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The Best Policy Remedies for Rising Housing Costs

The framework for an impactful affordable housing agenda.
December 10, 2018
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A version of this piece was published at Forbes on December 11, 2018.

If we are looking for a fair and efficient way of increasing supply of housing in fast growing regions of our country what are the basic principles that we should apply? If housing price truly is what people at all levels of the debate are really concerned about, what should we do to reduce prices? Or another question I get often is, “What’s your answer, then?”

Let’s start by describing some economic principles that underlie real housing reform:

  • Housing price is an indicator of costs of its production, and the ratio of its supply to demand for it.
  • While price is a quantitative measure of supply’s relationship to demand, affordability is a qualitative measure of a household’s relationship to price.
  • New housing supply impacts incumbents, but it also creates a broad and deep community benefit.
  • In a free society that allows mobility, the one control government has over housing price is regulation over rates and costs of production.
  • Efficient production of housing benefits investors seeking a return from the capital expense they incur by building it. It also benefits people with less spending power, who see less of their income consumed when housing is abundant and less expensive.
  • Cost-efficiency is compassionate.

Debates about housing usually start with price and end with debates about affordability without so much as a turn signal to warn about the shift in the discussion; they aren’t the same thing. If price is our concern, then the solution is simple: when prices are high, the market is sending a message that housing is scarce and more is needed.

But for people who already live in a community, new housing development promises change, and thus, for them, the risk is real. But if we are really worried about price, and the utility of everyone in a community — including those who don’t live there yet — we’d see that development as a net positive, not a risk.

So on the dashboard of the commons, the red flashing light of high prices should take precedent over the red flashing light of incumbent discomfort over the change that will result with more supply. When incumbent angst and price lights are red, there is one dial that the people in charge can turn down: regulatory barriers to the market to producers of housing. If government follows the price indicator and not the discomfort signals from people who are invested in the status quo, then prices will fall even while incumbent discomfort increases.

If, however, leaders pay attention to the discomfort of incumbents, they’re likely to tax and limit production, usually arguing that it will produce more money for subsidized housing and less discomfort at the expense of developers. This does nothing to help price but makes inflation worse, and the cash generated can’t produce enough offsets to shorten waiting lists. Yet, politically, this has a beneficial result on the indicators of incumbent angst; people already settled see production and change slow. And when prices go up, producers get the blame and even higher fees.

So what are the specific interventions we should initiate immediately when housing prices “skyrocket?”

  • Use subsidies to buy down cost burden and build low or no barrier housing. If a household is paying too much rent, they don’t need a new unit someday just some money to help pay rent next month. And homeless people don’t need red tape and rules, they need shelter right now.
  • Eliminate regulations that are not immediate to health and safety. Parking, aesthetics of design, limits on unit size, and excessive review all favor incumbents. If a rule doesn’t help protect resident health and safety eliminate it.
  • Tax inefficient use of land and transfer that wealth to incentives and buy down programs. Larger lots with lower density are inefficient while many smaller units on smaller lots are more efficient housing more people for less money. Taxes should be high on the former while negative on the production of the latter.
  • Reexamine measures of affordability. Measures of affordability should reflect the variables of utility consumers consider when buying housing like proximity to transit, work, amenities, and family, not what is important to bureaucrats, the ratio of gross monthly income to rent.

If high prices are a crisis, then this is the roadmap out of that crisis. The solutions aren’t complicated if leaders ignore the worries of people who “got there first” and ideological interests who trade in scarcity for more money from government.

These solutions are also fair, allowing new arrivals parity with those already living in a desirable place. Standing in the way of efficiencies created by allowing producers to compete to meet consumers’ needs fuels inflation, and that devours a disproportionate share of the hard earned dollars of poor people. That is not compassionate. Getting out of the way is.

ABOUT THE AUTHOR
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Research Fellow, Housing