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The Roots of the Housing Shortage

August 11, 2003

While listening to New York City's CBS News Radio the other day, I was struck by the juxtaposition of two stories, apparently placed together without ironic intent.

The first one was about New York Mayor Michael Bloomberg visiting Staten Island to gripe about the "overdevelopment" of the borough. In his recorded remarks (I quote from memory here), he noted that builders are putting up houses "only fifteen feet wide," and charging $400,000 for them. This price, he asserted, was outlandish. He did not state exactly what price fifteen-foot-wide houses in Staten Island should fetch, but it was clear that Bloomberg knew that it should be less than $400,000.

The very next story was about a group of protesters that had assembled at City Hall. Their gripe was… the lack of affordable housing in the city! And what they sought was for the city government to do something about that lack.

It did not seem to occur to the protestors that a good start in that direction might be for the city to stop getting in the way of those who want to build more housing. There are few things that reduce the price of a good like an increase in its supply. But the very people who decry the lack of "affordable" housing in New York and other places are often the ones who are most agitated about "overdevelopment." While the idea of "a lack of affordable housing" is itself suspicious, as pointed out elsewhere, it is clear that one effect of many government programs is to make housing less affordable than it otherwise might be.

Besides laws designed to halt "overdevelopment," the government reduces the supply of housing and drives up its cost in a number of other ways. Wetlands regulations often require extensive environmental studies before building is allowed to begin, and they completely prevent building on many otherwise viable sites. Licensing requirements restrict the supply of contractors, raising the cost of hiring them. Rent control laws reduce the attractiveness of investing in residential property. Government agencies that insure mortgages, such as Fannie Mae and Freddie Mac, reduce the cost of housing for those who qualify for their programs, since qualifiers can borrow at a lower interest rate with the government insurance than they could without it. But such programs drive up housing costs for everyone else, as those who do not qualify are faced with increased competition in bidding for houses.

It might seem that, with all of the downside to government activities that restrict supply in the housing market, a wily politician should be able to muster a coalition to overturn some of these laws. But the people who would like to buy or rent housing in a city, but cannot currently afford to do so, also cannot vote in city elections. Any people who are able to buy a house or apartment in the city as a result of previous "overdevelopment" immediately acquire an interest in restricting further development. Once they are "in," restrictions on new building increase the value of their property compared to what it would have been, absent the restrictions.

Able workers who are shut out of careers in building trades due to union and licensing restrictions cannot form a lobby as easily as those who already are organized in a union can. Although developers can and do form lobbying groups, they have a public relations problem vis-à-vis environmental lobbies: Developers can easily be portrayed as acting merely out of their selfish interest in profits, while environmentalists forward their proposals out of their altruistic concern for nature. It requires a little thought to realize that developers, in a free market, cannot profit from a project unless it also benefits the people to whom they hope to sell the houses they build. After all, if consumers don't prefer the new housing to all of their previously available alternatives, they won't buy it! (I don't mean to portray developers as saintly people. All too often, many developers have sought to gain from influencing government policy rather than fulfilling the wishes of the consumers.)

The current housing market provides a classic example of a pattern noted by Mises, Rothbard, Ikeda, and others. Every government intervention in the market thwarts the desires of at least some consumers to use their own resources in the fashion they think will benefit them the most. If it did not, there would be no point in intervening, since the market already allows every participant to employ his resources in pursuit of his most desired ends. Interventions are undertaken, at least ostensibly, to achieve some "social" goal different than those pursued by individuals who are acting without a centralized locus of planning.

Because they thwart some people's desire to use the resources they own as they see fit, government interventions always create new frustrations for those people. When price controls are placed on apartments, a shortage of housing appears. Renters must jump through hoops to persuade landlords to rent to them. There is a frantic rush to see any available rentals. When licensing requirements limit the supply of workers practicing a building trade, consumers must put up with innumerable scheduling delays from contractors. When legislation reduces the number of lots upon which one can build in order to prevent "overdevelopment," the price of the still-useful lots soars.

If one does not carefully trace the problems back to their roots in a previous intervention, it is very easy to believe that yet another intervention is just the ticket for rectifying them. If potential renters are having difficulties finding apartments, perhaps the state should build apartments. If there seems to be a shortage of carpenters, maybe a government-subsidized training program is the solution. If building lots seem very expensive, perhaps government credits for housing expenses is the answer.

Politicians, of course, have a motive to encourage such conclusions, since new interventions will further increase their power. Recommending interventionist "solutions" to problems created by previous interventions helps them to portray themselves as active statesmen willing to tackle the "tough issues" and "get something done."

But each new intervention will create new problems in its wake. Subsidized training for carpenters will lure workers into the trade who might have been better suited for other jobs. Subsidizing housing will prompt buyers to consume more of it than they otherwise would, at the expense of items that would have pleased them better in the unhampered market. The only reasonable solution to the vast, interlocking network of market interventions is to go "cold turkey," and let the market work its wonders in supplying all of us with what we desire.


Gene Callahan is author of Economics for Real People. Send him   MAIL, and see his Mises.org  Daily Articles Archive. He delivered the Henry Hazlitt Memorial Lecture at the Austrian Scholars Conference 9, March 13, 2003. Click  HERE to view the online video version of his lecture.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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