Daily Archives: June 17, 2013

An Affordable Housing Parable

Housing and development are such emotional issues that it’s often hard to have a reasonable discussion. So let’s talk about something we all like instead: riding bikes.

Suppose that everybody who wants to ride a bike already owns one. For whatever reason, the city has enacted rules that make the production of new bikes very difficult, but since all would-be riders already have a bike no one notices. Now, suppose the city becomes such a great place to bike that more and more people decide they want to ride. At first, the new riders can get cheap bikes, from existing riders fixing up and selling old bikes and the limited supply of new bikes. However, as more and more people decide they want to ride, the price of a bike will start to rise quickly.

The rapid increase in the cost of bikes leads to a public outcry – low-income people can no longer afford a bike. And so affordable biking advocates organize and insist that (a) a bike that was affordable at the time of previous sale cannot be sold now for more than the previous purchase price plus inflation and (b) a portion of the new bikes that are produced must be reserved for low-income people. Also, whenever someone proposes to produce new bikes, they insist on reducing the number and quality of bikes produced, because producing large numbers of high-quality bikes will drive up the price of all bikes.

Despite the enactment of these policies, things keep getting worse. The number of cheap bikes reserved by the policies is not enough to meet demand, so low-income people are forced to enter a lottery to win one of those bikes. People who win a cheap bike are extremely reluctant to ever give it up, even if it’s not the best bike for them. Low-income people who do not win cheap bikes must either pay market prices for one of the expensive bikes or move to another city where bikes are in greater supply. Worse still, because some bikes are reserved for the cheap bike lottery, the prices for the bikes not in the lottery are driven up more. So everyone who does not win the cheap bike lottery, from the poor to the wealthy, pays more for bikes. In addition, the high prices commanded by bikes results in every available bike being pressed into use – even unsafe rust heaps that would normally be taken off the market and recycled.

The response of the biking advocates is to reserve an even greater number of bikes for the lottery, which because of the further price increases now extends to middle-income people, require an even greater number of new bikes to be reserved for low-income people, and fiercely oppose the recycling of old bikes. The end game is obvious: eventually, all bikes will either be in the lottery or so expensive that only the very wealthy can afford them.

Now that probably sounds like a pretty insane system for trying to manage the increase in demand for bikes. Well, yeah. But it’s how the demand for housing is managed in just about every major American city. And if the solution in the bike allegory is painfully obvious – build more bikes – the solution to unaffordable housing in American cities is equally obvious – build more houses.

Look at any major, prosperous US city, and you will see all of the perverse outcomes of the bike metaphor in action:

bedstuy

Affordable housing advocates began organizing on a small scale, and the policies they developed were logical from the perspective of defending oneself against change. However, from a macroeconomic perspective, these policies were probably doomed to fail from the start. There is not a single US city where housing has grown more affordable as a result of these policies being enacted. More stringent versions of these policies are also doomed to fail from the same inherent contradictions. It is time to admit that our affordable housing policy does not work and try something else.

Every problem in the bike metaphor could be largely resolved by allowing the production of more bikes, and I think most of our housing problems could be largely resolved by allowing the production of more housing. It would be hard for any policy to not be an improvement over current outcomes.

Of course, allowing more bicycle or housing production by the private sector isn’t the only possible solution. Other equilibriums would include:

  • Reduce the quality of biking in the city by making infrastructure worse. That will reduce the desire to bike and therefore reduce bike prices. Again, this sounds ridiculous when posed as a solution for demand for biking, but it is not uncommon to see people argue against infrastructure improvements in their neighborhoods for this reason. The opposite extreme exists in places like Detroit, where the infrastructure and economy are so bad that despite the destruction of housing units, the city remains very affordable.
  • Have the prices of all housing units set by the government, and have a lottery for all units. Anyone who doesn’t win a unit has to leave the city. This is the equilibrium that current policy is trending towards.
  • Start a government housing construction program to increase supply. Personally I see no reason to do this if the private sector is willing to build housing. We don’t need the government to start producing bikes to meet the demand for cycling; existing bike manufacturers would be happy to increase output.

The usual economic argument against reducing control on private development is that new construction causes all prices to rise, but that doesn’t make sense. There are only so many people on the planet, and not all of them want to live in Los Angeles. If we keep building houses, at some point, they will become more affordable. Fortunately for us, the private sector is willing to build housing, just like it is willing to build bikes. All the government has to do is get out of the way.