Americans are increasingly unable to afford housing. For many young people, the “American Dream” seems out of reach. In moments of economic frustration, populists on both the Left and Right rush to identify villains.
Left-wing populists like Zohran Mamdani, Hasan Piker, or Bernie Sanders, blame the very wealthy and cite rising wealth and income inequality as the reason why, for example, home prices have soared. Right-wing populists often blame immigrants, arguing that more people inevitably mean more expensive rents and higher home prices.
What populists on both sides of the aisle refuse to grapple with—whether it’s due to ignorance or the need to feed their click-bait audiences with the usual outcasts to blame—is that excessive government intervention in markets is to blame for rising home prices. There are three reasons why the latter usually occurs.
Housing is, at its core, a supply-and-demand issue. The problem is not simply that too many people want homes. The problem is that government policy has made it far too difficult, slow, and expensive to build them.
Supply, on its end, is restricted due to a myriad of regulatory policies from local and state governments including but not limited to zoning laws, minimum lot sizes, parking mandates, permitting delays, environmental review processes, etc.
Take California for example. The median price for a single-family home in the Bay Area is $1.45 million. That’s almost 4 times the national average. Legislation like the California Environmental Quality Act (CEQA) has been weaponized by activist groups to stall or block new housing projects leading to years of litigation in court until a decision about final approval is made. Such legislation severely reduces housing supply by blocking new projects, taking a toll on home prices.
Second, government intervention in housing markets is ineffective and often feeds into the problem. By limiting the return property owners can earn, rent control discourages investment in rental housing and reduces the incentive to build or maintain units.
That inevitably leads to a supply crunch, with studies suggesting that, in DC, the number of rent-controlled units went down by 14 percent because of rent control. Fewer units on the market, means more competition between prospective tenants for those same units. That pushes rents up.
Lastly, markets, as opposed to politicians, solve shortages because markets reward production. When builders are allowed to build, developers are allowed to respond to demand, and prices are allowed to communicate scarcity, supply can expand. When politicians restrict construction and then try to subsidize demand, they produce the illusion of compassion while worsening the underlying shortage.
For example, New York had an affordability issue in the 1920s, and state lawmakers reacted by exempting newly-constructed residential buildings from local taxation for up to 10 years. Such a decision was highly effective as it increased overall housing stock by roughly 30 percent to 40 percent, therefore stabilizing home prices.
Critics of the laissez-faire approach cite the ever-increasing inequality and market speculation as the culprits behind the affordability issue. They believe that capping rents or providing handouts to people so they’re able to afford homes or rents will alleviate the problem. Proposals halting the purchase of single-family homes from private equity funds have also been touted as solutions to lowering home prices.
What those solutions miss is that the affordability issue is supply rather than demand driven. In other words, if you want home prices to drop, you don’t punish demand, but instead you incentivize supply. And the way to incentivize supply is by making it cheaper and more profitable for construction companies to build.
Populism offers quick, counterproductive “fixes” to complicated policy problems, often making those issues worse than before. In the case of affordability, ranting about the rich or immigrants will not cut it. What will lower prices for everybody, is less government and more markets.
