The Law of Supply and Demand


A friend and I were talking about Cambridge’s housing problem. Like me, he’s a proponent of increasing affordable housing. But as our conversation went on, he became increasingly frustrated with my comments about the impacts of density and growth. Finally, he blurted out, “haven’t you ever heard of the law of supply and demand?”

“I hate to tell you this,” I replied, “but any marketing professional will tell you that in reality, there’s no LAW of supply and demand.”

There’s been a lot written about Cambridge’s housing problems. Our stock of affordable units is being turned into expensive upscale housing at an alarming rate. Rents are spiraling upwards, and there is apparently no limit to how many units can be gobbled up by new 6-figure wage earners.

Realtors and developers are ecstatic. It’s like a gold rush; any realtor who can get a seller to sign with them is guaranteed a minimum of $30,000-50,000 per home sale. Competent realtors are making $500K per year and more. Developers are also experiencing happy days… just one luxury home can bring in $200K profit or more.

How did we get here?

Cambridge is a nice place to live. With our rich culture, proximity to Boston, attractive cityscape, well-funded schools, history of tolerance, and commitment to human rights it’s not surprising that so many people want to live here. However, one factor that has always driven people to come here is JOBS. Cambridge attracts tech, biotech, and pharmaceutical research companies, offering them an unmatched pool of highly educated professionals and support staff. Long gone are the days when we needed to attract new businesses; now we can’t build fast enough to provide the insatiable hunger for commercial space.

It’s a fact that many people prefer to live close to their workplace. But due to the limitations of our infrastructure, our roadways have become gridlocked, our buses are stuck in traffic, and the subways regularly experience breakdowns. Living within walking or biking distance of work is increasingly attractive.

3000, 4000, 5000… 10,000?

The new East Cambridge Courthouse will add 3000 new employees; the Galleria Mall proposal could result in thousands more. There are at least six new large commercial buildings under construction. Existing and new companies will be adding to the local workforce, and many will be paying attractive salaries to attract top talent. The pressure on housing will undoubtedly lead to continued astronomical increases in rents and condo pricing.

This essentially means that every year, Cambridge’s overheated job market will result in many thousands of new people seeking housing in Cambridge, with money to spend on high end housing.

Can we build our way out of this?

There’s a popular myth that pricing obeys some “law of supply and demand.” Einstein, Newton, Kepler discovers some of the laws of physics, nobody ever postulated that sales follow some definable law. Marketing professionals will talk about margin and supply elasticity, market/product driven commodities, necessities vs luxuries, perceived value, and many other factors. One can measure these relationships on simple and/or complex graphs, and forecast target price points that maximize profit with occasional accuracy. But even when armed with enormous volumes of data, marketers know that they’re really just guessing.

The factors of supply and demand are based on consumable commodities like eggs and milk, not housing. Supply and demand projections typically fail when (a.) the demand is insatiable or (b.) the supply is almost non-existent. This is why Cambridge housing is spiraling upwards: The demand is insatiable.

The first sign of this being true is that no matter how many units come to the Cambridge housing market, prices still go up.

The second sign is that everything sells, no matter how small, weird, run-down, or just plain crappy. People will buy condos in basements, above bars, squeezed into tiny lots – anything.

The third sign is that people who were living in reasonably-priced rental units are being forced out by the thousands. On my block in The Port/Area 4, in the last couple of years, at least 30 formerly reasonable-rent units have turned into condos or high-end rentals, forcing out middle income families. Perhaps five new market-rate units have been added. No new affordable units have been created. My block is typical of the city.

My friend believes that the only way to bring down the cost of housing is to build a LOT more units. He thinks that this will create a glut – as if it were like milk and eggs - and the price will come down.

His “build-build-build” opinion seems to have come from the real estate industry, who has been claiming that by allowing a LOT more high-density new construction, prices will come down to middle income levels. But when I’ve asked for an example of where this has worked in America, I’ve been met with deafening silence - because there are no examples of where this has succeeded.

Will it end?

Some city councillors see overheated development as beneficial. One wrote “where do you think we get the money for bike paths and other city services?” But the build-build-build mentality is self-defeating, as each councillor sees many of his/her constituents being forced out. Residents who own their condos are seeing their friends being priced out, and few of us who bought our homes 20 or more years ago could afford to buy in Cambridge today.

The construction of affordable units cannot possibly keep up with the demand; it’s not sustainable. We simply cannot continue to build-build-build thinking that that developers – the ones who got us into this situation – will get us out of it. Our failure to rein in uncontrolled development will displace all those who cannot afford the “new” rents, which will continue to increase annually. It will limit buyers to those who have two high-earning professionals in the household.  This decreases the diversity that Cambridge values, displaces long term renters and discourages families from putting down roots here.

There are solutions.

Since build-build-build is a strategy that cannot work, what will work? Knowing that this isn’t a problem that’s facing just Cambridge, how can we stop the rapid erosion of affordable housing? These are a few ideas:

1. A moratorium on commercial development. We don’t need more commercial buildings. They’re not serving the residents; they just enrich developers.

2. No more variances/special permits for big buildings. Our zoning allows developers plenty of profit under current zoning. Allowing skyscrapers to infiltrate our neighborhoods will destroy what defines Cambridge. Affordable units can be built without such significant increases in density.  And adding 10 affordable units in a building that will ultimately drive up rents throughout a neighborhood is not good housing policy.

3. A strategic plan for Cambridge. What is the ultimate population that our current infrastructure (water, sewer, transit) can sustain?  How will our housing policy ensure that families and middle-income people can live in Cambridge?  Our Community Development Department knows how to enable development; we need them to define and work towards a Community vision that is sustainable and includes the families and middle-income people critical to the fabric of the city we want to live in.

Phillip Sego
Norfolk Street



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