By Roger Valdez | Forbes Magazine
What is the problem with housing and how do we solve it? Fortunately, the answer is simple: lack of supply in the face of rising demand. Noted economist Milton Friedman often said that inflation is “always and everywhere” the result of too much money. That is, as employers higher more people and population grows, demand for housing grows with it. If housing is scarce, then its price begins to rise, and this means people with less money can’t compete and get priced out of the market. The immutable law of supply and demand applies to housing just as it does to any other consumer product.
The answer to housing price increases is either to reduce jobs and population growth or to increase production. The answer is definitely not more money, yet this is at the core of almost every housing proposal offered at the federal, state, and local levels. The argument is, “we need more affordable housing” when it should be “we don’t need more affordable (subsidized) housing, we need more housing so that it is affordable.” The way to accomplish this from a state and local policy level falls into two categories: 1) things not to do and 2) things to do.
In this post I’m going to focus on two examples from each category, Mandatory Inclusionary Zoning (things not to do), and cash for rent (things to do).
Don’t Do: Inclusionary Zoning
That taxing something will discourage its production and use is a common-sense notion. A mandate for housing providers to include rent-restricted units in rental housing projects or pay a fee in lieu is essentially a tax on new housing production, thus discouraging that production. Worse, when rents can support the fees, the residents ultimately pay the fees through higher rents, resulting in local renters adding local dollars to federally funded projects. Cities like Cincinnati have been flirting with inclusionary zoning as it gains popularity. And cities that do have the measure in place, like Seattle and San Diego are still in the middle of what they themselves describe as a “housing crisis.”
What’s behind this movement to tax new housing to pay for subsidized housing? It’s basic human confusion. I recently heard a local city councilmember praise what she called “luxury housing” because she understood that more new housing takes the price pressures off existing housing. “Wow,” I thought, “She gets supply and demand.” Even though that new apartment building has higher rents than an older building around the corner, people with more dollars to spend will go to the new building, and existing units won’t see rises in rent when new vacancies open.
But less than an hour later, after she and her colleagues voted for significant supply side land use reforms, she said, “Make no mistake, these measures aren’t about affordable housing. There is no affordable housing here.” I’m paraphrasing, but what she meant is that in her mind the words “affordable housing” means either money for subsidized housing or price controls. It’s a psychological problem that is shared by almost all human beings, left or right, north or south: the “market” alone can’t solve the problem of high housing problems, we need to add more money. See above my quote from Milton Friedman.
Solution: State governments can preempt local cities from imposing inclusionary requirements (Tennessee has done this). When people think more money is the answer, the allure of a tax on every square foot of new housing is intense. Politicians can raise the costs and barriers of new housing which mean higher prices because almost all their constituents think “more affordable housing” means “more money.” It satisfies the urge to do something by apparently penalizing developers and skimming off some of their profits to pay for cheaper housing. Of course, this doesn’t work. Housing prices continue to rise to absorb fees and new residents end up paying higher rents to subsidize their neighbors.
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Related: Center for Housing Economics