How Urban Would a Free Market Be?

Suppose we fully deregulated the housing market.  What would happen?  A common YIMBY trope is that cities would dramatically expand; the endless millions of people who have been priced out of New York, San Francisco, and LA would rush to enjoy affordable, spacious urban living.  A common doubt, however, protests, “Most people don’t want to live in cities!”

What’s the real story?

To answer, consider the following scenario.  X and Y are substitutes.  For decades, there has been a 100% tax on X and a 1000% tax on Y.

What happens to consumption of X and Y if you suddenly abolish both taxes?

Theoretically, of course, it all depends on elasticities.  The reasonable prediction, however, is:

1. Consumption of Y will almost surely rise massively.

2. Consumption of X will probably rise by a lot, but maybe not.

This scenario closely fits actually-existing housing regulation.  Current regulation strangles urban construction, and heavily restricts suburban construction.  If you got rid of this regulation, skyscrapers really would start going up all over high-priced cities – and millions of urban commuters would swiftly relocate to occupy these new buildings.  Families with children would naturally be less-eager to go urban, but even they might be tempted by large, cheap apartments across the street from their jobs.

Plenty of other folks would respond by moving into all of the newly vacant – and suddenly cheap – suburban homes.  This could conceivably fully satisfy suburban demand, but the more likely result is that developers would also take advantage of deregulation to subdivide existing lots and build lots more single-family homes.  And of course other developers would buy up neighborhoods of old single-family homes, bulldoze them, and replace them with massive cheap apartment complexes.

“People don’t want to live like that”?  That depends on the price.  Deregulation doesn’t just make dream homes affordable.  It also allows people to settle for ultra-cheap, so-so housing and spend the savings on their higher priorities.  Whatever they may be.

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