On a cold October morning in 2015, protesters gathered in New York’s Chinatown. The object of their protest: new luxury towers rising in their neighborhood. One protester said that the towers would drive out residents and shutter local businesses, declaring them “a blatant and obvious example of the destructiveness of luxury development in the neighborhood.” Another lamented that “the developer wants to take down our buildings and build luxury high rises” which “attracts people who are wilfully ignorant of the community.”
The sentiments of these activists reflect a broader pulse: from Boston to Los Angeles, Americans are up in arms about new luxury developments. Protesters—convinced that new housing will do harm to existing residents—have taken to the streets across the country. The perception that the benefits of new luxury housing developments accrue exclusively to those who inhabit them fails to capture the true dynamics of the housing market and is dependent on the faulty assumption that prices and quality are inherent, rather than set by market mechanisms.
An atypical arthropod holds the power to dispel this mistaken impression: hermit crabs. These crustaceous nomads allow us to understand how price and quality are products of a broader market and tangibly demonstrate that new developments—even luxurious ones—have market-wide benefits.
The Human Housing Headache
A housing crisis of unprecedented scale is wracking America’s cities. New developments are dwindling in number, prices are skyrocketing and a housing shortage is dragging down growth and amplifying inequality.
Despite the growing crisis, new housing is subject to fierce debate. Many are convinced that permitting new developments will simply worsen the affordability crisis. Protesters have packed city halls, city streets, and community board meetings across the nation, decrying projects that they see as displacing existing residents or gentrifying their neighborhoods. The common rationale among protesters is that new developments are largely comprised of luxury apartments, a composition that guarantees that these developments benefit the rich and not the residents in the neighborhoods where they being are built.
Broadly, their worries make sense. Rich people will be living in these new apartments, so it is easy to imagine that the wealthy are the only ones who will benefit from their construction. Many are distrustful of the idea that doing something for the wealthy will help everyone else, and it is undeniable that developments are often disproportionately comprised of luxury apartments. However, permitting new development can only be seen as a problem if one buys into the faulty notion that the housing market is stagnant and that price and quality are inherent. In reality, new developments have benefits that extend beyond their immediate inhabitants through market mechanisms.
Demonstrating this reality can be difficult. Terms like “supply,” “filtering,” and “elasticity” often serve to confuse more than clarify. Thankfully, hermit crabs have granted us a tangible example of the market wide effects of new developments. Their behavior of shell changing demonstrates that even developments inhabited by someone at the top can, in the right circumstances, benefit people at the bottom.
Unlike most other shelled animals and like human tenants, hermit crabs do not construct their own shelters. Crabs must find a shell developed by another (presumably dead) organism and move into it. Hermit crabs occasionally outgrow their current shell, and—like humans—must hunt for a new one to move into. As a result, these crustaceans serve as an effective analog for human tenants. The crab that finds a new, larger shell is not the only beneficiary of the discovery: a dozen or more crabs form a conga line—arranged smallest to largest—and all move up one size together.
Large Crab A is the first to move and relocates into a new, slightly larger shell, which opens up its old shell for medium-sized Crab B, which opens up Crab B’s old shell for small-sized Crab C, and so on. These dynamic behaviors ensure that all crabs ultimately find themselves in the possession of a larger, better shell, even though only a single large shell entered the hermit crab shell “market.”
Human housing is governed by similar behaviors, though we refer to them as “market mechanisms.” These mechanisms ensure that new developments has positive effects on all tenants, just as a single new shell precipitates movements among all hermit crabs. When a new luxury apartment enters the housing market, upper-class Tenant A moves into it, which opens up their old apartment for middle-class Tenant B which opens up their apartment for working-class Tenant C, and so on. Landlords, faced with the possibility that their tenant may abandon them for a competitor, are forced to cut prices, even for tenants who ultimately stay in place.
These market mechanisms ensure that all tenants ultimately find themselves in the possession of a better apartment or see their current apartment fall in price, even though only a single luxury apartment entered the housing market. This phenomenon is well supported by empirical evidence, from American cities like Seattle and Houston to international ones like Tokyo, which have seen the rents fall and vacancies rise in the face of a wave of new development.
Of course, dynamic market mechanisms do not mean that it is acceptable for all new developments in the housing market to be luxury apartments. However, the fact that new developments are disproportionately luxurious should itself not be a concern. Building an apartment is expensive, and rich tenants have the money to shoulder that burden. Furthermore, there are no pre-existing apartments for the rich to move into; the entirety of their demand must be sated by new development. By contrast, middle and working class tenants have access to the apartments vacated by the wealthy, which means that they demand fewer new apartments from the housing market to begin with (and more renovations and subdivisions of existing apartments instead). Ultimately, when affordability is at stake, the quantity of housing built outweighs the quality of that housing.
Luxury Developments can be Beneficial
The comparison between humans and hermits crabs is not perfect, though no analogy is. Hermit crabs evaluate their new shell largely on size, while humans lean on everything from crown molding to nearby schools when choosing a home. Furthermore, the only constraint on a hermit crab’s ability to move is the availability of larger shells. Humans, on the other hand, may worry about cost, changing jobs and schools, disrupting their family, adapting to a new community and a host of other factors.
Yet the principle behind the analogy holds. A walk around Hyde Park, or any neighborhood that has experienced a few generations of development, confirms this fact. It is easy to find great swaths of working and middle class housing originally built for the wealthy. Particularly common are turn-of-the-century townhomes that were subdivided into apartments, after their original wealthy occupant was lured away by a new luxury tower.
So, when thinking about new developments in the housing market, remember that the luxury apartments of today are luxurious not because of some inherent value that they have but only in relation to other apartments. When new development is permitted to proceed, the luxury apartments of today are devalued and subdivided into the middle and working class apartments of tomorrow. When new development is not permitted, luxury apartments stay luxurious. In fact, when a shortage grows dire enough, these mechanisms may run in reverse—the rich displacing the poor and recombining their units into penthouses and condominiums—gentrifying working-class neighborhoods.
Seeing housing as an inherently valuable good is tempting. Fearing for the fate of one’s own home and neighborhood is natural. However, when thinking about development and its consequences, we must look beyond just our apartment, just our neighborhood, just our city, and do our best to conceptualize the broader forces and mechanisms that govern the price and quality of housing. Not doing so risks dire consequences for the vitality of our cities as market mechanisms turn against us: gentrifying the neighborhoods of the poor, rather than subdividing the housing of the rich.
Opinions expressed in this article are not necessarily reflective of The Gate.