Affordable Housing and Government Regulation

by Mark Dempsey

Hardly a day passes without some politician or concerned citizen writing an editorial or letter to the editor to say California can fix its affordable housing problem by deregulating. One contractor recently wrote to say “Every level of government is working to make housing as expensive as possible…”

And California regulations do sometimes require additional expenses, like steel straps on wood frames for earthquake resistance, but would we really rather build homes that collapse in earthquakes, even if the occupants are poor? What if government regulation is not really the biggest obstacle to affordability? After all, steel straps aren’t that expensive. Fiddling with regulations may actually be like rearranging the deck chairs on the Titanic.

The larger truth: market conditions for real estate are so heavily influenced by government policies that no housing market would exist without them. The 30-year mortgage is a government invention. Building codes often have their roots in New Deal property standards.

That’s true not just in the U.S., and most of the world’s governments subsidize housing to make it affordable. Putting an end to those subsidies in the U.S. has been a generations-long project. Nixon put a moratorium on building federally-funded affordable housing. As he was cutting taxes on the wealthy, Reagan also cut HUD’s affordable housing budget by 75%. This has been a bipartisan effort, too. The Clinton administration cut federal public housing expenditures by $400 million annually, nearly the same amount by which the federal prison budget increased.

Perhaps the policy change most damaging to affordability occurred when Reagan’s ’86 tax law removed a subsidy for multifamily housing, retroactively removing limited partnerships’ deduction for depreciation. As a consequence, scores of limited partnerships with apartments failed because their economic viability depended on that depreciation write-off.

California’s Proposition 13 also influences affordability. Lower taxes on real estate means that speculators can keep vacant land off the market without a big tax bill, as they wait for market peaks. This is one reason the Sacramento region has 20 years of unbuilt infill, and land speculation is rampant.

How much does land speculation cost homeowners? Rethinking the Economics of Land and Housing (by Ryan-Collins, Lloyd and Macfarlane), concludes that 80% of the recent decades’ increase in home prices comes from increases in land prices. So higher land taxes would actually discourage price gouging!

Finally, the consensus among the deregulators is that rent control would be a disincentive for affordable housing builders, but not even that is true. After he privatized trains and government insurance programs, Mussolini eliminated rent control…leading to an increase in Italian homelessness. J.W. Mason notes that  “In economists’ terms, the supply of housing … is inelastic – it doesn’t respond very much to changes in price….there is a great deal of space to regulate the rents on existing housing without affecting the decision to build or not build.

“The bottom line is that rents in the everyday sense are often also economic rents … They come from a kind of monopoly, not from contributing real resources to production of housing. And one thing that almost all economists agree on is that removing economic rents does not have costs in terms of reduced output or efficiency.”

So let’s all take these dire warnings about government meddling adversely impacting affordability with at least a grain, if not a block, of salt.

Article originally appeared here.

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Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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  1. Richard McCann

    I was with Dempsey up to the point where he tried to defend rent control. Contrary to his assertion, rent control more than just about any housing policy has been shown to be counterproductive. (I’ve posted links to various studies over the last few years.) It both limits new housing development (as developers anticipate lower future revenues) and benefits higher (not lower) income households (as shown in studies of both SF and Cambridge).

    1. Ron Glick

      My problem with this article is that on one side its saying we need more regulation but more regulation is at odds with affordability. California recently enacted mandated solar but I wonder how many advocates actually have it? If the advocates of these kinds of zero net energy proposals led by example it would give them more credibility.

      Also notice the constant arguments for high density but this is top down planning that should be discredited by the continued popularity of single family homes.

      The one place he is correct is that the conservative arguments, remember Bill Clinton had a Republican majority congress for 6 of his 8 years, resulting in the defunding of public housing has greatly contributed to lack of affordability and housing insecurity.

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