How St. Ives’ Plan to Fight Second-Home Gentrification Is Backfiring

St. Ives, England

Changing landscapes are inevitable.

Whether the change is from the slow crawl of gentrification or the colorful cult moving in next door, a common theme emerges: locals don’t like it.

Here’s the situation St. Ives residents were dealing with in basic economic form:

An increase in demand leads to two things: rising prices and rising quantity.

Rising prices: Rising demand causes prices to go up, which may be great for landlords, but not for renters.

Rising quantity: Rising demand also causes the quantity of housing to go up, changing the landscape.

The combination of the two incentivizes things like this:

Cover for a YouTube video
The article caption reads, “At right. Tracy Popken’s 92-year-old house in Bishop Arts. At left, a new apartment building, which will not be there in 92 years”

Squeezing in more people into a smaller space is great for the new people moving to town and property owners, but not so much for current residents.

Take Dallas and their residents, who bemoan their city being, “swamped by outsized under-construction apartments,” making the street feel like a tunnel. “All it’s missing is a Super Walmart and an Ashley’s Furniture to complete its transformation into Anywhere, U.S.A.,” says one resident, emphasizing the homogenization effect that so often characterizes gentrification.

Legal moves are made in attempt to protect lower-income locals and their homegrown housing from the onslaught of rich outsiders and towering housing. At best, the laws have unintended economic and social consequences. At worst, they backfire.

Urban Economics Case Study: Restrictions on New Housing in St. Ives

This was the case for St. Ives, a small beach-side community in England.

St. Ives, England

One of the tools many communities use to build a bulwark against gentrification and its effects—and the one we’ll be focusing on here—is restricting the supply of new housing.

St. Ives, however, took it one step further. St. Ives residents overwhelmingly decided to ban the sale of new homes specifically to non-residents.

They saw outsiders moving in, buying up shiny new developments and using them as holiday homes. They saw their local community become less of the home they once knew, increasingly growing into a tourist town of temporary and unknown faces. They saw house prices going up, making their once homely community increasingly unaffordable for locals.

How to get St. Ives back to its old-timey, more-affordable, less-second-home self?

It’s simple, they thought: if people want to buy new homes here, they’ll have to live here, too. No new homes for non-residents. That’ll slow the incoming wave of second-home-buyers, which will make homes more affordable for locals, right?

It’s only been a few years, but so far, their legislation isn’t causing the effects they hoped for.

The economics of banning new-build holiday homes in St. Ives

Using information and limited data gathered from two Financial Times articles, Python, and basic economic concepts, we can construct the basics of what happened.

You can see the Python code for the graphics here.

Situation and response of St. Ives residents

In the 15 years prior to the legislation being passed, the influx of holiday-home-buyers increased average housing prices to 18x local salaries, more than 2x the national average. Since landlords can make good money from tourists, it’s been increasingly difficult for local workers to find long-term rentals and affordable mortgages.

With the demand for housing in St. Ives increasing from holiday-homers and tourists, both the cost and quantity of housing in St. Ives increased.

In response to rising demand, 80% of St. Ives residents voted to cut back on supply: no newly built houses can be bought by non-residents.

The decrease in supply resulted in two things: a decrease houses on the market and a further increase in prices.

Here’s where things get interesting.

St. Ives residents attempted to reduce demand for holiday homes by reducing supply of new homes. The thing is: market demand is like water—if you block it in one place, it will simply flow to another place.

This legislation cut the housing market into two markets:

  • The market for new houses: The demand for new houses plummeted since holiday-home-buyers weren’t allowed to have them and locals couldn’t afford them. In the words of the regional director post-legislation, “Builders have disappeared.”
  • The market for existing houses: The demand for existing houses boomed. For holiday-home-shoppers with their heart set on St. Ives, existing houses are their only option. For locals, existing houses are more affordable than new houses…for now. As second-home-buyers flood the existing house market, existing homes are becoming increasingly expensive and out-of-reach for residents.

The regional director explained that second-home-buyers are buying older homes that they previously would have “turned their noses up at,” and are paying handsomely for them.

Situation and response of second-home-buyers

When holiday-home-shoppers were blocked from buying newly built homes in St. Ives, that demand was routed into these three areas:

  • Existing housing in St. Ives: Second-homers with their hearts set more on St. Ives than on modern interiors chose to buy existing houses there in lieu of new ones.
  • Newly built holiday houses elsewhere: Other second-homers took their money to other destinations.
  • Renting instead of buying: AirDNA, which tracks Airbnb and HomeAway listings, shows a 74% increase in St. Ives tourist rental listings between 2016 and 2018.

Does that mean second-home sales in St. Ives decrease like locals wanted?

Noin fact, the data suggests demand by second-homers had an increase following the legislation, dragging up the total demand curve.

In 2016, the year of the legislation, 16% of properties were sold as second homes. In 2017, 33% of properties were sold as second homes. In 2018, it was 32%. The proportion of holiday-homers in St. Ives’ housing market doubled, and on top of that, the total housing market shrank.

Economic theory would have us expect demand for housing from locals hasn’t changed. For them, there’s no substitute goods, and they need housing just as much as before.

For second-homers, however, it’s like all houses are ‘on sale’ compared to the housing market before the legislation. Second-home sales rose from 50 houses in 2016 to 89 houses in 2018. It’s apparent that the limited stock of cheaper, older homes in St. Ives is more attractive to the second-home market than newer, more expensive homes elsewhere.

With the new-build market almost dead and the available supply of houses being snatched up by second-homers with money to burn, St. Ives homebuyers are being squeezed out of housing at an even faster rate than before.

In addition to residential homebuyers, St. Ives renters are being squeezed out too. Recall the 74% increase of Airbnb and HomeAway listings. While this increase could be due to other reasons, its largeness suggests that to some extent St. Ives property owners are increasingly renting to tourists over residents.

Here, we can compare urban economics theory of housing supply and demand to the reality based off of the limited data. While the slopes and movements have been purely theoretical, it’s clear that they are possible. At the very least, we can see the effect we’d expect from cutting supply: a lower quantity at a higher price.

As we can see, the number of houses sold between 2016 and 2018 decreased a fairly substantial amount for such a small area, nearly 15%. Meanwhile average house prices rose, though slower than before, with a 9% increase over the two years.

A better way to decrease demand from holiday-homers

Playing with the ‘price’ axes of the housing market over the ‘quantity’ axes may give locals some of the effects they’re looking for.

For instance, increasing property taxes for non-resident homes could be designed in a way to help both local buyers and renters have a larger share of the housing market.

Slowing new housing: a liberal political trend?

A 2011 paper by Matthew E. Kahn[1] suggests an irony: Californian cities experiencing a growth in their liberal voter share have lower new housing permit growth rates.

The political ideology that correlates with less new housing—making housing more expensive—is also the political ideology of reducing inequality.

Those aiming to level the playing field in terms of house prices are oftentimes, inadvertently, making it worse.

How is this happening?

Doing ‘something’ feels better than doing nothing, even if that something exacerbates the problem. Local politicians are at the mercy of local voters, who want to them to do something. Legislation that sounds friendly to locals buys local politicians votes—even if that legislation ends up backfiring.

[1] Kahn, Matthew E. “Do liberal cities limit new housing development? Evidence from California” Journal of Urban Economics, vol. 69, no. 2, 2011, pp. 223-228.