In response to my claim that they should let people build more housing units in the trendy, expensive parts of Brooklyn so more people could afford to live there, I heard that all the new construction would just be luxury units anyway.
For starters, I think people can exaggerate that. The bias toward luxury construction in high-cost urban areas is likely, in part, a result of restrictions on new building rather than a good reason to keep them in place. Think about other major classes of widely owned durable goods like cars and refrigerators. Obviously luxury cars and Sub-Zero fridges are a real thing. But the bulk of new car and new fridge production is targeted at a mass middle-class customer base simply because there are more customers there. But if you made the refrigerator industry abide by tight production quotas, all that mass market fridge building would vanish and everyone would make super-expensive high-end fridges. Middle class people would face a crisis of fridge affordability and need to subsist on used luxury fridges, very small fridges, or make substantial financial sacrifices in order to get a decent-sized properly functioning fridge. The Japanese auto industry did in fact face import quotas to the United States in the 1980s, which was the impetus for Honda and Toyota to develop the Accura and Lexus luxury sub-brands. So in a real luxury free-for-all, I think you'd see more business incentive to target the middle class customer base in housing just as you see in durable goods.
But there's also the issue of "filtering" that I learned from a smart Stephen Smith column. Those of us who've been living on the East Coast are all familiar with "gentrification" where rich people buy up old houses in now-cool neighborhoods and invest in renovating them. Filtering is essentially gentrification in reverse.
If a ton of new luxury apartments get constructed in a city, then at least some of their residents will be abandonning homes in other structures elsewhere in the area. Those homes are now free to be occupied by some less-rich people. And over time newer even more luxurious buildings will come on the market and yesterday's new luxury construction will age and filter down the socioeconomic ladder. When you see the gentrification trend outpacing the filtering trend, with higher-income families replacing lower-income families and lower-income families moving to worse-and-worse locations, that's a consequence of excessive restriction on new construction. In a healthy regulatory climate you should see more filtering than gentrification, lower-income familes moving into houses that have been abandoned by the rich as rich people move into fancier and fancier new buildings. Of course in the worst case scenario you get filtering without construction—"white flight" and the like—as affluent families simply leave the area and your tax base collapses.