PPA786: Urban PolicyClass 5:Neighborhood Change

Urban Policy: Neighborhood Change

•Class Outline

▫Neighborhood change

Increase in low-income residents Gentrification Outmigration

▫The ripple effects of neighborhood change

▫Long-term urban trends

Urban Policy: Neighborhood Change

•Housing Bids and Neighborhood Change

▫The tools we have developed help us to understand neighborhood change.

▫The key is to recognize that change in population or income shift bid functions up or down.

If people move into an area, for example, competition for housing intensifies and bid functions are pushed upward.

This leads, in turn, to declines in housing unit size or quality.

Urban Policy: Neighborhood Change

•1. Increase in Low-Income Residents

▫Suppose that an urban area experiences a large increase in the number of low-income residents (due to immigration or job losses).

▫Then the bid function for low-income households will shift upward.

The low-income section of town will expand; housing units there will be converted.

Low-income households will consume less H and pay more per unit of H.

Urban Policy: Neighborhood Change

Neighborhood Change

These neighborhoods shift from high-to low-income

< Figure 8 > P(u) low-income high-income u1 u2 u

Urban Policy: Neighborhood Change

•Downward Housing Conversion

▫This housing conversion can take many forms

Dividing large units into smaller units

Renting previously single-household units to more than one household (or to larger households).

Allowing units to decline in quality.

Urban Policy: Neighborhood Change

•Type A Neighborhood Decline: Overcrowding

▫In some cases, this process leads to clear neighborhood decline due to:

Severe overcrowding and/or

Extensive housing deterioration—to bring quality-adjusted square feet, H, down to a level that the entering low-income people can afford.

Urban Policy: Neighborhood Change

•2. Gentrification

▫Neighborhood change can also involve higher-income households moving into previously low-income areas.

This is called gentrification.

Now conversion involves improving units.

People must expect neighborhood amenities to improve.

Urban Policy: Neighborhood Change

Gentrification

These locations change from low- to high-income

< Figure 9 >

P(u) low-income

high-income

CBD u

Urban Policy: Neighborhood Change

•The Role of Expectations

▫The role of expectations is worth emphasizing.

▫Housing is a long-lived asset. Home buyers bid on housing based on their long-term expectations concerning neighborhood quality.

▫High-income people will not move into a poor neighborhood if they do not expect its amenities to improve.

Urban Policy: Neighborhood Change

•The Role of Expectations, Continued

▫Many local policy makers have figured this out.

▫Programs providing moderate-income housing in poor neighborhoods are likely to fail

Unless the city is committed to improving the neighborhood.

And moderate-income households believe the city will succeed.

Urban Policy: Neighborhood Change

•Gentrification and Displacement

▫One great dilemma of local housing policy is the trade-off between gentrification and displacement.

Cities want better housing and nicer neighborhoods.

Existing low-income renters may be pushed out as a neighborhood improves and rents go up.

▫Existing low-income homeowners benefit from gentrification because the value of their homes goes up.

Urban Policy: Neighborhood Change

•3. Outmigration

▫Sometimes economic or social changes pull people out of a city.

Low-income jobs move to another region.

Housing subsidies or new highways pull middle-income households to the suburbs.

▫This leads to the opposite of the first case.

Urban Policy: Neighborhood Change

Neighborhood Change

If P(u) shifts downward: The fate of these locations depends on expectations

< Figure 8 > P(u) low-income high-income u1 u2 u

Urban Policy: Neighborhood Change

•Type B Neighborhood Decline: Emptying Out

▫As P, the price per unit of H, declines, landlords have less incentive to maintain their units and housing quality (H) deteriorates.

▫If high-income households cannot be convinced to move in, some neighborhoods will experience vacancies and abandonment—which have a strong negative impact on neighborhood quality.

▫We will return to these topics in the next few classes.

Urban Policy: Neighborhood Change

•The Ripple Effects of Neighborhood Change

▫Change in one neighborhood often has ripple effects in other neighborhoods.

▫If low-income households move in and some neighborhoods change to low-income neighborhoods, for example, high-income people will not have enough room.

▫The resulting increases in high-income bids will lead to additional neighborhood change.

Urban Policy: Neighborhood Change

An Illustration of Ripple Effects < Figure 11 >

P(u) low-income

high-income

PA

u1 u3 u2 u4 u u*1 u′1 u*2 u′2

Note: u* stands for the inter-group boundary and u′ stands for the outer edge of the urban area.

Initial shock shifts low-income bid function to here.

Urban Policy: Neighborhood Change

• Evidence on Neighborhood Change from Ellen/O’Regan

▫They studied changes in “gaining” low-income neighborhoods in the U.S. in the 1990s.

▫Gaining neighborhoods are those in which average incomes grew.

▫They put together a unique data set that could track people within neighborhoods.

▫Their key question was: Did economic growth lead to displacement?

Urban Policy: Neighborhood Change • Findings of Ellen/O’Regan

▫There is no evidence of heightened exit rates for renters or for poor households—i.e., no displacement!

▫Selective entry and exit among homeowners (e.g. richer owners moving in) are key drivers of neighborhood change.

▫Incumbents had larger income increases in gaining than in other neighborhoods.

▫Neighborhood satisfaction increased a little more in gaining than in other neighborhoods.

▫Populations in gaining neighborhoods did not became more white in the course of change.

Urban Policy: Neighborhood Change

•Long-Term Urban Trends

▫Two key long-term urban trends are

Declines in transportation costs, t

Increases in income, which lead to increases in H

▫These long-term trends obviously flatten the slope (-t/H) of bid functions.

Urban Policy: Neighborhood Change

The Impact of Long-Term Trends < Figure 12 >

P(u)

PA

u1 u2 u

Slope flattens as t/H declines.

And bid function shifts downward to keep population constant.

Urban Policy: Neighborhood Change

•The Impact of Long-Term Trends

▫This picture leads to three clear predictions:

Density will decline in central cities

Density will increase in suburbs

The physical size of urban areas will grow

▫The predictions are supported by evidence from many countries.