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The Only Way to Solve the Affordable Housing Problem

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Lack of affordable housing is a problem, but tweaking market forces makes it much worse.

As the saying goes, it’s all about location, location, location. But the problem of supply and demand, which is naturally affected by the limitations of location, has very real consequences for those who live in these places.

And that may be why the idea of rent control is making a comeback. New York City and San Francisco are the most visible players in the rent control industry — to the detriment of their respective residents. The West Coast, and California in particular, is suffering from a terrible homeless crisis in no small part due to their housing policies like rent control.

In these cities, rent control laws artificially limit the prices on rentals. The effect of this relief effort, however, actually exacerbates the problem, as economics professor Mark Perry explains.

[R]ent control laws that artificially force the rental price of housing below the market-clearing equilibrium price are guaranteed to create a housing shortage by: a) increasing the number of rental units demanded at the artificially low rents and b) decreasing the number of rental units supplied to the market. You can artificially restrict the amount of rent a landlord can legally charge for a rental unit, but you can’t force developers, builders, and landlords to build or supply more rental housing in the future. And the supply of rental housing in markets with rent control is guaranteed to decline.

If rents are mandated at a price lower than the natural value of that apartment, there is little incentive to build new housing because a developer would not make any profit off of the development. The result is that there is less housing available, especially for those who most need it.

In places where affordable housing is already scarce, rent control has the exact opposite of its intended effect. Perry quotes a recent article in Bloomberg elaborating on why that is.

Price controls actually make the scarcity worse. They increase demand — who wouldn’t want to live in New York City in a $600-a-month apartment? Meanwhile, price ceilings reduce the supply because they decrease the incentive to build, and can make it downright imperative to remove rental housing from the market and turn it to some other use — condos, warehouses, anything that won’t trigger the rent controls.

What’s the solution to the affordable housing issue? It’s pretty simple: build more housing! Where there is a very high demand, builders need to be able to meet it by creating more supply. Unfortunately, in these cities suffering the worst housing crises, city ordinances often prohibit creation of more housing.

Rent control and new building prohibitions are creating more of the problem they allegedly want to solve. That will involve a serious reality check, but one that community leaders need to consider as they look at smart growth.