A Better Way to Create Affordable Housing

Affordable housing is one of those great political phrases that just about every politician seems to believe in. It’s a cause that crosses political lines, and has justified a diverse set of policies ranging from the mortgage interest tax deduction and government-insured home loans to rent ceilings and government-owned housing units. But in spite of all the political efforts directed at this problem, it’s clear the problem endures.

To use my own city of Portland as an example, our mayor recently declared a state of emergency over homelessness in the city and committed additional funding to the matter. Meanwhile, we learned last week from the financial press that home prices were up 5.7% in January 2016, relative to prices in January 2015, and Portland actually led the pack at 11.8%. Of course, the financial markets celebrate this fact–as it’s taken as a sign of economic strength if house prices rise. But if you’re a renter, your take may be understandably less rosy. Indeed, a recent study indicates that Portland’s rent rose at the sixth-fastest rate in the US over the past five years, fully 20% over that time-span. It’s entirely likely that some people that were already in an unstable economic position fell into homelessness in the face of such increases.

But while politicians agree that the problem exists, the usual solutions offered are less compelling. The mayor has announced plans to spend $67M for the government to subsidize housing. And surely, this will help some people. However, there’s good reason to think this is addressing a symptom rather than a cause. If prices are too high, obviously giving people more money may help some afford it. But it’s worth asking the question: Why are they so high in the first place?

According to a new article from Emily Washington at the Foundation for Economic Education, one major reason for this may be that our building codes have outlawed the lowest quality forms of housing. On its face, this probably sounds like a good thing. Certainly, no one wants to condemn low-income people to living in the horrifying tenement slums we learn about growing up. But we should be careful about thinking of low-quality in a pejorative way. The fact is that the existence of lower quality products is a great thing.

To see why, it’s useful to consider a simple example. Specifically, we’ll focus on food and grocery stores. There are several options to choose from in this industry, and each has its own price point. At the high-end, you have stores like Whole Foods that offer mostly organic and natural products. Meanwhile, at the bottom, you have places like Walmart or WinCo, that offer primarily conventionally grown and mass-produced products at far lower prices. It is not relevant whether natural / organic foods really are higher quality for the sake of this example, but it is relevant that they currently tend to cost more money to produce. This is why they will tend to be far more expensive.

Now to extend the example, imagine a law–the Organic Only act–was passed that declared only organic foods were suitable for consumption. Without a doubt, proponents of such a law would declare this to be a victory for public health and social progress. They might also celebrate the fact that lower-income people would no longer be confined to consume the low-quality, pesticide-ridden food that dominated Walmart’s shelves. The rich, of course, could already afford organic products if they preferred them. Thus, the Organic Only law would surely be a victory for the little guy.

But back at the grocery stores, we’d discover the victory was a hollow one–at least insofar as it was aimed at helping the poor have access to better quality food. Prices would go up immediately, as the most efficient means of production just became illegal, reducing the supply in the market. Over time, the agricultural industry might become more adept at organic farming and gain some economies of scale. But it’s likely that prices would remain considerably higher than they would be in the absence of the Organic Only law.

This is analogous to the situation in housing. Instead of the Organic Only law, however, the culprit is city codes. In many cities, it used to be common to find housing that basically amounted to adult dormitories–small private bedrooms with shared bathrooms and kitchens. Other arrangements included subdividing homes. Neither may sound ideal, but they offered housing at a cost that low-income people could afford. Unfortunately, these arrangements were broadly made illegal–cutting off the cheapest options available. The predictable result is a lack of affordable housing, and a desire of politicians to do something about it. But they fail to realize that the government helped create the problem it now seeks to fix.

The situation is a reminder that changing the law cannot will a new reality into existence. Banning low-quality housing options doesn’t mean low-income people will now magically gain access to higher quality options. On the contrary, it may mean they lose access entirely. Emily Washington’s summary captures it perfectly:

Singling out housing as a good that requires special standards and assistance may soothe urban reformers’ consciences, but it makes low-income people worse off by eliminating choices that would otherwise be available to them.

Indeed.

Check out the rest of the article here:

Cities Need Low-Quality Housing

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