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Monday, April 8, 2019

A Simple Way to Make Housing More Affordable

Restrictions on housing construction make housing prices rise.

Image Credit: Pxhere

If you want housing to remain affordable, you have to build more of it to accommodate a growing population. But zoning and land-use regulations make it hard to build new housing in many areas.

Cutting Zoning Restrictions Help

Minneapolis recently loosened zoning restrictions, becoming the first major city to end single-family zoning. That way more families can live on a single lot, and each family can spend less on land to pay for their home. Minnesota still has a lot of costly construction requirements, though.

Economists support getting rid of many zoning regulations. As Professor Ilya Somin notes,

The case for cutting back on zoning restrictions unites economists and housing policy experts across the political spectrum. That includes both pro-free market experts and prominent left-liberals such as Nobel Prize-winning economist Paul Krugman…and Jason Furman, Chair of President Obama’s Council of Economic Advisers. In addition to greatly increasing housing costs, zoning also cuts off many poor and lower-middle class Americans from valuable job opportunities, thereby also greatly reducing economic growth.

Restrictions on housing construction have made housing prices rise a lot in California and Oregon. These states place many areas off limits to homebuilders and discourage new housing elsewhere with a maze of complicated permitting and construction requirements.

Rent Control Hinders Progress 

California has more space than the entire nation of Japan, and less than a third of Japan’s population. Japan is very densely populated and poorer than the United States. But even in Japan’s capital Tokyo—the center of the world’s most populous metropolitan area—people are able to afford housing. Why? Fewer zoning restrictions.

As Nolan Gray notes at Market Urbanism:

Japanese zoning is relatively liberal, with few bulk and density controls, limited use segregation, and no regulatory distinction between apartments and single-family homes. Most development in Japan happens “as-of-right,” meaning that securing permits doesn’t require a lengthy review process. Taken as a whole, Japan’s zoning system makes it easy to build walkable, mixed-use neighborhoods, which is why cities like Tokyo are among the most affordable in the developed world.

As the Wall Street Journal notes, although housing has gotten much more expensive in 32 major cities across the globe,

one major city has had stable housing prices as a result of pumping out housing supply to keep up with rising demand. Tokyo is one of the few cities in which supply has kept up with demand, keeping a crisis from developing. But that is due largely to deregulated housing policies that other countries would have a hard time reproducing.

As another article in the Journal notes,

In the past two decades, home prices in some leading North American and European cities have skyrocketed. In Tokyo, however, they’ve flatlined. So why no affordable-housing crisis in Japan? A big factor, experts say, is the country’s relatively deregulated housing policies, which have allowed housing supply to keep up with demand in the 21st century. With no rent controls and fewer restrictions on height and density, Tokyo appears to be a city where the market is under control—where supply is keeping home prices from rising as drastically as they have in many other major world cities.….The Japanese government began relaxing regulations that had restricted supply, allowing taller and denser buildings in Japan’s capital. Private consultants were given permission to issue building permits to speed up construction. “This created something like a free-trade zone in Tokyo,” Mr. Sorensen said.

Allowing more dense housing is key:

Two of Japan’s largest housing construction companies, Daiwa House Industry Co. and Sekisui House Ltd, both say that the easing of land and construction regulations has helped them build in Tokyo. The companies say that deregulation has benefited them particularly in their ability to expand housing units by replacing low-rise residential complexes with much higher ones. “A good environment for housing construction is being created,” says Daiwa House managing executive officer Yoshinori Ariyoshi.

In fairness, Tokyo’s population isn’t growing as fast as many of the world’s other major cities. Japan as a whole has a stagnant population, although Tokyo’s population continues to rise.

Rather than learning from Japan’s example of how to make affordable housing available, Oregon recently imposed rent control on a statewide basis. Rent control neither provides, nor encourages landlords to provide, any new housing. It will result in landlords spending less on maintaining their buildings. It will make housing scarcer in the future by discouraging new construction of rental housing. The Oregon rent-control law does not yet cover recently-constructed buildings. But it could easily be extended to cover new units in the future, wiping out much of their economic value. Investors know that all too well, and housing construction will fall to reflect that risk.

Counterproductive Housing Policy

Owners of housing units will be less likely to rent out apartments at all in the future because of another feature of Oregon’s rent control law. It also “bans no-cause evictions, so any landlord must offer a government-approved excuse for evicting a tenant.” So a landlord may now be forced to continue renting to tenants she finds personally disagreeable, even those living in close proximity to her own family. The law will also effectively make it harder to evict people who harass other tenants.

As the Heritage Foundation notes,

Across Oregon, stringent zoning restrictions, density limitations, and aggressive environmental regulation limit supply of housing while increasing the costs of construction. Rental costs reflect those realities. Capping rent increases does nothing to make housing less costly to build. But it will have the perverse effect of shrinking future supply by deterring new construction and incentivizing landlords to spend less money on upkeep and remodeling. Criticism of rent control as bad economics is hardly limited to landlords or to free-market conservatives. As far back as 1965, Gunnar Myrdal, one of the visionaries behind Sweden’s welfare state, warned, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” Economics professor Assar Lindbeck, Myrdal’s fellow Swede, cautioned in 1972, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” In 1989, communists running Vietnam linked the abject condition of Hanoi’s housing directly to rent control. Then-Foreign Minister Nguyen Co Thach said, “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.”

California also has very counterproductive housing policies that drive up the cost of housing. As the California Policy Center notes,

There are obvious reasons the median home price in California is $544,900, whereas in the United States it is only $220,100. In California, demand exceeds supply. And supply is constrained because of unwarranted environmental laws such as SB 375 that have made it nearly impossible to build housing outside the “urban service boundary.” These laws have made the value of land inside existing urban areas artificially expensive. Very expensive. Other overreaching environmentalist laws such as CEQA have made it nearly impossible to build housing anywhere. Then there are the government fees attendant to construction, along with the ubiquitous and lengthy permitting delays caused by myriad, indifferent bureaucracies with overlapping and often conflicting requirements. There is a separate fee and a separate permit seemingly for everything: planning, building, impact, schools, parks, transportation, capital improvement, housing, etc. Government fees per home in California often are well over $100,000; in the City of Fremont in 2017, they totaled nearly $160,000 on the $850,000 median value of a single family home.

This article is republished with permission from Liberty Unyielding. 

  • Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law.