John Hood: To Make Homes More Affordable, Build!
RALEIGH — In places where the regulatory climate makes it easier to build new homes, it’s easier for people to find housing at affordable prices.
No, really, please bear with me. I know my proposition sounds improbable. Could there truly be a direct link between the cost of building apartments and houses and the cost of renting or buying them? I submit the answer to this provocative question is yes.
My answer depends on two propositions for which, I argue, there is strong evidence. The first is that regulation increases the cost of building new residences. Many studies illustrate this effect, some from the industry itself and others from scholars who publish their work in peer-reviewed journals.
The following passage sums things up well. “Even where housing is allowed,” a group of economists stated, “local permitting requirements can drive up the cost of housing and contribute to the nation’s housing shortage.”
The economists pointed out that while “some permitting requirements serve an important purpose, such as ensuring structural, electrical, plumbing, and mechanical safety and environmental protection, the rise of unnecessary and onerous permitting has contributed to housing shortages and housing unaffordability across the country. Permitting requirements directly increase the cost of building new housing by increasing soft costs, administrative burdens, uncertainty, and delays.”
Some hack consultants on the take? Nah. I just quoted the Biden-Harris administration’s Council of Economic Advisors.
Now, in theory, homebuilders and developers might eat any higher costs imposed by housing and land-use regulations. That’s not what happens in practice, however. Consumers bear most of it —by paying higher prices, by renting or buying less quantity and quality of housing than they’d prefer, or by having to choose another location entirely where the housing is cheaper but other job or lifestyle amenities are less desirable.
A new study in the Journal of Political Economy-Macroeconomics quantified the relationship. For every 1% increase in the supply of housing, average rents fell by .19%. There was also an increase in second-hand units placed onto the market to rent.
This finding underlines a key mechanism to keep in mind: you don’t have to build “affordable housing” in order to make housing more affordable. That is, even a project aimed at middle- or upper-income consumers can end up serving the interest of lower-income consumers by freeing up preexisting houses or apartments.
The first house I ever purchased, in a starter-home neighborhood in Garner, was far from new. The couple from whom I purchased the home had lived in it for many years. When the husband got a raise at work, they jumped at the opportunity to buy another house closer to his office — and large enough to accommodate their growing family. Their decision, in turn, put an existing unit on the market for a young journalist living paycheck to paycheck.
Housing is an urgent and emotional issue. Policymakers have to talk about it, and at least promise to do something about it. On this matter, as on so many others, my advice is to focus on the supply side, not the demand side.
Except for poor people on public assistance, government ought not subsidize consumers of housing. Recent expansions of the standard deduction and caps on the mortgage-interest deduction have drastically reduced the number of Americans who take it. The deduction never played much of a role in boosting homeownership — countries such as Canada have comparable rates of homeownership without such a tax deduction — and mostly benefits high-income households.
And as Mark Calabria, former head of the Federal Housing Finance Agency, recently explained to Reason magazine, the government-sponsored enterprises Fannie Mae and Freddie Mac provide “not a homeownership subsidy but a home debt subsidy.” Their implicit federal subsidy can only boost the demand for mortgages, which “if you’re not doing anything about supply is only going to run up prices.”
Both the state legislature and local governments have been deregulating housing markets in North Carolina. Let’s do more of that, and soon.
John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).
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