced properties in outlying areas. In fact, I saw more examples of the opposite; the building of luxury condos downtown increased the housing prices nearby and displaced traditional residential neighborhoods. As shown by this article and from here:

"Gentrification usually increases the property value of an area. This is a positive development for city officials (by raising tax revenue, which is often dependent on property values), the middle class, as well as existing resident owner-occupiers. Unfortunately this same rise in property value can be devastating to those in lower income groups, when children of such residents find they can no longer afford to live in certain neighborhoods. As a result, there tend to be very strongly opposed views on gentrification, with some seeing it leading to healthier, more vibrant cities, and others seeing it as destroying poor communities. Both views would seem to be correct."

What I see happening downtown is an economic segmentation of the super-haves (i.e. - Congress, 2nd street and the new high-rises), the haves (like M1EK and myself; our outlying areas) and the have-nots (the East Austinites that are soon going to be priced out of their neighborhoods through higher property taxes and moved out through infrastructure placement and building). I believe this is counter to Austin's traditional blending of cultures and income levels throughout their neighborhoods. So in the anecdotal spirit M1EK is fond of, I'll use where I live as an example of the "traditional" neighborhood. I live in a duplex in Barton Hills. The surrounding houses in this neighborhood roughly start in the $300's and go up. I couldn't afford to live in this neighborhood otherwise (I live on a city worker salary, for pete's sake!) but because there is "worker affordable" housing in this area, I can enjoy the benefits of living in this neighborhood (the key one being I can ride my mountain bike to work safely on the greenbelt :). What's key to greater affordablity is a supply of housing within the segments that people can generally afford. That's why I've been posting that we need more "affordable housing," and not just addtional inventory in the luxury segment.

While I'm at it, I guess I should define what I mean by "affordable housing." When I talk about "affordable housing," I'm not talking about the traditional political definition of the term. I'm not talking about putting government subsidized housing on 2nd street or the like. What I am talking about is "worker affordable housing," which is generally set at about 70% median income (roughly $1,400/mo rent) versus "affordable housing" which is 50% and below median income (about $700/mo and below) **. As far as my research has been able to produce, there's only one property being built downtown that could fall into that "worker affordable housing" range as their rentals will be starting at $1,400/mo: Red River Flats.

So for me, a long time (11 yrs) Austin resident, it concerns me to see the current pattern of development that excludes the types of developments which will lead to the "unblending" of what I feel is one of the defining characteristics of Austin. Economic segmentation is how places like Dallas developed and I have a bit of firsthand knowledge there as well. I lived in the McKinney Ave. area just before the big redevelopment boom and moved to Austin about 3/4 of the way through it's completed development. I saw the moderately priced area where I lived soar to unaffordable in a mere few years which benefitted the property owners (like my father who owned a few of those condos) but didn't do anything to bring middle-income families to the area (seemingly, the "rocket shot" of property prices hit just after the completion of the driving range. Go figure...). I saw the residents of the low income side (east of Central) displaced in fairly short order as the property values skyrocketed and they were left looking for affordable housing elsewhere. (But give credit where it's due... At least Dallas had the foresight to put in a good mass transit system so at least for those that can't afford to live downtown but need to work there, an inexpensive and efficient people moving system is in place.) In my opinion, Austin needs to stop this segmentation or we risk losing what makes this city so great. We can do this by building (and the City supporting) affordable housing initiatives (like inclusionary zoning) and the building of more "worker affordable" housing like Red River Flats downtown. This really will bring diversity to downtown and will speed the migration of middle-income families to the downtown and surrounding areas.

Finally, I see gentrification being the larger threat to long-term property values and see little merit to M1EK's "trickle down" scenario to stem the upward trending property values. We currently have a very developer friendly City Council and Mayor, seemingly offering tax breaks and incentives to any of their PAC supporters that come within breathing distance (see the above mentioned post for some details). I suppose time will tell if gentrification is truly going on downtown as the growth starts to spread eastward but the seeds certainly seem to have been planted. I'm all in support of development downtown and certainly support NuPro's ideas for new urbanization (I hope she'll post about the importance of bringing middle-income families to downtown) but I feel there must be greater support from our City Council to provide affordable as well as luxury housing downtown with a coherent development plan if they truly want to meet their goal of 20,000 people living downtown while preserving cultural and economic diversity that is so much a part of Austin.

** - Ed. note -- Argh, lost my link here. Will post it when I find it in my history file...

Addendum: Since I'm no longer allowing M1EK to comment on my entries (and I will remove them if you do comment, M1EK), I will, however, give him the space to put a complete response. I will post his entry unchanged and unedited and will leave open the comments for responses. I know I don't have to do it but someone has to be the bigger person here and I'm genuinely interested in his response. I will put no qualifiers on the post for publishing other than any points made must be backed using facts and linked to the authorative data provider (which means you can put as much bile in the post as you want).

Update: In M1EK's reply on his site, he mischaracterizes the above addendum as a "demand," which it was not meant to be. Since I was using one of his comments as the basis of my entry, I was merely offering M1EK the opportunity to post a reply in the same forum if he felt the need. I'd like to make clear that nowhere in my post did I ask for a response or at at any time thereafter was I looking for a response from M1EK. I would be just as happy if he didn't want to post about the subject. I'd also like to add that the post was not supposed to be a "hit piece" or anything of the sort on M1EK. I just thought that he said something interesting and simply used that as a basis for a post.

Now, for a quick response to his... First off, I can see that the bile started right from the title (why so defensive?). His example of a "typical comment" is misleading. What he quoted is just a portion of a comment, not the full comment and not representative of what he left on my blog. I still have the comments he left on my blog; I just didn't make them visible. I won't say that they are the worst comments I've ever seen nor is there any abusive language contained within them. But, much like many of his blog entries and comments on other sites, they are condescending to those who don't agree with his view. There were no links, citations nor quotations contained within them. Just pure opinion. And while M1EK is entitled to his opinion, because I felt he was moderating out comments on his blog that he didn't like, I did the same on mine (another person also submitted a comment to his blog post that did not get posted as well to which M1EK responded back with the same "the software ate the comment" reply (which could very well be true). In my experience with MT (I used it before CoreBlog) and leaving numerous other comments on MT-based sites (some moderated), the comment I left on his blog post seems to be the first I've seen "lost." No biggie, I'll move on..

Also, it appears that I don't have a complete misunderstanding of economics because he at least afforded me one point:

"Well, his first assertion is true - the markets are 'segmented', but individual complexes can, and do, migrate from luxury to moderate segments."

So the premise I took in my post may not be what's going on but at least it's not a "complete" misunderstanding of economics.

Finally, someone else did take the time to look into the issue and sent me a great link (h/t Jen). This link to the National Housing Council shows how much money it takes to "survive" in various cities using 63 jobs as a metric. In Austin, just to "get by," it takes $61,840 / yr with a median priced home at $195,000. Looking at the 5 pre-selected jobs (School Teacher, Nurse, Police Officer, Retail Sales Rep and Janitor), none of them make enough money to "afford" to live in Austin (which goes along with this editorial that shows that most Austin police officers and fire fighters live outside of Austin). The type of "affordable housing" I'm talking about would allow people in these jobs to live in the city where they serve. That just seems like the right thing to do.

Update II: Whilst searching my history for the lost "worker affordable housing" classification link, I found this great comment attached to this article:

[...] As someone once said, the notion that all growth is intrinsically good is the mindset of a cancer cell.