The neighborhood is bustling with luxury housing that millennials are moving into. Disorder is minimal, people are having kids and starting families. Starbucks is charging an entire 3 dollars extra for Almond Milk. Oh, and our climate is fine so there’s no reason for exorbitant spending on jobs programs for literature graduates who somehow have jobs.
Our progressive politician wakes up in a sweat. It was just a nightmare. There’s still problems to solve. One of which is affordable housing, the idea that some houses must be below market rate for any dwellings to be built.
The current politically fashionable style of affordable housing is deficient in a couple ways, fueled by economic illiteracy, that prevents our housing market from adjusting.
There’s three principles to this that I think incorporating into decision-making about real estate planning that’ll lead to better outcomes. First, appreciating assets are more valuable, and are more likely to be desirable as investments. Second, policies that discourage cheaper and crappier types of housing are going to raise the price of all housing. Finally, ex post assurances tend to increase the ex ante costs for other people.
Housing is an appreciating asset because the demand is outstripping the supply. Large companies, due to artificially low interest rates can speculate on being able to capture consumer surplus because of their access to capital. It’s taken as a given that it’s unlikely much new housing will be built at a time. Generally, if an asset increases in value beyond the cost of credit, people will want to buy it. This can either be adjusted by increasing the cost of credit/capital or increasing the supply, which shifts to an equilibrium of lower price. The reason this is important is because absent a true commitment to building more, or a significant decrease in access to low-cost credit, we’ll continue to have this problem. Giving consumers an extra 25 K to start with on down payments won’t change the underlying dynamic.
Rich people are part of the same market as poor people if less houses are built, period. When more luxury housing is built, this reduces the price pressure of increased dollars chasing the same amount of product. Developers don’t want to be left holding properties vacant indefinitely (taxes + fees are expensive), therefore they’re likely to reduce rent to maximize total profit by increasing utilization. The more developers in the market and the less likely price-making behavior happens, meaning that prices fall to market levels. Sometimes shitty housing is good to keep prices affordable too. Slums with cheap rent are good at keeping people housed even if their dwelling admittedly sucks.
Finally, rules around who gets access to what decreases efficiency, meaning less overall development. Rent controlled apartments where it’s hard to kick people out raise the real costs of development, making it less desirable for developers on the margin. The same is true for eviction protections and tenant rights.
Taken in conjunction, these effects suggest that our policy is artificially increasing the costs of housing and decreasing the supply. These effects lead to deadweight loss.
Isadore Johnson's Website 