As part of Mayor Parker’s H.O.M.E. plan and related efforts, many of our elected officials have emphasized the need to build more capital-A Affordable Housing, while dismissing the value of market-rate housing to their cause.
That’s a mistake. There’s no logical reason why a preference for affordable housing has to be paired with an attitude of ambivalence or outright hostility to market-rate development. In fact, market-rate housing has recently been shown to make all housing more affordable in Philly in both direct and indirect ways that should prompt our leaders to update some of their political priorities.
Like musical chairs
Most new housing starts out as “luxury” but as time goes on, becomes outdated, and more relatively affordable. People are familiar with this economic story for other investments, like cars, but we sometimes reject this logic for housing.
A healthy amount of ongoing new construction needs to happen for this story to play out. If not, the scenario works in reverse. A good local example of this is upper middle-class professionals still willing to live in very small older rowhouses and trinities — originally built for working-class factory workers — in trendy neighborhoods that restrict new housing supply, bidding up the prices of those homes.
Skeptics of market-rate housing sometimes lampoon this “filtering” concept as “trickle down economics” — a non sequitur comparison to the high-end tax cut strategy favored by national Republicans. But a better metaphor for the dynamic is the children’s game musical chairs.
With one fewer chair than players, and one more chair removed in each successive round, more players become displaced from the game. The opposite set of rules wouldn’t make for a very interesting game, but if there were more chairs than people, with more chairs added in each round, more players would be able to move in and have more seats.
Over the last several years, more academic research has shown this story is more or less correct. One of the better ones comes from Evan Mast in a 2023 paper published in the Journal of Urban Economics titled The Effect of New Market-Rate Housing Construction on the Low-Income Housing Market.
Mast analyzes historic postal data to trace the “chain of moves” that begins when someone moves into a new market-rate housing unit. Who moves into the home vacated by that person? And who moves into that second person’s home?
Looking at the chain of moves set off by 52,000 residents moving into new market-rate apartment buildings, and tracing the sequence for six rounds, Mast finds new market-rate housing availability leads to residents moving into higher quality housing than they had before, quickly reaching into the broader region, and creating opportunities to level up on housing quality for lower-income residents.
Constructing a new market-rate building that houses 100 people ultimately leads 45 to 70 people to move out of below-median income neighborhoods, with most of the effect occurring within three years. These results suggest that the migration ripple effects of new housing will affect a wide spectrum of neighborhoods and loosen the low-income housing market.
However correct it may be, this academic evidence still unfortunately strikes a lot of people as counterintuitive, blunting the emergence of a more pro-construction politics.
For those still unpersuaded, some clearer local examples of the benefits of market-rate housing.
New market-rate buildings compete for Housing Choice Voucher-holders
Philly’s record on new housing construction has been pretty middling. Cities like Austin and Seattle have experienced true building booms. But we did have two well-above-average years of permitting activity in 2020 and 2021, most notably the River Wards neighborhoods where it created high vacancy.
That temporary housing glut made building owners compete for tenants for the first time in many years, offering price concessions and other incentives. But more surprising were the number of landlords rolling out the red carpet for Section 8 Housing Choice Voucher recipients. As Jake Blumgart wrote back in the fall:
Developers and landlords who previously had little experience with the voucher program have been increasingly interested in guaranteed rental income from the federal government.
At the same time, the Philadelphia Housing Authority has been ramping up a campaign to get more voucher holders into higher income areas of the city. It helps that since 2018, they have been able to base the dollar-value of vouchers by zip code, allowing them to meet market-rate rents in pricier areas. Then in 2021 PHA began more aggressively courting developers and property owners who had never used the program.
The City and public interest legal groups have long struggled to enforce the law banning source-of-income discrimination against voucher-holders, and this new competition among landlords pushed them toward those vouchers. The Department of Housing and Urban Development (HUD)’s “small area fair market rent” initiative has also made the vouchers more appealing for landlords. While Section 8 comes with other hoops landlords usually don’t want to jump through like annual inspections, plenty are willing to exchange administrative burdens for guaranteed income from the federal government, under the right market conditions.
PHA’s big apartment-buying spree
Now that the Philadelphia Housing Authority has become the largest single buyer of apartment buildings in the city, the direct connection between building abundant market-rate housing and the housing affordability cause becomes a lot clearer.
The rent projections many developers pitched to lenders and investors to secure financing for their projects may not come to pass because of all the competition from other new buildings. This has many owners nervously eyeing the exits, looking to sell their projects.
The Philadelphia Housing Authority has stepped in to buy more of these brand new or new-ish buildings, and PHA CEO Kelvin Jeremiah has announced the agency’s intention to spend around $900 million buying 4,000 units of market-rate housing over the next few years.
Jeremiah told The Inquirer that PHA can acquire buildings for about half the cost of what it takes the agency to construct new purpose-built public housing, extending their limited funds much further and ultimately helping many more residents than would benefit from the old approach:
But in recent years, as Philadelphia has seen a historic surge in market-rate apartment construction, some building owners have been desperate to fill vacancies and unload properties that haven’t proven as profitable as hoped. More private sector landlords actively court Section 8 voucher holders, and PHA itself is purchasing struggling buildings for half the cost of building themselves.
Such acquisitions are a key part of Jeremiah’s plan to get back to 21,000 units. He says private sector owners regularly get in touch with PHA to offer buildings. (Many are too old to be of interest.)
It’s an inspired play by the Housing Authority, but it’s worth underscoring that this is only possible because of all the new market-rate housing supply that was built over an unusually busy couple of years. And it goes to show that there’s no hard-and-fast delineation between market-rate and affordable housing. These market-rate buildings were built and financed under one set of assumptions, but then along came a different buyer who wanted to use them for something different.
In hindsight, it’s easy to see how everyone would be worse off if these buildings had never been built. But in neighborhoods all over the city, people show up to zoning meetings to argue for exactly this, sometimes based on the premise that they don’t contain enough subsidized housing. Many people today would be worse off if we listened to them.
The in-lieu fee money machine
Market-rate buildings also pay taxes and fees that are helpful for funding publicly-subsidized housing, home repairs and more.
Philly’s 2018 Mixed-Income Housing law offers some attractive zoning density bonuses for developers who either provide on-site subsidized housing, or pay a fee to the City’s Housing Trust Fund, which provides flexible funding to a wide range of affordable housing and preservation initiatives. This system has proven to be more popular than the bill authors ever imagined, in part because by using those bonuses, developers can build bigger buildings with more units than the law normally allows.
I’ve written about how City Council originally hoped the Mixed-Income Housing bonus would become a machine for boosting subsidized housing in market-rate developments — subsidized, that is, by the market-rate housing tenants who make up the majority of renters in those buildings. Once it became clear that the fee option was much more popular as a result of how the law was written, some Council members and planners got sad about this and amended the law to make it all work less well.
One line of criticism from Council has been that, even though their bill directed the fee money to go entirely into the Housing Trust Fund, Mayor Kenney instead sent the fee payments to the City’s General Fund. Incoherently, this argument has been used in the service of making the fee option less attractive. (This echoed similar rhetorical moves from soda tax opponents about how all the Rebuild and Pre-K funding was actually just disappearing into the City’s General Fund due to the city Charter’s prohibition on dedicated taxes for specific spending items.)
Third District Councilmember Jamie Gauthier, to her credit, took direct aim at the crux of this problem by introducing a Home Rule Charter change requiring density bonus fee money go entirely to the Housing Trust Fund. Primary voters approved that change last month.
When this takes effect, this line of excuse-making will be officially null and void. There will now be a very direct connection between allowing more market-rate housing to be built, enabling more fee payments, and increasing the Housing Trust Fund’s resources. Any Councilmember who claims to support increasing the Housing Trust Fund balance will have a clear and direct incentive to promote more new housing. Any laws or other actions that reduce market-rate housing viability, or the useability of the bonus system, can now be fairly described as stealing from the HTF. The more dense market-rate housing is broadly allowed, the more money will flow into the HTF.
Cushioning the blow for homeowners from lowered commercial taxes
For all the benefits of the 10-year tax abatement for property improvements, one of the big drawbacks of it was that it broke the political linkage between permitting more market-rate housing and municipal government getting more property tax money right away to fund the City budget.
With the tax benefits of new apartment buildings only materializing 10 years later, and local politicians having four-year terms of office, we might as well have been sending that money to the moon, for all anyone in elected office was concerned.
In 2021, Council scaled down the abatement by 10 percent a year over the 10-year horizon, bringing more property tax money into the City’s coffers sooner, helping to partially restore this important linkage between building more buildings and getting more tax money.
This is now more relevant than ever because of the coming hit to commercial tax assessments. Commercial office buildings have had a rough run since the pandemic, with higher rates of remote work reducing the structural demand for office space. This has resulted in office building owners appealing their current tax assessments, and often winning lower tax bills that are more reflective of reduced building values.
How will City government make up the gap? If we do nothing, either residential homeowners will have to pay higher tax rates to raise the same amount of property tax revenue, or the City will have to cut spending. But there’s also an option to try our best to increase the rate of market-rate housing construction as a way of growing the pie of tax money, and limiting residents’ exposure to higher property tax bills or unpopular spending cuts.
It’s worth noting that the PHA strategy of buying apartment buildings cuts against this, as the properties then become tax-exempt, but the policy incentives all still push in the direction of doing more. If PHA is going to take more large apartment properties off of the tax rolls, then we need even more tax-paying properties to make up the difference.
None of this is to say City officials should take their foot off the gas in trying to boost construction of affordable housing — only that it isn’t an either/or proposition. Both kinds of housing are net beneficial for bringing about widespread housing affordability, and a healthy housing market for Philadelphia will feature high rates of construction of both privately-owned market-rate housing and publicly-subsidized housing. A politics that pits them against each other is sure to leave everyone worse off.
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