Chuck Marohn has long been critical of housing research that treats affordability as a simple supply problem. This week, he brings Andrew Burleson, chair of the Strong Towns board, and Jeff Fong, a board member at YIMBY Action, a new paper on Australia’s housing crisis that starts somewhere else: with the way price increases move between detached houses and apartments, and from one city to another. The paper argues that detached homes help lead the market, while the discussion keeps returning to a harder question: how much of the crisis is about housing supply, and how much is about the financial incentives built into the market?
Hey everybody, this is Chuck Marohn. Welcome to Upzoned, a podcast from Strong Towns, where we take a current news story about cities and we upzone it, using the story to explore deeper concepts about how our cities work and what we can do to make them better.
Before we jump into this week's paper, let me say something that longtime listeners probably already know about me. I'm generally pretty skeptical of academic housing research. That's not because I think academics are bad people or that rigorous research isn't valuable. It's because I think housing research has developed something of an echo chamber. Researchers tend to build on one another's work. They use the same assumptions, they ask the same kinds of questions, and they refine the same basic models over time. Those assumptions become accepted wisdom, even when I don't think they've actually been proven.
One of the biggest examples is the way we talk about housing affordability. Much of the literature starts with the assumption that housing is fundamentally a supply problem. Researchers then spend a lot of time studying how much supply we need, what kinds of supply we need, and how quickly prices respond to new supply. Those are worthwhile questions, but they all begin from essentially the same premise. I've been a critic of that way of thinking for a long, long time, so when I came across a paper that genuinely asks a different question, I paid attention. That's what this paper today does.
I wanted to give this background because some of you are going to say, 'Chuck, I thought you didn't like studies, and now you're sharing a study.' Yeah, I'm a bit of a hypocrite there. I'm not sharing it because I think it's right. I'm sharing it because it's different.
The study that I asked our guests to read today is called 'The Role of Price Spillovers in the Australian Housing Crisis: A Two-Market Analysis.' It is an academic paper. It has a number of authors on it. I'm not going to read their names, and I'm not going to butcher their names. I have more respect for them than that, but we will link to it in the show notes. You should go read it.
The authors aren't asking how many homes Australia needs to build. They aren't trying to estimate the elasticity of housing supply or even measure the impact of zoning reform. Instead, they're asking something a bit more fundamental: How do housing price increases spread? Why do detached houses keep getting more expensive than apartments? Why does that rate go up higher and faster, and what does it tell us about what's actually driving the affordability problem?
Their first major conclusion is that detached houses drive the housing market, with price increases in housing leading and pulling up prices in apartments, not the other way around. Their second conclusion is that housing prices don't stay local. They spread from one city to another. This suggests that housing is increasingly functioning as a financial asset, with capital chasing appreciation across markets.
With me today to discuss this is Andrew Burleson. Andrew is the chair of the Strong Towns board. He's been involved with Strong Towns since the very early days. He brings experience from urban planning, real estate, finance, and local development. He's also the founder of the Houston chapter of the Congress for the New Urbanism, and he now lives with his family in Denver. Andrew, welcome to Upzoned.
Thanks, Chuck. Glad to be here.
Jeff Fong is a board member at YIMBY Action. He has spent years writing and thinking about housing policy, housing production, and the social safety net. Jeff also brings a personal perspective to the issue, having entered the workforce during the 2008 recession and worked additional hours as a Lyft driver to keep up with the cost of housing. Jeff Substacks at Urban Proxima, so you can check him out there. It's a fantastic Substack. Jeff, welcome to Upzoned.
Yeah, thanks for having me, Chuck.
Jeff, maybe we can start with you. I feel you, in particular, have a very interesting perspective when it comes to housing. I wonder how you read this study, some of the analysis that went into it, the assumptions, and some of the conclusions.
Yeah, so I may have gone down a rabbit hole and hyperfixated after you sent me an interesting paper.
You're here, friend.
In broad brushstrokes, I think this paper is doing three different things. I'll keep them brief, and we can dive into whatever is actually interesting here.
One is advancing a specific statistics approach. Part of what they're doing here is saying we should understand different types of housing as different discrete markets. I think that's absolutely correct and very interesting, and I wish we would do more of it. I think too much aggregation blinds us to a lot of stuff.
The second thing is making an empirical claim about the relationship between these two submarkets. I think that's also interesting. However, and we can get into this if we want, I have deep concerns about the way they went about that, which are buried in the paper if you read the fine print.
The third thing is a set of policy recommendations. Some of them make total sense to me, and some of them I'm thinking, this only follows if you grant some of the things from step two. It's an interesting paper overall. I think they're trying to chart out some interesting territory. I have some concerns with some of the conclusions they jump to.
I want to come back and have you delve into the second part. Before we do that, Andrew, why don't you give your first-blush impression of what you read and what the assertions are here that we should discuss?
Yeah, I did not think of that as systematically as Jeff just broke down for us, so I'm a little bit at a disadvantage out of the gate, I guess. I will say this: I had two reactions first that I feel about any kind of paper I read.
The first one is that we're talking about Australia. I think we can learn a lot from any place, but I definitely have to be careful trying to learn too much from a place I don't know a lot about. These are big, complex issues, and it's too easy to imagine that things are exactly the same there when I know they aren't. That's one note of caution I had for myself.
The second is that housing and financial markets are complex systems. We can reason about what's going on in them, but we can't run controlled experiments, and we never see the counterfactuals. We have to be humble about how much we can actually know versus how much we can theorize and have some partial understanding of, but not a complete understanding.
I agree with Jeff's framing on the first point that it is interesting to think of these as two markets. I actually felt a little more triggered by their second assertion that there is really just one market. Chuck, I think I've argued with you about this once or twice. I hate that framing. I think there's no such thing as a national housing market. There's only regional housing markets, because you can only physically live in one place. What's going on with prices in Akron, Ohio, is just not very connected to what's going on in Miami, Florida.
It is connected to some degree, and I think the point they made of being able to see evidence of how the financial market was pushing spillover resonates. I've had a lot of firsthand experience with that in the U.S. I'm from the Austin area. I lived in San Francisco for a long time. During COVID, I moved back to Austin to be closer to family, and I had the cringey experience of being part of this wave of Californians. It was, 'No, I swear I'm from here. Ignore my license plate. Let me in with these people.'
I watched as the market in Austin reacted very strongly to this influx of people who were coming from a very different economy, and how that impacted and changed everything on the ground in Austin and created a huge price shock there. I definitely think that spillover effect is real, and the way they analyze that was interesting. That's probably enough preamble, but those were my first impressions.
Jeff, I remember back in 2006 and 2007, when we were having this debate over how correlated the housing market was. The underlying argument was that the California market is different than the Florida market, which is different than Nevada, which is different than Texas, which is different than Minnesota. Then it ended up that everything was perfectly correlated in financial terms.
Obviously, this is not 2006 or 2007. It's a different time, and we're doing things differently. I wonder if you can delve into Andrew's point there about correlation, but also expound on your second point about the relationship between markets and some of the assumptions in that report that you would question, or where you would say, 'Hey, this maybe is not going far enough or doesn't answer all the questions I've got.'
Yeah. In general, 2008 is something that I don't even know if I fully understand. In full disclosure, I was still relatively young in 2008 and not fully formed in my opinions about the greater political economy.
You're still relatively young, Jeff. We all are, right?
Yeah, let's go with that, Chuck.
2008 does sound a lot more like a financial story. The way that I would think about it, given my frame of mind now, is less that all housing markets were correlated because finance, and more that all housing markets were correlated because all housing markets were dominated by single-family homes backed by everybody's favorite 30-year fixed-rate mortgage that was being securitized. That felt like a financial thing. I'll stop myself before I go too far, because it starts to sound like a Georgist story in my head. We can circle back to that later.
I echo Andrew's sentiment that I'm skeptical of talking about housing markets as a national phenomenon. As it turns out, I got into a fun little back-and-forth last year with an Australian economist who takes the view that national housing markets are highly correlated in a way that, if you built one additional unit in San Francisco, it would literally cause one less unit to be built somewhere else. I don't think markets are that efficient, particularly in housing.
As for the paper, one of the things I found in the fine print is that their definition of units is literally anything that is not a single-family home.
There's dwellings and there's units, yeah.
Right. Units is literally anything that is not a single-family home. Reading that, I think there's still something there to talk about, but they've lumped in literally anything that's not a single-family home as its own category and then are theorizing about the relationship between two statistical aggregates: one being single-family homes and one being everything else. It's purely based on the structure. There's nothing to do with how they're financed. That raised an eyebrow for me. I don't know if this is saying anything about the price behavior of commercially financed apartment buildings as we would think of them colloquially.
The two pieces that I feel I can really easily understand from the paper: one is the idea that there would be some kind of push-pull effect. I think that's pretty easy to reason about intuitively, because you can talk about preference order.
Not everyone prefers to live in a single-family house, but from everything I've ever seen, the majority of people, if all costs, locations, and other concerns were equal, would. I'm a person who really likes big cities and has lived in downtown apartments. I still, if I could have all other things equal, would probably choose to have a house for myself with more space and more yard. Why not? That's a personal luxury. The idea that would be the top of most people's preference hierarchy is pretty easy to accept.
If that's the case, then you can imagine how people are basically buying the best housing they can afford. Each individual person is. Now, the best is actually much more complicated than just saying houses are the best, but we could pretend for a moment that most people would say, other things equal, 'I want a bigger house on a bigger piece of land, if I could have it.'
Then you can imagine the world as an auction where the richest person gets the biggest house on the most land, and we filter our way down until there are no more houses left. Everyone after that chooses to live in apartments. I don't think the real world is that clean, but that rhymes with reality. There's some truth to that.
That could become plausible: whatever is going on in the housing market is setting the price at the margins, and the price cascades down from the best houses selling first to the richest people. Then what's left over is what's left.
If we go to the other side of the spectrum, if your alternative is to sleep on a park bench and there's a tent available for $5 a night, you might take the tent if you could afford it. I don't want to make that too extreme, because that's not a realistic example either. People who are in that level of poverty have a very different set of problems. But if you're someone with a small income and you're trying to find whatever you can find, you're looking for the housing that's left over that no one else wanted, because that's probably what you're going to be able to afford.
In this preference cascade, the crappiest apartments in town are at the bottom of that list. We know income distribution is this power curve. It makes sense that you would have more movement at the wider end of that power curve. The first-richest person and the second-richest person are actually quite an enormous gap, so their ability at the margins to move the most desirable housing stock in terms of price makes sense. That would move more, and apartments would move less, because apartments are more constrained by the people who are looking for apartments. They don't have as much room to go up.
At the same time, since there is a degree to which shelter is shelter and everyone is looking for a place to live, the nicest house going up in price moves the next-nicest house up in price, which moves the next-nicest. All of that pulls the whole market up.
At a certain point, and this is what I felt I lived through in San Francisco, you were down to the point where I didn't want to live on the street, and I did have a good job that paid a good salary, but I was having to pay a huge amount of rent for a terrible apartment because my alternative was to not live there at all. In that sense, the luxury, the top of the market, was pulling up the bottom of the market too.
That framing does make intuitive sense. When they jump to the conclusion that supply doesn't matter, that's where I have a hard time. I think that's an oversimplification or too strong of a conclusion. I can tell you, if there had been the IKEA tower in downtown San Francisco available, and it was 300 stories and I had to live on the 200th floor, but it was 500 bucks a month, I would have been interested in that. A lot of other people would have too, but it didn't exist. We don't know the counterfactual.
I don't know where the tipping point is. At what point is there so much supply that enough people say, 'Never mind. Forget about the top-end luxury market here. I don't even care.'
The last thing I'll say before I yield the floor is that many things in the world are becoming this kind of K-shaped world of the ultra-wealthy and everybody else. We've seen that as a concern across many aspects of our society right now. It's not hard for me to imagine that some of that dynamic exists in housing as well and could show up in a study. When you're trying to look at how to break things down, starting to see this bimodal effect is not surprising to me. Anyway, let me pass it back.
The three of us have had enough conversations over time where we all respect the idea that housing is complex and housing prices are complex, and it's not just a function of supply. Period. There are other things.
What I found interesting about this study, and the reason I wanted to talk about it and share it, is that the very first chart shows that divergence you describe, Andrew. What you just described is, I would say, the opposite of filtering. The filtering concept is the idea that, and I make fun of it because I'm not a fan, we build a really wealthy person a house, they move up, then the next wealthy person moves up into their house, and then, at the bottom, a poor person gets a house and an angel gets their wings. It's all great. Go build luxury housing, and everybody will filter up.
What this chart kind of shows is that if this is just a supply problem, and filtering is actually a thing where everybody moves up and then when there's a new unit you're competing, there shouldn't be that broad divergence. There should just be demand all the way down, because someone's sleeping on a park bench who could otherwise be in a house. Why is there this huge divergence in Australia? Why is there this huge divergence between what you're seeing for single-family homes and what you're seeing other places?
I do feel their conclusion is maybe too strong, but I feel the conclusion is that it's something more than just supply. There's something else pushing that market up, and that something else really feels like investment capital, speculation, finance, in that realm, and less in the strict number-of-units, we-can-solve-it-by-building-more kind of realm.
Andrew, I see you being skeptical, but I'm going to let Jeff talk next. Then, Andrew, we can come back to you. Jeff, go ahead.
This is actually the perfect setup, because I may have spent a little bit too much time this week learning about the Australian housing market. I had some free time.
One thing I noted, and I have citations somewhere because I wanted to make sure I wasn't LLM-hallucinating anything, is that it looks, at least specifically for the five cities they called out, something like 66%, two-thirds, of the housing stock is single-family detached housing. Even with their grab-bag other component, that leaves the other third as other stuff.
If we're talking about why single-family detached housing drives the overall distribution, well, if prices in two-thirds of your observations go up, of course that's going to have an overwhelming effect on the smaller portion.
As far as why that's the case, this is getting way beyond my knowledge of Australia. It looks like they have minimum lot sizes that can run something like 5,000 to 8,000 square feet. Don't quote me on this, but it looks like the worst type of 'you must consume the entire cake or you get nothing' land-use planning.
Yeah.
The financial story there is, and this is going to be wild, I think they don't have a 30-year fixed mortgage analog, but they have something called negative gearing, which sounds completely insane. If you own an investment property and you lose money on it, you can deduct that loss against your income.
Then there's also a capital gains piece. If you sell your house in the United States, you can roll it over into a new house. Apparently, they have that, but you don't even have to roll it over into new property, from what I read this week.
There's this larger portion of the housing stock that appears to be mandated, as far as what's allowed, and then on top of it gets all these extra tax incentives. Of course, you made it so people had to buy a large piece of pie, and then you gave them all these tax incentives. Of course that's all capitalized in the land values. That's what I think I'm seeing, and what feels like a more specific set of explanations for why one side of this looks so big and the other side looks so inconsequential.
Andrew, I'm going to give you the last word on this study, and then we'll shift to the downzone.
That's a good tee-up. I know the U.S., and Australia, it sounds like, I would have assumed, and it sounds like Jeff did the research to confirm. Thank you, Jeff.
This is what you wrote about in The Housing Trap. We've done a lot to try to make housing into a good financial product, into a good financial asset. We have two things going on at the same time. We have a shelter market that is real and is part of the equation, but we separately have this financial market going on that is part of the equation.
When we've created all of this policy to make sure homes are a great financial asset for anyone who lives in them, and then they're also a great financial asset for people who don't live in them, you kind of can't have it both ways. Ultimately, it's not surprising that we would get these consequences.
Because I think this may help any listeners who might feel skeptical about that, let me try to illustrate with one short story. The mindset of your home value as part of your net wealth, rather than it being your shelter, matters. People don't think of their cars as being part of their net wealth. They think of them as part of their personal utility. I don't know how to say this, but it's one of your assets. It's not a financial asset. It's a financial liability. But you value it because it does lots of good things for you. You need it, and you get all this utility from it. It's great. You're not bothered by the fact that this is a financial liability, but you're conscious of the fact that you're not making money off that.
People think about their house as something they're making money off of, and that has these weird effects. What I saw in Austin was this huge wave of people in 2020 and 2021 moving into town. They had just sold a house for a million dollars in California. In 2019, a million dollars would have bought you almost any house in the Austin area. By the end of 2021, it would not have bought you very many houses in the Austin area.
There weren't actually that many people who moved there. There also weren't that many houses for sale. What happened is that people listed at what they thought of as the normal Austin price. Someone with California money goes, 'What a great deal.' They beat each other up. Those prices then skyrocket on paper.
What I lived through when I left Austin in 2022 was this incredible hangover where people still wanted to list their price for this influx of California money coming in, but the wave was over. What I saw was people leaving their house on the market for a year and then just refusing to sell because they've latched onto this number in their mind. 'Last year, my neighbor sold their house for a million dollars. Therefore, my house is worth a million dollars. Therefore, anyone who doesn't want to pay me this is insane.'
They have this weird behavior where it's your shelter. You're living in it, and you don't have to move. Maybe you want to, but your decision not to ends up being muddled by this idea that you have this number in your head that it's worth. That makes the single-family house market very strange, very sticky, to use the term people use. The prices are unreasonably sticky, and people's retirement plans are based on these numbers they have in their head that are very sticky about things that happened at one point in time in a very illiquid market.
All of that tends to hinge on things we have done to make the housing market a very, very good investment. That gets people thinking of it as not just the place they live, and not just an asset that they sort of drain the value of over time, but rather as this thing that's making them wealthy.
We've done a lot to make that true. Now we're facing the consequences of having made it a good asset, and that actually has all kinds of negative consequences for our shelter. That's a big problem. You wrote the book on that, so we probably don't need to belabor it too much, but I do think that is a big part of the story we have to grapple with if we want to actually fix our shelter problems. Probably, doing things that make housing less of a great financial asset are going to be part of that mix. Politically, I don't know if we can talk about it that way or not, but when you think about grappling with reality, that's going to have to be part of what we do.
Jeff, I saw you nodding along. I said Andrew had the last word, but I'll let you have it. Jeff's our guest.
I do feel there's this human side of it where if we looked at a stock I invest in, whatever stock, it goes up in price and then it goes down in price. I don't wait and say, 'I'm going to wait until it gets to my price before I sell it.' If I've got to sell it, I've got to sell it at whatever the stock price is.
The more we make housing act like a financial asset, the more it mirrors a stock in terms of its price up and down. It is different because it is, A, less liquid, B, more emotional, and C, more tied directly to your own personal net worth than whatever stock you own here or there. I don't know if you want to take this home, build on what Andrew said, or if there's something else you wanted to add.
Yeah, I just want to plus-one all that. When I think about housing, if housing continues to be everybody's main personal financial form of, not even really savings, but an investment vehicle, that is a fundamental problem with the system that we have.
I would prefer to see housing, and I think this is the same thing Andrew was saying in different words, thought of as a consumer durable, like a car or a refrigerator. It's something that we know we're going to use and get use out of, and that is going to be a depreciating but useful piece of capital over time.
The extra thing I'll add is that I think about that in terms of separating the land value that's getting securitized from the structure itself. In my mind, that is the underlying problem. When a random house on the periphery of some booming metro, because somebody founded a tech company, 10-, 20-, 30-, or 50Xs, it's the location value. It's not the timber in the walls that's getting more valuable. Finding a way to pull that out of the financial system is part of what needs to happen here.
We're going to switch to the downzone, where we pause for a moment and talk in a friendly way about something we've been up to, doing, or interested in. Andrew, I'll start with you this week. What's your downzone item?
Well, I wrote about this because it was such an unusual experience, but I got to go to a World Cup game. I still feel just a little guilty admitting that it was something I had to save up for for a long time to be able to afford, but I was really amazed by what a great experience it was, and not in the ways I expected.
I thought of it as a personal bucket-list thing. This may never happen again in my lifetime, and I am interested in the World Cup, so I want to see it. But there was this incredible positivity. That's the best way I can describe it.
There's usually this paradox when you go to a sporting event. Either it's a baseball game in the middle of the season, and no one really cares that much who wins, so it's fun and festive, but no one's really paying attention; or it's an SEC football game in October, and people have falsely equated that their life hinges on the outcome of this game. Everyone's really paying attention, and the energy is there, but there's also this desperation and negative edge. People are more afraid of losing than they are excited about winning.
This was the only thing I've ever been to where everyone was paying attention, no one was on their phone, and every person in the building was incredibly invested in the outcome, but it didn't have any of that negative edge. It seemed like everyone, probably because it's a once-in-a-lifetime thing, felt lucky to be there.
I will say this: it's a cliche to say that these things bring the world together, but man, it really felt like that. I was really amazed by how entirely positive, happy, and uplifting the whole thing felt. They did a great job with the national anthems and the intro videos for each country. All of it was like if Disney put on the perfect sporting event that made everyone leave happy, whether they won or lost. I was not expecting that at all.
That was amazing. I'm very excited for the rest of the World Cup. I obviously hope the U.S. pulls off an improbable deep run into the tournament. If anybody lives near any of the host cities, the atmosphere was that way not just inside the building with the ridiculous tickets, but all around the whole city center. My sister lives in the Kansas City area. She said it's been the same there. Go check out the festivities around the stadium, and you'll get most of that same experience. Super cool.
Jeff, your downzone?
Recently, I've been meditating on how I experience my own attachment to place. I wrote something about this recently, but I've had the experience of moving around quite a lot in my adult life. I've had the experience of going back to places I've lived, and that's almost always, not always jarring, but almost a melancholic experience of being, 'Oh, this isn't like it was 5, 10, 15, 20 years ago.'
The thought that came to mind and made me put pen to paper was recognizing that a lot of times, our attachment to place is really an attachment to a period of time when we experienced the place, the relationships that existed in those places, and the things we experienced at those times.
I was thinking about it almost like a piece of music. You can appreciate a couple lines in a song, but everything keeps going. That was my reflection on how I experienced it, and I was trying to maybe give other people words for things they've experienced in their life.
I'm going to shift from my downzone this week. I'm in the final sprint, the last six or seven weeks of finishing the next manuscript that needs to be to the publisher in mid-August. I'm going back and reading a book that I had read, not really thinking it would be part of this book on economic development that I'm working on, but is now becoming a big part of it.
It's called Apple in China, and it's about how Apple essentially dipped their toe into China as a way to solve a short-term problem, then essentially got sucked in and now is, in a sense, wholly dependent on Chinese supply chains. The part of it I found most interesting is the idea of extracting from China. We're going to start a chip factory in Arizona. Well, a part goes bad, and now it takes six weeks to get a replacement part. In China, the entire ecosystem is there. If a part goes bad, you just order it, they bring it across the street, and it's installed in 45 minutes. You're up and running again.
This is what Jane Jacobs called import replacement. It's become such a passe economic concept because we're thinking, distribution, Ricardo, put things where people can do them best, and we've got globalization. As globalization becomes under threat, the ability to react and adapt and actually build supply chains becomes really important.
I found this book to be really good when I read it, and now going back a second time and rereading it in light of some of the arguments that I'm trying to make has been really enlightening.
I did not mention at the top, I had written bios for you guys, and it did not include your Substacks. You two are both prolific Substack writers. You do great work. Your stuff is fantastic to read. Jeff, I'm going to get this right: yours is Urban Proxima. Is that how you would say it?
Yep.
If you go on Substack, the URL, is it going to be your name, Jeff Fong, or is it going to be Urban Proxima? I can't remember how you get there.
The actual site is urbanproxima.org, and if you look for me on Substack Notes, it's just @jeffong.
All right, perfect. Andrew, your Substack is now Free Range City, right? If people want to follow you, where are they going to get that?
You can go directly there online at freerange.city, or just search my name on Substack, and I'll pop up.
Andrew Burleson. All right.
Thank you to both of you. Jeff Fong, it's been wonderful having you here as a guest. I hope we have you back again soon. Andrew, as always, I'll say this not just because you're my boss, but because I love you. Thanks for being here. It's always a great gift for me to be able to hear and listen to your thoughts and share that with our audience.
For everybody listening, thank you for doing what you can to build a strong town. We'll talk to you again soon. Take care.
This episode was produced by Strong Towns, a nonprofit movement for building financially resilient communities. If what you heard today matters to you, deepen your connection by becoming a Strong Towns member at strongtowns.org/membership.