Growth Is Not Always the Answer

Why is it always assumed that a city’s rate of growth is natural, or unavoidable, or simply that more growth is always better?

Photo by Flickr user Jenn Deering Davis, CC BY 2.0


A crowd of people relaxing in an Austin, Texas, park in the evening, with the city skyline visible in the background, accompanying an article on cities with a high rate of population growth.

Photo by Flickr user Jenn Deering Davis, CC BY 2.0

Officials in cities that are experiencing rapid growth are becoming more and more concerned about skyrocketing housing prices that often accompany such growth. It’s more important than ever that we talk about what causes prices to rise so quickly, and possible solutions to address the effects of such increases.

I live in one of these cities, Austin, Texas, where the growth has been nothing short of astounding: more than 50,000 people have moved to the area each year for the last two decades, and home prices are more than twice what they were just a decade ago. This leaves a much larger portion of the population housing-cost-burdened and/or unable to buy a home. For example, we’ve gone from having homes available for buyers making 25 percent of the median household income (MHI) in 2008, to homes available only for buyers making 98 percent of MHI or above in 2018.

One prominent explanation of the growing unaffordability—the “housing as opportunity” school of thought—asserts that municipal zoning regulations that limit density, and thus restrict the supply of new construction, are the primary cause of soaring prices. While such zoning does constrain future responses to the affordability crisis, it cannot be the cause of our skyrocketing housing costs, at least in Austin: zoning has stayed essentially the same (if anything, restrictions on density have lessened over the last two decades), while Austin has gone from being a broadly affordable city to one affordable only for a small fraction of the population.

Upzoning Won’t Create Affordable Housing

Austin does have a significant supply/demand gap. But there are logistical constraints on building that city demographer Ryan Robinson finds more important than zoning restrictions. In a report, Robinson says,  “. . .  even if the code were to be dramatically opened up with vast increases in entitlements, I’m just not sure we would see levels of production much above what we’re currently seeing–the pipeline of production must be nearing a maximum threshold of sorts.”

It is actually unclear whether upzoning (changing the zoning code to allow for larger, more dense developments) in high-growth cities improves affordability at all, as blanket upzoning seems to increase supply mostly in high-end properties, with no trickle-down effect to less expensive homes, according to scholars Andres Rodriguez-Pose and Michael Storper. Nick Barbaro at the Austin Chronicle states “ . . . consultants have been unable to point to a single growing city in the U.S. where the kind of upzonings proposed by the new code have actually resulted in greater affordability.” All we can say reliably about upzoning is that it increases land values, given that price per square foot is higher in small homes than large ones; Yonah Freemark documents this rise in land values in a Chicago-based study.

Growth as a Driver of Home Prices

Growth is the most salient feature of Austin that has directly driven change over this period of time. Austin was the fastest-growing large city in the U.S. this past year, and has been one of the fastest-growing cities for many years. Austin grew 30 percent faster than the second-fastest-growing U.S. metro from 2010 to 2019, and almost 5 times the national growth rate.

In addition, the new arrivals tend to have higher incomes. Austin has been cultivating knowledge industry jobs, and several of the biggest tech companies (e.g., Google, Facebook, Amazon, Oracle) have significantly increased their presence in recent years. As a result, the portion of high-earning (over $150,000) homeowners went up 25 percent between 2012 and 2017. And housing prices are very sensitive to changes in per capita income: a Freddie Mac analysis found that prices went up 1.5 percent for every 1 percent increase in per capita income.

Yet our sustained levels of very high growth, and higher-income growth, are rarely mentioned as drivers of prices; we tend to assume that the rate of growth is natural, or unavoidable, or simply that more growth is always better. But what if that’s not the case?

What Drives City Growth?

First, it’s important to note that urban growth is generally driven by job growth, not amenities, as Storper and Allen J. Scott point out in their paper Rethinking Human Capital, Creativity. So the question becomes, why are jobs moving to places like Austin?

Urbanization of jobs in general stems from “agglomeration economies,” in which geographic concentrations of workers and firms boost productivity: workers become 2 percent to 8 percent more productive when the labor pool doubles in size. Cost is another factor, and even as prices are soaring here, Austin is still low-cost compared to California and the Northeast.

A motivator for many firms moving to Texas is the state’s weak labor regulations: it is a right-to-work state, and the minimum wage is no higher than the federal rate, $7.25 an hour. What’s more, the state prohibits localities from passing their own minimum wage laws. It’s worth noting that the five states with the most people moving to them are all right-to-work states (Idaho, Arizona, South Carolina, Tennessee, and North Carolina), while the five states with the most people leaving are all union-friendly (Illinois, New York, California, New Jersey, and Maryland). Of those five states seeing the most inbound migration, only one of them—Arizona—has a minimum wage above $7.25 an hour.

These lax labor protections increase corporate profits and attract businesses to the state, but suppress wages below competitive-market levels, reduce economic growth, and worsen inequality, as I show in The Free Market Fallacy. Combined with fast-rising rents, this leaves many workers in Austin—fast food cooks, waiters and waitresses, nursing aides, security guards, child care workers, EMTs, and e-commerce service reps—with wages so low they cannot even afford a one-bedroom apartment, much less begin to build wealth by purchasing a home. As Patrick Le Gales and Paul Pierson put it, “rapidly rising housing prices are a generator, repository, and transmitter of inequality.”

Austin and local counties also provide plenty of tax incentives for firms to move or expand here—even though 85 percent to 95 percent of these firms would have moved here without the incentive, as Nathan Jensen at UT Austin has found. Austin currently has nine incentive deals totaling $112 million in tax rebates, including $8.6 million for Apple and $62 million for Samsung, and Travis County has eight such agreements, including one with Tesla that could total $60 million.

The Costs and Benefits of High Growth

Certainly a growing city has advantages over one that is losing population, avoiding the huge costs of asset depreciation, unemployment, and infrastructure degradation. And high levels of growth produce quick appreciation for homeowners (45 percent of Austin residents) and owners of investment property, expanded markets for the real estate industry, and increased city revenues and staffing.

Yet the costs of high growth are also significant and fall especially on the people already living in the growing city. All residents face increased traffic, commute times, and pollution. Homeowners are saddled with rapidly increasing tax bills, especially in a city like Austin, where property taxes are especially high due to the lack of a state or local income tax. These taxes make up about one-third of a homeowner’s beginning monthly bill here, and having that double every 7 years (valuations are allowed to rise 10 percent a year even on homesteads) can be a major strain. Renters are hit especially hard with rapidly rising housing costs. Even a homeowner’s main benefit, the rise in home value, is only useful to them if they are willing to leave the area.

Expanding the Dialogue: Supply and Demand

So, what about the other side of supply and demand? What about “demand cooling” strategies—such as restrictions on foreign ownership, tighter lending requirements, fewer tax incentives for corporate relocations—as a way of increasing affordability? The financial incentives to landowners and city coffers make it an uphill climb for sure. But consider: does it really make sense for a city like Austin, which has long had low unemployment rates (25 percent less than the national average, 15 percent to 25 percent less than Texas) and high growth rates, to actively lure additional companies here? Is it really taking care of the half of your residents who rent to do that? Does it take care of the portion of homeowners who can’t afford rapidly increasing monthly payments due to rising property taxes, and must leave their community to get by?

Simply taking the municipal foot off the gas by lowering or eliminating tax incentives for business relocation would be a start. We could also follow the lead of Vancouver or New Zealand in taxing or restricting foreign ownership, which amounts to about 5 of Austin area purchases. When Vancouver created a 15 percent tax on foreign real estate purchases, single-family home prices fell 20 percent. New Zealand recently banned most foreign purchases, as foreign ownership of central Auckland properties had risen to 22 percent and prices had doubled. Singapore has successfully pursued its own demand cooling strategies.

Confronting the fact that high growth is not an unalloyed good can feel strange. To Americans, the actions Vancouver and New Zealand are taking may sound like draconian interference in the market. But in essential goods markets, like housing (and water, electricity, etc.), government has an important role to play—not just in enticing corporate relocations, but also in ensuring its residents have access to a key essential good—housing.

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