The Real Link Between Urban Growth and Gentrification

Many urban thinkers such as Edward GlaeserRyan Avent, and Matthew Yglesias make the simple economic argument in their latest books that increasing the supply of urban housing will lower its price.  While these books present sound cases against the commonly perceived notion that development causes higher prices, there are still several examples of neighborhoods experiencing both influxes of development and higher prices that would lead people to link them causally.

Stephen Smith addresses these concerns by saying it all comes down to amenities.  These poor urban neighborhoods have attractive housing stock, but lack goods and services that more wealthy residents would demand.  New development brings along these new amenities.  New development by itself acts to lower housing prices, but this decrease is overcome by the increase in prices caused by the new amenities.  If this cycle were allowed to continue, the diminishing marginal returns to amenities would eventually lead to a peak in housing prices and cause them to start dropping again.  However, before that happens the new wealthier and more politically savvy neighborhood residents would fight against development, causing prices to remain high and for gentrification to continue to spread outward.

I've thought of these issues as well, and while my conclusions are similar I've always had a slightly different line of thinking.  Amenities tell only a small part of this story, and I think there's way more going on here.

Given any exogenous increase in demand, prices will start to rise.  Higher prices lead to development, and normally this development will occur until prices go back to their original levels.  If there are any restraints to development, then any increase in demand will lead to both increased development and increasing prices, which could lead outside observers to incorrectly assume that development is causing higher prices.  This feeling will lead to more restrictions on development, and this conventional wisdom becomes a self fulfilling prophecy.  NIMBYism very easily breeds more NIMBYism.

That's the bare bones of what's going on.  It completely explains why there's a perceived link between development and rising prices, why it's fought against so hard, and doesn't even take into account amenities or gentrification.

Stephen does have some absolutely valid points, and it is fascinating piece of analysis in its own right. There is a diminishing marginal return to amenities, there is more NIMBY activism in wealthy neighborhoods than in poorer neighborhoods, and this does lead to an acceleration in the existing process of gentrification.  I begin to disagree when he expands this argument and says that the presence of amenities is when things start to go awry.

I think that the increase in demand is where everything begins, and is the culprit behind everything that follows: development, rising prices, and increased amenities.  Amenities don't automatically come with new development, they arrive for the same reasons as developments.  Amenities are a result of the surrounding population, and the population is determined by housing prices.  If these housing prices are artificially high because development wasn't allowed to keep them low, higher class amenities will follow.

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