Why housing matters – Econlib

Noah Smith has a position that advocates for policy reforms to encourage more housing construction. At one point he makes the following observation:

Housing policy is incredibly tough in America – and in most other wealthy countries – because housing has to perform two functions at once. It is both one consume well and a investment good. A house is a place to live, but it is also something that should make you richer over time as its price rises. These two objectives are in direct conflict with each other: as owner-occupied housing becomes more affordable, that makes most Americans poorer.

When I say “most Americans,” I am not exaggerating. Home ownership is about two thirdswith only minor fluctuations. And for middle-class Americans, the value of their home makes up most of their wealth

This fact creates a direct and inevitable conflict between two major classes of American society: homebuyers versus homeowners. If you’re buying a home for the first time or looking to significantly upgrade, you want home prices to be as low as possible. But if you already own a home that you’re happy with, you want the price of that home to be as high as possible so that you can ensure that the home buyers will pay you a lot of money when you’re finally ready to sell. It’s basically a zero-sum game.

But when it comes down to it new constructionit is very much a positive-sum game. (To be clear, in this paragraph Smith is discussing a change in the price of existing homes, so there is no disagreement on this point.)

There are two ways to think about issues of economic prosperity: financial flows and the consumption of goods and services. In my opinion, a monetary approach often leads to sloppy thinking. Some people complain that building lots of new homes won’t lower the cost of homeownership. But who cares? The point of building lots more housing is not to lower the price (which, as Smith rightly points out, is a zero-sum game), but to have more housing. So while building more housing may not lower the price (although ceteris paribus which is usually the case), it will certainly provide more housing. Countries don’t get rich by having a lot of money (Zimbabwe has plenty), they get rich by having a lot of stuff.

When traveling in America, you can usually tell how wealthy an area is just by looking out the window of your car. But there are a few exceptions. There are areas in New York City, San Francisco and West LA that are much wealthier than they appear. I’m told the neighborhoods are trendy and expensive, but they look quite run down, with unimpressive buildings that don’t look well maintained.

As many of you know, the cause of this disparity is regulation. Rent control laws, apartment conversion restrictions, a burdensome permitting process, requirements to use union labor, affordable housing mandates, restrictive zoning, and many other regulations cause property owners to let their buildings fall into disrepair .

The root cause of all this was satirized by Kurt Vonnegut Harrison Bergeron. The pursuit of excellence leads to inequality. If we allow market forces to create beautiful neighborhoods in these depressed areas, lower-income people can be replaced by wealthier residents. So all these misleading regulations are being introduced in the name of ‘the poor’. Ensure that the area remains neglected so that the poor can still afford to live there.

There’s only one problem. In the long term, it is the poor who suffer most from the housing shortage. The wealthy can usually find ways around misleading government regulations, while the poor who aren’t lucky enough to live in a rent-controlled unit often end up homeless.

If a country has 100 million homes and 110 million households, as many as 10 million households could become homeless. That problem can’t be solved with rent control, because landlords will prefer wealthier tenants who they can trust to pay rent on time. YIMBYs understand that the only sustainable solution is to create another 10 million homes. It doesn’t even matter whether the new housing is “affordable” as new construction will tend to drive down the price of existing housing, which would be emptied by wealthy people moving into the new McMansions. Affordable housing mandates actually provide housing fewer affordable, because they discourage new construction.

Why then is housing such an important public policy issue? Why don’t I write articles about the television production industry or the dry cleaning industry?

Housing has two special characteristics. First, housing expenditure represents a very large share of consumption. Secondly, it is a very inefficient industry, especially in some key coastal areas. And this inefficiency is largely due to regulations. I would add that the other two major economic problems, healthcare and education, are also industries that absorb a large share of GDP and are heavily distorted by subsidies and regulations. In all three cases, the media relentlessly focuses on monetary issues, while solutions can only come from approaching these industries from a starting perspective. The goal should be to change the overall quantity and/or quality of output and produce each unit of output at a lower opportunity cost. Monetary solutions such as subsidies and price controls only obscure the deeper problems.