How Not to Address the Housing Affordability Crisis

How Not to Address the Housing Affordability Crisis

Daniel Shoag of the Harvard Kennedy School has an excellent review of the literature on the housing affordability crisis and a number of reforms to increase housing supply across the country, published by Brookings Institution’s Hamilton Project:

Regulatory constraints on housing production have shut millions of Americans out of the country’s most productive labor markets. Historically, Americans have moved to the parts of the country that offered the highest wages and most economic opportunity. This tendency for Americans to move has changed in recent decades, as changes in legal land-use restrictions have limited housing construction in America’s richest locations. These restrictions have created limits on housing supply and have led to rapidly rising prices that make high-wage places unaffordable to less-educated workers. As a result, workers without a college education are now moving away from the places that offer them the highest wages and their children the best later-life outcomes.

In this proposal, I discuss strategies that policymakers at various levels of government can use to combat this relatively new problem, including case studies of cities that have successfully expanded access at the local level. This challenge differs from the more-traditional problem of making housing affordable for low-income households. Combating it requires new political coalitions and a sharper focus on the barriers, both political and legal, to development.

I won’t go through all of the findings of his review, as they are likely familiar to regular readers of Rent Check (though I encourage everyone to read the paper in full). Instead, I’d like to focus on two well-intended policies that have made the affordability crisis worse mentioned in the paper.

First, is inclusionary zoning (IZ)–policies that require new developments to set aside a certain number of units for below-market rate tenants. Shoag finds that IZ:

lowers the return on development investments. This discourages developers from building multifamily units by making it relatively attractive for them to build single-family or less-dense units without this requirement. Inclusionary zoning also intensifies incentives for neighborhoods to block up-zoning (i.e., loosening restrictions to allow for increased density) to discourage poorer residents from moving nearby. Evidence shows that the benefits of inclusionary zoning are very mixed….Despite the popularity of these programs, my judgement is that these policies are unlikely to make a real dent in the supply problem, even for low-income households.

Shoag did find examples of IZ improving the affordability of housing markets in some cases, but much like rent control (another non-solution solution Shoag finds), by capping the return on investment of developers it decreases the incentive for development.

Next, and perhaps more important, is the problem with demand-side subsidies to renters, such as HUD housing vouchers or a renter’s tax credit, as recently proposed by Kamala Harris:

One major class of proposals to address the problem of rising house prices in rich areas has been subsidies to housing demand. HUD vouchers are one example of such subsidies. They have served as an important part of the safety net, but property owners capture a significant share of the benefits. This problem seems especially severe in markets with inelastic supply. It therefore seems unlikely that further demand-side subsidies, such as the recent proposal to offer tax credits for rent-burdened Americans, can solve this specific problem. Similarly, interventions in the credit markets such as expanding Federal Housing Administration loans are likely to benefit the existing owners—particularly in supply-constrained markets—much more than they are to expand access. There is evidence that subsidized construction may simply crowd out market development, given existing land-use laws. [Citations excluded]

Notice that Shaog doesn’t argue that such subsidies can’t work. Rather, his argument is that such subsidies can only be made to work in housing markets with elastic supply growth. It’s also worth noting that most of the benefits of such subsidies are captured by landlords. Rather than subsidizing new housing, all these policies do is subsidize NIMBYism.

To address the housing affordability crisis, it is just as important to acknowledge what doesn’t work (or will make matters worse) as it is to find solutions that do.

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By |2019-03-14T10:42:12+00:00March 14th, 2019|Blog, Land Use Regulation|