August 15, 2016

More Building Is the Only Cure for Expensive Housing


City officials and residents around the country are concerned about the affordability of housing in their city.

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City officials and residents around the country are concerned about the affordability of housing in their city. In addition to the well-known high-price areas of coastal California, Manhattan, and Washington D.C., officials in cities such as Denver and Orlando are fielding concerns from constituents and housing advocates about the prices of housing. Unfortunately, the common policy responses to the affordability concern don’t address the fundamental cause and in many cases they exacerbate the problem.

Rent control is back in vogue in many areas, especially in California communities such as Concord, Burlingame, and Oakland, but it’s an inefficient policy with several negative side effects. Rent control has been shown to decrease the quality of housing in the long-run because landlords have less of an incentive to invest money in rent-controlled units from which they are unable to recoup their investment via higher rents.

Consistent with theory, rent control also reduces the quantity of housing, either by discouraging new construction or by inducing property owners to convert rentable units to other uses. Some supporters of rent control praise its ability to reduce economic segregation. But while there is evidence that it does have a small effect in some places, in others it isolates the poor.

Rent control also leads to a mismatch of tenants and apartments, since it encourages people to stay in one apartment throughout their lives even if their needs or tastes change. For example, the mother of a family of four who obtained a three bedroom, rent controlled apartment when she was raising her children may stay there long after her children have left and spouse has passed away, despite no longer needing the space. Since the apartment’s rent is not controlled by the market, a younger family of four who could use the space is unable to acquire it by offering a higher price. This type of apartment misallocation negatively impacts people’s wellbeing.

Other local policies increase the costs of building and contribute to the high price of housing. Inclusionary zoning, which requires builders to include a number of affordable units in any building project, is a favorite among local officials despite evidence that it raises costs and ultimately lowers the supply of housing. Local minimum lot size requirements also increase the prices of homes, and land use regulations have been shown to decrease the number of housing permits in California, which again contributes to higher prices by limiting supply.

Other, narrower regulations also have a negative effect on the housing supply. In her recent resignation letter, former Palo Alto, CA planning commissioner Kate Downing laments the no-growth policies instituted by the city’s council—the prohibition of duplexes, allowing only one floor of housing in mixed-use developments, and restrictions on granny units. Many other expensive cities have similar rules that should be reformed.

If housing prices are to decline without the use of distortionary government policies, the supply of housing must outpace demand. This means expensive cities need to allow more building. But it also means that in very popular areas—Southern California, Northern Virginia, Manhattan—increasing supply may not be enough to cause a substantial decline in price since building takes time. But it’s still a necessary step, and increasing supply in those areas, even if it doesn’t lead to a large drop in prices, will allow more people to take part in those productive economies and boost economic growth. This would be a boon to our current slow-growth economy.

Many people worry that profit-motivated developers will only build luxury units, but there is evidence that the filtering process, in which higher-income people inhabit the newest housing while older housing filters down to lower-income people, can effectively provide low-income housing if we let it work. Policies such as income grants or housing vouchers that allow low-income people to choose the housing that’s right for them can fill in any gaps left by the filtering process.

Fortunately, there are some new state efforts aimed at limiting local regulations that restrict new housing. California Governor Jerry Brown has proposed a bill that would allow multi-family housing that meets local zoning requirements to be built as-of-right, meaning that such development could avoid local communities’ added layers of discretionary review. This bill is only a marginal improvement, but it’s a start. Moreover, it may signal the beginning of a change in attitude among state politicians about the effects local zoning has on the availability of housing and the importance of more building.