Condos don’t cause gentrification; gentrification causes condos. That’s the verdict of Leah Boustan and Robert Margo, who come on the show to discuss their research on condominium conversion restrictions in US cities. In addition to their research results, we talk about the (surprisingly short) history of condo ownership, the unintended consequences of condo restrictions, and the way other policies like HOA governance and rent control influence the popularity of owner-occupied multifamily housing.
Condos don’t cause gentrification; gentrification causes condos. That’s the verdict of Leah Boustan and Robert Margo, who come on the show to discuss their research on condominium conversion restrictions in US cities. In addition to their research results, we talk about the (surprisingly short) history of condo ownership, the unintended consequences of condo restrictions, and the way other policies like HOA governance and rent control influence the popularity of owner-occupied multifamily housing.
Shane Phillips 0:04
Hello, this is the UCLA Housing Voice podcast and I'm your host Shane Phillips.
This week we're joined by Leah Boustan and Robert Margo to talk about condos and specifically, the role condos play in gentrification. Many people see shiny new condos going up and assume that they're responsible for the other changes happening in their neighborhood, whether that's rising rents, higher end retail and restaurant establishments opening up or changing demographics. In other words, they think that condos cause gentrification. Leah and Bob recently published compelling evidence of what most economists already knew, which is that condos don't cause gentrification, gentrification causes condos. Just as we tend to see with other types of housing production, supply is really responding to rising demand, not the other way around.
We get into how they show this in their study, comparing cities that restricted the conversion of rental housing into condos with laces that didn't impose those types of regulations, and how the places that limited condo conversion didn't experience less gentrification by the typical measures. We talked about condos more generally, including how surprisingly new condos are as a form of ownership in the US. And we spend some time on what drives landlords to convert their rental units to condos, including the role of policies like rent control. Finally, we get into why we seem to build so few condos in the US compared to other countries, especially Canada, where their complaint is that no one seems to want to build rentals exactly the opposite problem we have. We're still looking for answers on that. So if you read anything persuasive, send a link my way. The Housing Voice podcast is a production of the UCLA Lewis Center for Regional Policy Studies. With production support from Claudia Bustamante, Jason Sutedja, Divine Mutoni, and Phoebe Brous. As always, you can email me with questions or show ideas at shanephillips@ucla.edu. Now, let's get to our conversation with Leah and Bob.
Leah Boustan is professor of economics at Princeton University. And Robert Margo is professor of economics at Boston University. And they are here with us today to talk about the relationship between condo development and gentrification. There's plenty of data showing a correlation between the two. But whether condos cause gentrification is another matter since it's also possible that gentrifying neighborhoods attract condos, or even that some third factor is causing both. Leah and Bob, thanks for joining us for this conversation, and welcome to the Housing Voice podcast.
Robert Margo 2:39
Thank you for having us. We're excited to be here.
Leah Boustan 2:41
Great to be here. Thanks.
Shane Phillips 2:43
And I think possibly for the first time ever, I do not have a co-host here today. We are having exceptional tech problems on both my and Mike's end, but Mike Manville couldn't join us. So it's just me here today. So we will jump straight ahead to our regular starting point, which is a couple of guided tours. Leah and Bob, this question is for each of you separately, what is the city you know well that you would like to tell our listeners about, and what are some of the places or things they should check out if they're ever to visit?
Leah Boustan 3:15
Well, the city that I know best is a city that scene you probably know really well to which is Los Angeles. So it's not an exotic tour. It's a place that most people have been to, but it is a place that is far better to live in than it is to visit. Oftentimes, when you come and you visit, you think I'm going to go to the Getty, and then I'm gonna go down to the beach, and you really just have to pick one neighborhood. And that is the way that people live in LA, they get very attached to their neighborhood. So when we were living there, and we lived there for 10 years, my husband actually had an artist who was working on some outsider art maps of different neighborhoods in the City Commission, a map of our neighborhood, which was Miracle Mile, for my birthday. So now that map is available for purchase as a poster, but it was made for my birthday. So Miracle Mile, that particular neighborhood is very special to me. It's right near the LACMA Art Museum and the La Brea Tar Pits. And if you look at aerial photographs from 1922, there were no houses there at all. It's right next to an oil field. By 1924, it was completely filled with houses. So all of the houses in the neighborhood were built up in around two years, all the kinds of Spanish-style 1920s houses, and so it's a place that a lot of people probably visit if they're going to go to the La Brea Tar Pits, and I recommend walking around the nearby residential streets as well to see some really cool old houses from the 1920s. And maybe also check out the El Rey which is our neighborhood music venue.
Shane Phillips 4:59
Yeah when I moved to LA, I moved to Koreatown. But I was there with a friend for the first week. And pretty much the first thing we did after getting some Korean barbecue was walk all the way down toward LACMA and the carpet. So then, from there up to Hollywood, and then down back to Koreatown, it was a very long day. But that area has a special place in my heart for sure. Bob, how about you.
Robert Margo 5:22
So I grew up in Detroit, and as an adult, I've really lived in three cities; in Boston, and in Philadelphia, and Nashville, Tennessee. But I think the place that's nearest and dearest to my heart is Boston. I was here as a graduate student, and I've lived here, basically, since moving to Boston University in 2005. Boston, to me, is one of the great cities of the world. I love it for its sort of culture, the universities that are here. And when I think of Boston, I should say, I'm not thinking just about the actual city proper, I'm thinking about Cambridge, and so forth. And so the places that I like to visit, if I'm in Boston, I like to go down to the public garden, and walk around in the garden, and in the nearby neighborhoods of the Back Bay. I like to go to the art museum, go to hearing the symphony, or to go to Harvard Square, and just sort of walk around the square and walk around Harvard. I always come back, I mean, of the places that I've... I like visiting other cities, but this really is the place that I think of as home.
Shane Phillips 6:34
Somehow, I've still never been to Boston, I'm a little embarrassed. So the article we are discussing is very fresh, published earlier this year in the Journal of Urban Economics, it's titled pointedly 'Condominium development does not lead to gentrification'. I saw that your earlier working paper for this study had a different title, which was posed as a question, 'Does condominium development lead to gentrification?' which looks to me like another point in favor of the theory that if the headline is a question, the answer is always no. Your co-authors on this were Matthew M. Miller, James Reeves and Justin Style, and in this study, you leverage the introduction of condo conversion restrictions in some cities, but not others, to see if the two groups diverge in later years on typical gentrification metrics, like household income, the share of households with a bachelor's degree or higher, and the Black or African American share of the population. Before we get into the methodology and the details of your findings, you note early in the article that "the condominium only became a legally recognized form of owner occupancy in the United States in the 1960s". And that was news to me. I don't really think I've ever thought of it before or took the time to think about it. But if you'd asked me before reading this article, I'd have probably guessed that condo ownership was at least 100 years old. How did condos come about? And did people just not own individual units in multifamily buildings before that time, like what was going on?
Robert Margo 8:08
Why don't I address that Leah? So Leah and I are economic historians, as well as urban economist. So when we look at a sort of a modern question, we're always looking at it through the lens of history. And we both have long been interested in the history of homeownership in the United States, and the role of various institutions in fostering homeownership. And this is a case where, you know, yes, you might think the condo is an old form of ownership. And in fact, in fact, it is outside the United States, the idea of owning and living in us call it a slice of the building dates back in European history, well back to the 12th century. But it was a novel thing in the United States. And you know, there are a lot of reasons for that. But it comes down to the fact that the sort of institutions in the mortgage market and also legal institutions that are there, they're sort of the glue that sort of... or the background that fosters the actual ownership in the conveyance of property really didn't function that well, in this particular way until as we say, until after World War Two was a combination of legislation and sort of legal change. In some sense it's always been possible to own an apartment you could buy an entire building yourself.
Shane Phillips 9:31
Maybe you could
Robert Margo 9:31
That was always theoretically possible or it was possible for, say, two people, unrelated people, to buy a duplex or in Boston we have a lot of triple-deckers, you can do that. But there are a lot of transactions costs and difficulties with that. The one form of ownership that is like the condo that did exist for quite a while was the cooperative apartment or coops which are common in New York. And in that case, they emerged after the Civil War, and it's a consequence of particular legal change that makes it possible for people to buy a building and form what amounts to a corporation under incorporation statutes, and then basically create a situation where you get a share of the corporation, and then you can sign what amounts to a long-term lease to live in a unit. And you can think of these coops as a sort of gate... (a) form of gated housing of their time. There are ways for high-income people in say New York, to live in the city but keep everybody else away from them, right? Because coops, there's lots of rules about who can buy into a coop, you can't just sell automatically, and so on. So the condo is just, it basically was effectively impossible to get a mortgage, save for a particular unit in apartment building, say in 1920s. If it was a co-op, you could certainly buy into the building, but getting a mortgage as well was not something that had happened until after World War Two. So a lot of this is coming into play after World War Two because of general changes in mortgage markets that facilitate homeownership to a far greater extent than was true before World War Two.
Shane Phillips 11:22
And so what is the argument for why condos might contribute to gentrification? I think it might be helpful to maybe make a general case first and then talk about the possibility of different impacts from newly built condos on the one hand, and condos converted from existing multifamily rentals on the other.
Leah Boustan 11:41
So it's funny when we talk to fellow economists, they say, "Well, who would have thought that condos would lead to gentrification? Wouldn't it be that developers would be assessing what types of households want to move to an area and if high-income people want to move to an area, there would be maybe some luxury apartments built or some condominiums, you know, who would think that there will be a Field of Dreams type model, where if you build it, they will come". However, if you talk to anyone else, anyone who has been involved with local politics, and has been paying attention to some of the conflicts going on in their city, you'll hear this argument all the time that condominiums come into an area, high-income people then move in. And so the idea is that the condo is attracting in the high-income households who wouldn't otherwise live there. And as a result, existing local people who might be lower-income renters have to move out. And this argument is especially poignant, as you point out if we're talking about condo conversion, because condo conversion means take an existing standing rental structure and convert the units from rental property to owner-occupied condo units. And so in that case, you're not building a new structure that would add to the housing stock, but you're perhaps directly displacing existing residents who had been renters before, and now bringing in owner occupants into the same structure. And so if we turn to the legal literature, from the 1980s in particular, we find this argument throughout the legal literature and urban planning literature. So this was the era immediately after, as Bob was saying, the condo as a legal form emerged in the US through the 60s. And then throughout the 70s, the first condo conversions are taking place. So by the early 80s, we hear academics, and advocates making this argument throughout the scholarship. And so this is a very old argument, both in the academy and in the public perception.
Shane Phillips 14:11
So you make a causal claim in the article, but I think we should start with just the correlations or associations that were pretty well established before you did this study. What do we know? Or what did we know about cities or neighborhoods that have an above-average share of owner-occupied condo units relative to the rest of the housing stock? What do we tend to see in those places?
Robert Margo 14:36
Well, let's see you I mean, the way we were doing it, you know, the way we were we approach it, we're not like driving around our neighborhood and observing this physically, you know, we're looking at data. And so our data are coming from the census, and when we're looking at data at the level of say census tracts which is what we do in the paper, there are strong positive correlations between income, education, and race, if you just look at the sort of the simple correlations and not really control for much of anything, but as you start putting in controls in our analysis and sort of keeping other things constant, you suddenly see these correlations diminishing in size. And this is, this is not a case of them sort of like changing their size in a small way, this is sort of very large changes. And that's a sort of clue, you know, Leah, and I've been doing this type of work for a long time. And when you see something like that happen, you realize that you're probably dealing with the correlation and not an actual causal relationship. So you know, that would correspond to, you know, me walking around the neighborhood in Boston, near the public garden, and I would see these high rises that would be very expensive, and they would be filled with very high-income people. And it would look like there would be a correlation between the condo which is what they are, and these characteristics.
Leah Boustan 16:08
I think that the general public doesn't add controls to their regression as far as when they're looking around neighborhoods, right. So they are going to see these associations that there's an area with a large condo share. And there's also a lot of high income residents with a college degree. And they look at an area with a lot of rental, and they see a lot of high school graduates with low income. And then a particular model emerges in their mind, which is, it looks like the housing structure and housing stock is what's driving the differences between these neighborhoods. And that's what we see when we look at the basic correlations in the data too, but really, we wanted to push further to say, what if we could do something like take a helicopter, drop a condo unit in a particular neighborhood, what would happen to that neighborhood? Would suddenly that neighborhood become higher income?
Shane Phillips 17:06
Yeah, so more of a random placement as opposed to possible confounders completion, these issues where maybe it's just the developers following the demand. To get there, you had an idea of how you might do this. Let's have you lay out your research design, you have to have a pretty high bar to establish a causal relationship. And I think even demonstrating that a causal relationship doesn't exist can be challenging when there's an association or correlation there. How did you structure this study? Or how did you set it up so that you could ultimately say that condos don't cause gentrification even if they are associated with it?
Leah Boustan 17:44
Well, one thing we noticed in the history is that after the first wave of condo conversions in the 1970s, there was a lot of tenant organizing and anger, in favor of restricting developers' rights to convert units to condo. And so some cities then passed a set of municipal ordinances or regulations to restrict this condo conversion process, and other cities did not. And those restrictions can include something as onerous as the owner of the building needs to give the current residents of the building 18 months before moving out, has to pay for their moving expenses has to give them right of first refusal on buying the unit, etc. So we speculated that those ordinances may have been binding, and then cities that passed an ordinance, we might expect condo development to slow down, even if the underlying conditions for condo development were still in place. And so what we are comparing in the first layer of the analysis are the cities that passed these condo regulations against condo conversion, and cities that did not. But if you take a look at the map of which city has passed these regulations, you won't be surprised to see places like New York and San Francisco, you know, areas that had high demand, areas with a large number of tenants who would then organize. So it may not be fair to compare New York and San Francisco to Nashville and Houston, cities that did not pass condo ordinances. And even if we're talking about comparing the city before and after the regulation passes, you may worry that, "hey, New York and San Francisco were on a different trajectory, and they would have grown differently". And so we brought in a third layer to this research design, which is what about the suburban rings of these areas? Even in suburban New York or suburban San Francisco, when the cities pass condo ordinances, the suburbs do not. And so if we could think about the suburban ring of a metro area as following the same growth trajectory as their center city, then we might really be able to get somewhere. So now putting all the layers together, what we're doing is comparing a city that cracks down on condo to a city that does not before and after the law passes, and all relative to the suburban rings of those metro areas. So it's a comparison along three different dimensions over time, cities that do or do not pass regulation, and all relative to the suburban ring.
Robert Margo 20:38
I'll just add two things to that, as Leah describes it, it sounds very, it sounds straightforward. But to implement this was not straightforward, because it wasn't like you can just pull off the shelf, a list of all of the condo conversion regulations that were enacted, we had to actually construct this, we didn't, but one of our co authors did, and who you know, has special skills and sort of dealing with the legal literature. And then we had to persuade the Census Bureau to construct which they will do for a price, assuming they don't have too much else on their plate, a special data set that would allow us to do the type of before and after comparison that Leah was describing, but that even then it's not the absolute perfect data set, we would like to have, you know, more years in the data set than we have, but we're limited to what the resources that we have to do this type of analysis. And also getting the Census Bureau to do this kind of work was not easy. We were delayed, I think for quite a while, before we can actually do this.
Leah Boustan 21:44
Yeah, that's exactly right. We had data already at the census tract level. So basically, that's the equivalent of a neighborhood on the condo share of units in 1980. So that's essentially our start date. And we need to start the clock before cities decide to regulate condo. So that already limits us because some cities had made this decision in the 1970s. And we are missing data from 1970. So we're starting the clock in 1980. And then we're looking at cities that add regulation to their condo conversion process in the subsequent years. And our end date is 2010. That was the one year we could get the census to provide this information at the neighborhood level. Ideally, we would have the intervening periods, 1990 and 2000. And we could see where we would like to check whether immediately after the regulations in place, indeed, does the condo development slow down. So we'd like to be able to check out the timing. But instead, we have what we think of as a long difference. So we're imagining that we have cities that are similar in 1980, or at least they're similar relative to their suburban ring. And we're either turning on condo regulation, or we're not in the intervening 30 years. And then we're checking the endpoint. And we're saying in 2010, now that 30 years have gone by, are these cities now slower to develop condo and they have less condo by the end of the process?
Shane Phillips 23:18
Yeah, and just to clarify here, you said condo development a few times. But I think you're really looking at just the total stock or the share of the housing stock that is condos, right? So it's not necessarily just looking at condo development certainly, it's the combination of or I guess, if you would consider a conversion to be a condo development, then maybe you would all put that under the same umbrella. But we're really looking at the sum of both of those things.
Leah Boustan 23:46
Right, we're looking at this of conversion and new construction. And the regulations are really binding on conversion.
Shane Phillips 23:54
Right.
Leah Boustan 23:54
So the idea is that new construction is likely the same in the two types of cities. And what differs is how easy is it to convert the rental stock?
Shane Phillips 24:05
And so what did you actually find here? How did gentrification outcomes compare between places with and without condo conversion restrictions? And maybe just as a starting point, did places with these restrictions actually see their owner occupied condo share decline compared to cities without those restrictions or their inner suburbs without those restrictions?
Robert Margo 24:27
Well, we do see when we look at the, you know, where the variable we're interested or the treatment as we call it is the regulation, we do see an effect of this in the manner that we expected on the condo share and we also do that analysis. We're able to do that analysis, looking at sort of restricting our attention to multifamily dwellings of different sizes and we see different effects or larger effects for the types of housing stock where we would expect to see more of an effect. So we do see that, okay. And then we do a second analysis where we're looking at the impact of the regulations on sort of the measures of the characteristics of the people living there. So income and education and so forth. And there, we don't see the kind of relationship that we would expect, if the conversions are reducing, right, reducing the share of condos. And so that should also show up in sort of how it's affecting, say, the share of high-income people, there should be an effect there, and we either don't see an effect at all, we don't see an effect that we can see is statistically significant, or I think there's only one variable where it actually goes in the expected direction. So we're not seeing the kind of response that we would expect if in fact, the condo shares actually causing gentrification
Shane Phillips 26:06
And that expected direction you're referring to is actually like kind of the common sense, or the kind of man on the street expectation that...
Robert Margo 26:14
What the sort of the general public or advocates or whatever are sort of assuming that the relationship is supposed to be, we're not really seeing that?
Shane Phillips 26:25
Yeah, I think the one was, there is a slightly higher share of the population with a bachelor's degree in places with these condo conversions at the end of this study period. But incomes are actually slightly higher if anything, the share of population that is black or African American is slightly lower, if anything are not different, statistically significantly different. So you've concluded that condos aren't causing gentrification. And if anything that places with condo conversion restrictions, and fewer condos seem to have gentrified a bit more than their peers without these restrictions. Referring to the association between condos and gentrification, though you write in the article, "we suspect that the correlation is driven by reverse causality. If high-income residents prefer condos to rental units, developers may anticipate larger profits and thus be more willing to undertake condo conversion projects in cities that are attractive to high-income residents for other reasons". So you've provided pretty strong evidence that the high-income residents aren't being attracted by these condos. But what evidence would you need or do you have to support the reverse causal claim that condos are actually following high-income residents, that gentrification is causing condo development or conversion.
Leah Boustan 27:48
We would need the reverse experiment, and we don't have data or evidence for that yet. So our experiment is take condos away from the housing stock due to the local regulatory environment, and see whether that drives high- income people away. Instead, what we would need is something that drops high-income people into a location and watch how developers respond. So for example, you could imagine that moment when Google was trying to or Amazon was trying to bid across different cities and say, "I'll build my high-tech cluster, in this city, or that city or in this neighborhood or that neighborhood". And now imagine that we had that process at random, Google, or Amazon was drawing out of a hat, I'm going to locate my high-tech cluster here. And because of those high-education, high-income jobs, we have new demand for living in the area from the workers who might be working at this new office park. Now, we could watch how housing developers respond. It seems a little ridiculous to say that this would be possible. Of course, we don't see companies pulling a neighborhood out of a hat and then deciding to build in that location. But there are examples through history where companies have a lot of outside factors that are determining where they locate. And so while Bob and I have not done work on this directly ourselves, you know, if we sat down to think about it, you know, I guess we would probably come up with some form of reverse experiment. So we do not have evidence of the reverse claim that if we were to draw up high-income people in an area developers would respond, but remember, we do start our current study with that very strong correlation. If condos are present in a location, high-income people are too. And we posit that there's two possible explanations here, A might cause B or B might cause A, so if we rule out one, we're sort of saying by a residual argument, the other causal arrow must be present. I know that that's not the smoking gun, but it certainly is suggestive and maybe food for thought for someone who might want to jump into this area.
Robert Margo 30:10
You know, I think also in the back of our minds is, you know, we might observe other changes in the city, you know, we might observe a neighborhood, new entertainment appearing in a neighborhood, a cluster of restaurants, something that makes a city attractive in and of itself, right? And that's like, something that Leah and I can't see in this. It's not like the census is collecting data on this, we don't see that. But we're, you know, pretty sure being economists that developers see that. And so they might not be literally responding to, you know, they could be responding to all sorts of things. They could be responding to other changes that are occurring in cities that just simply make it more attractive for high-income people to live and then respond to that, right? So as Leah said, there are a limited number of possibilities here. The other thing I would say is if we had what we would call very high-frequency data, if we literally could see, follow the city, let's say month-to-month, imagine you could follow a particular city on a month-to-month basis. And you could actually see when new housing starts begin, and you can just compile a very big data set on that. There were other ways you could do this, you could look at sort of leads and lags between migration of different people so there would be ways of doing it, it just doesn't... they don't really work for the sort of data. It was already difficult enough to sort of construct the data centers, and I did write it, I hesitated to say how many years that we worked on this before we got to this point,
Shane Phillips 31:48
While we were talking ahead of the actual recording about how the final product of the paper, it's very succinct, concise, it feels very tight. And so all the work doesn't show and that's kind of a compliment, in a way. So something that did come to mind, as I read your study was the role of rent control. In all of this, there's a very strong incentive to convert your rental units to condos in cities with rent control. And that's especially true for units that are vacancy controlled, because rent increases are restricted even between tenants. Over time, the revenues that you're bringing in may fall behind as the cost of operating the building and taxes and everything else goes up. But if you convert the units to condos, then you can just kind of escape that and sell them at market rate. At least if condo conversions are not restricted. The same does apply to cities with rent control policies that allow rents to reset to market rate when tenants move out, that's vacancy decontrol. But maybe you know the incentives aren't quite as strong there. And if you're in a city without rent control, there may still be cases where landlords might want to convert their units to condos but they can charge market rate rents usually, so there's a smaller delta between what they would get from renting versus converting to a condo or condos and selling. So did the presence of rent control in some cities, but not others, and different kinds of rent control also factor into this analysis at all?
Leah Boustan 33:18
Well, we were originally hoping that we could look at rent control, and there were a few cities in our sample analysis that did pass rent control regulations in the 70s as well. So it was sort of a package of tenants rights; rent control, coupled with extensive restrictions on condo conversion. However, we didn't have enough cases in our dataset to specifically look at rent control. So we were hoping condo conversion restrictions would slow down condo development, and rent control might inadvertently increase the pace of condo development. So we could look at both of those factors. But we didn't have enough cases to do that. So as it turns out, we have 13 metropolitan areas anchored by a central city that passed condo conversion restrictions, and 50 metro areas anchored by center city that did not. And that felt like maybe enough cases that we could analyze that difference. When it came to rent control. There were only a few prominent cases in the 70s. And so we didn't think we had enough variation to actually perform that analysis. But it was very much on our mind because rent control was another policy that was in the news in the 70s as part of this tenants rights movement. And along the lines that you're describing. Shane, one of our economist, colleagues, Rebecca Diamond and her co-authors have done an analysis of rent control in San Francisco. And in their case, they had detailed information parcel by parcel on whether a unit was rent controlled or not, and they're able to show at that very micro level, at the unit level, that if rent control is in place, the owner of that unit is more likely to convert from rental to condo.
Shane Phillips 35:16
Right right
Leah Boustan 35:16
So we very much had this hypothesis in mind. And we just didn't have enough cases to do the comparison in our time period.
Robert Margo 35:22
This is another case where sort of history interacts in an interesting way. We know also from other work in economics, Dan Fetter, who is at Stanford that rent control was a big issue during World War Two. And it has an effect on homeownership during in the 1940s. But as you'll recall, we you know, there weren't the possibility of condo conversions or condo, condo anything is not a possibility in 1940. So if you can imagine an entirely different history of homeownership in the US where, like you were asking before you say, imagine the condo had come into existence in 1920 right, as opposed to 1970, we might have been able to have a lot of evidence on rent control, and its effect on condo conversions, because it would have happened in the 1940s. But that's not the history that we actually confirmed.
Shane Phillips 36:14
I mean, during World War Two, essentially everywhere had housing prices controlled during that time, right? And some places like New York and others just maintained those price controls beyond that point. So this is a bit of a tangent, it's not in your study but it's a question that has been on my mind, bugging me, I have no idea how to investigate it really, for years now that I'm hoping one of you might be able to shed some light on. The US has, as you know, been building a lot more multifamily in recent years, but almost all of it seems to be rentals. So, you know, why do we build so few condos here, or at least you know, the coastal cities, maybe that I'm a little more familiar with build so many rentals compared to condos. And it's especially perplexing to me because I know that Canada actually has exactly the opposite problem. And they even have a special term that they call 'purpose-built rentals' for apartments that aren't just condos being leased to tenants. So what is going on that multifamily production is so imbalanced between ownership and rental in both countries to the extent you have any knowledge of what's happening up in Canada, and yet you know, we're on completely opposite sides of that spectrum.
Robert Margo 37:28
I don't have any knowledge about what's what to say to that? I don't know Leah, do you have anything to add to that at all?
Leah Boustan 37:36
Well, I have some speculation, but I don't know. So what I would throw out there is Bob talked about why it was that condo as a legal form was so slow to emerge in the US, and some of the transaction costs and difficulties of living in a multifamily setting, but owning a slice of the building. And so condo as a legal form emerged in order to address that issue. However, I don't think that condo smooths all of the problems of living in a multifamily setting and only owning a portion of the building. So it can be hard to ensure that your fellow owners of the building who might sublet their place to another person are necessarily maintaining the common spaces, it can be challenging to interact with the other members of the building about when should we replace the roof, when should we invest in some of the common spaces. And so it still might be the efficient form, if you're living in multifamily setting to have a single owner who are making that decision, and then renting out the subparts. And so there might be a ceiling on how many condo units that a city can bear...
Just based on demand essentially
... just based on demand. And that might be an explanation for why condo development is slowing down in the US in favor of various forms of rental properties either luxury rental or mid-market rental. Now as to why this is different in Canada, I wonder what the legal structure is there to address some of these issues about collective action and investment in common. So for example, if the original developer of a new condo building made a mistake, and water is coming in through the windows or there's a problem with the roof or the parking garage is cracked; in the US, how easy is it to sue that developer, what are the steps that you need to take to make yourself whole versus in Canada, what are the rules in place where the owners of the individual units can be made good? So I don't know and this is where it comes into speculation but maybe the legal system is friendlier to the individual owners in Canada, and it makes it easier in that case, to address some of those collective action problems and to undertake the investments that are needed. And just anecdotally, folks in the family or friends who've owned condos, have all complained, and they've all had some headaches involved with some of these collective investment decisions. on the US side. No doubt the Canadians complaint as well but I wonder if there's elements to the regulatory structure there that smooths this process?
Shane Phillips 40:32
Yeah, that sounds plausible to me. And if there are any Canadian scholars or scholars of Canadian condo development, you know, reach out, maybe there's an opportunity for another episode just on this specific subject.
Leah Boustan 40:43
Maybe another interesting thing about condo development in the US is that it's far more suburban than Bob, and I expected when we before we looked at the data. And if you think about suburban condo units, they tend not to be one large building with a single roof and a single parking structure. But instead, they're attached townhomes. And so some of these collective decisions might be easier to resolve in a suburban context.
Shane Phillips 41:10
Yeah yeah, and frankly, just there's much smaller HOA fees period. And the HOA fee, I think is something of a deterrent in itself when you're renting a unit or you're paying $2,000 - $3,000 on a condo mortgage, and then another 700 or 800 or $1,000, just for the maintenance and operations and so forth in that HOA fee. So stopping or slowing gentrification is, you know, a stated aim of restricting condo conversions. And based on your research, it does seem like if anything, it might have the opposite effect, or at least does not have the intended effect. But another goal that we haven't really talked about is preventing renters from being displaced in the process of condo conversion. So not just kind of indirect effect, but direct displacement through condo conversion. I think that is a worthy goal in its own right. And it seems like the connection between condo conversion and displacement, maybe easier to establish or at least easier to understand than neighborhood-level changes like gentrification. Assuming you agree that there are also some benefits of condo conversion restrictions, how do you think about the balance of positive and negative impacts, especially after doing this research. Are there maybe ways to protect against some of that displacement without all of the unintended consequences that we've been talking about with respect to gentrification?
Leah Boustan 42:35
Well, in this way, I think of our study as really belonging to economic history, rather than to current policymaking, because in the time period that we are analyzing, with cities making a decision about condo conversion restriction in the late 70s, early 80s, cities at the time, were focusing on existing housing stock, existing multifamily buildings that were renter occupied, and they had concerns about displacement. These days, most new condo units are new construction. And so the concerns about displacing existing residents are less relevant. And when we think about new condo construction, that's also one means of adding to the housing stock. And so we haven't talked very much about housing affordability, and housing price growth, which really is a crisis, especially in coastal cities in the US, also in Canada, also in the UK, and around the world. But I think that given that most new condo units that are coming online right now are coming from new construction, the concern about displacement, that it was animating the restrictions that we study is far less relevant.
Robert Margo 43:54
I do think Leah's point about the sort of economic history angle of this is is interesting and sort of addressing what you might call the welfare implications of condo conversions. And the fact that all of this is happening in the 1970s, and the 80s makes it doubly interesting because we sort of remember the 1970s as a period of general urban decline in the United States. And you know, this is in a history where, in the 1960s, there were riots, and so forth, which have their own separate effects on things and the displacement issues of that period were very real. And although it's not the study that we undertook, it would be interesting to sort of think about the impact of conversions on, say in-migration or out-migration in these cities. One could imagine a study that could sort of illuminate you know, the impact on particular neighborhoods that you know, will require different data than we did we had but it would certainly be an interesting thing to pursue.
Shane Phillips 44:57
Yeah absolutely, it seems to me like there's really just not enough discussion about owner-occupied multifamily housing in general and condos in particular. While I've got you here, is there anything else we should know about condos or again, owner-occupied housing multifamily generally? Or is there anything we missed, or maybe some myths you want to bust?
Leah Boustan 45:20
Well, we already talked a little bit about how the condo rate in the suburbs is much higher than either Bob, or I expected going into this work. And so if you think about, where do high-income people want to live, and high-income people often prefer to be homeowners, for various reasons, one location at certain times of life is right downtown, maybe close to a tech or a finance type job, maybe in an area that has a lot of interesting urban amenities. But at other times of life, perhaps when starting a family, high-income people also have a strong taste for living in the suburbs. And so condo development is not as closely tied to these happening center city neighborhoods as I thought. In fact, there's a lot of high-income people who want to be homeowners and also want to live in the suburbs that are purchasing condos in the suburbs. So that got me thinking condos may also be useful in terms of high-density development in the suburbs, not only in center cities.
Shane Phillips 46:32
Which we don't get a lot of here in the US but as you said, it's actually much more common in Canada and many other places.
Leah Boustan 46:38
So I think that there's a lot of negative associations in the public mind with condo. But there's also interest in transit-led development, or densifying the suburbs and condos are one of the tools that we can use for those other goals. So if you're thinking about a commuter rail station that's out in the suburbs, that might be close to a shopping development. That's a place that a lot of people would want to live, and maybe a place that could support multifamily development in the suburbs. But given that high-income people often do like to be homeowners, that development might be a condo development, rather than a rental. So I do think that we need to peel away some of the negative associations that we have with condo and recognize that they're also a tool of changing the face of the suburbs.
Robert Margo 47:31
I guess the one thing I want to add to that is that, again, if you sort of see this through the lens of economic history, land ownership, homeownership, you know, these are sort of central parts of most people's lives in terms of their accumulation of wealth, as they age. You know, you think about the component of the average person's wealth that represents owner-occupied housing, you know, it's nothing for Bill Gates, but for the average person. It's like everything. And it's been everything, actually, for people in the United States for a very long time. It's just taken different forms. And so I think of the condo as a mechanism, a legal mechanism that helps people to facilitate that process. And I can imagine, as I said earlier, that can imagine a different history in which it was available earlier. And if you look at the sort of history of homeownership in the US in the 20th century, it's a very uneven history. We have the first part of the of the century, homeownership is very well by subsequent standards. It jumps in in a short period of time, and it's been sort of stable for a very long time. It's not obvious that's like what it should be what should happen over time. And so the the institution of the condo and how it fits into this, it's a policy tool in a way that it's broader than I think in terms of its implications on people's lives and how it facilitates high-density development here or there. Right, it's a mechanism by which people pursue what we think of as part of the American dream.
Shane Phillips 49:14
I think that is a very good place to end. Leah Boustan and Bob Margo, thank you so much for joining me on the UCLA Housing Voice podcast.
Robert Margo 49:23
Thank you for having us.
Leah Boustan 49:25
Great to be here.
Shane Phillips 49:31
You can read more about Leah's and Bob's work on our website, lewis.ucla.edu. Show Notes and a transcript of the interview are there too. The UCLA Lewis Center is on Facebook and Twitter, and I'm on Twitter at @shanedphillips. Thanks for listening. We'll see you next time.
Transcribed by https://otter.ai