Tech's Dream of Building Our Way to Affordability Will Never Come True

Silicon Valley's loudest mouths love little more than demanding free market solutions to every public ill—the Bay Area's housing crisis being no exception. Their pitch is simple: just build more housing and prices will plummet. But that's not happening.

The cheerleaders of laissez-faire development are your usual suspects: tech bloggers, Redditors, Hacker News trolls, and politically-connected venture capitalists. They point to government red tape, preservationism, and progressivism as the major obstacles to affordable housing. As Business Insider's Kyle Russell once put it, "The [city's] policies and concerns [of residents] have established a distinct anti-growth culture in San Francisco."

Fortunately, the Bay Area has been undergoing a development boom for the last few years. Well over two thousand units opened in San Francisco alone last year, and that number is expected to rise in 2014. It would stand to reason that if the market is cranking out new construction, prices would begin to stabilize.

Not so. In the past two weeks alone, two studies have been released that indicate housing costs are skyrocketing despite an unprecedented construction boom, and there is little chance of reversing the trend. According to the San Francisco Chronicle, the city's median home price just hit $1 million. Local realtors say prices are climbing because of "Google kids" and foreign speculators flooding the market.

And the situation is even more grim for renters:

San Francisco continued to have the highest rents — $3,229 on average, up 5.6 percent for the quarter and 9.4 percent year over year.

But Oakland had the biggest percentage gain. The average asking rent there jumped to $2,421 in the second quarter, up 10.6 percent from the first quarter and a whopping 19.1 percent year over year.

Tech's free-market warriors often use two housing projects that have been stymied by preservationists (read: neighbors concerned with slumping property values) as proof of anti-development sentiments raising rents: the lavish 8 Washington condo project that was blocked by voters and a Valencia Street condo that was forced to remove four units. But despite those arguable setbacks, there's so much construction in the Bay Area that firms are having to import workers to build projects. As SPUR, a development and planning advocacy group, noted, "Local union halls' out-of-work lists are empty, and some unions are even calling in workers from other parts of the country."

The market may not be able to build enough housing, but San Francisco's Mayor Ed Lee has a plan to address the housing crisis. He wants to see 30,000 units built by 2020—9,000 of which would be below market rate. And the Mayor wants to spur the building of those units with market-friendly solutions: cutting out red tape at the building permit office and prioritizing developments with high percentages of affordable housing.

It's a plan being loudly championed by Mayor Lee's financier and celebrity venture capitalist Ron Conway. Conway famously started a public screaming match with Chamath Palihapitiya when his fellow VC insisted the Mayor wasn't doing enough to address affordability. "It is going to get better," Conway persisted, "not worse."

However, a report by San Francisco's Grand Jury analyzing the feasibility of Conway's beloved plan concluded the situation is only going to get worse.

[While] the residential real estate market is enjoying a strong recovery, it is doubtful that the City can build its way out of the current affordability crisis, and one should not expect market rate rental housing and ownership prices in the City to decrease even if the [Mayor's] target is met.

San Francisco's chief economist Ted Egan also agrees the Conway-endorsed plan would fail to impact housing prices. Egan estimates it would take at least 100,000 additional market rate units to achieve affordability. And 100,000 units are unlikely to go up in a land-scarce city with only thirteen square miles of earth available for housing—especially considering the Grand Jury casts doubt that the 30,000 target will even be reached.

However, the Grand Jury did anticipate one way the Bay Area could become affordable again:

[The] current affordability "crisis" could also dissipate, at least temporarily, should technology employment turn out to be a bubble, as occurred in 2000 after the "dot com" cycle when laid-off workers left San Francisco and vacancy rates increased.

But if all the laid-off tech workers left San Francisco, who would be left to tell us how to fix the city?

[Timelapse GIF via Google Street View]