How “inclusionary” are market-rate rentals?

In metropolitan Baltimore, a family of four making $73,000 in 2024 qualifies for 60% AMI affordable housing, where it would pay $1,825 per month for rent, utilities included. A third of new market-rate three-bedroom units in Baltimore are rented at around that level.
Baltimore is typical, as it turns out. In most U.S. metro areas, a substantial share of rentals constructed since 2010 were, in 2021 and 2022, affordable at 60% of AMI… You can also check out maps showing rentals affordable at 80% and 120% of AMI.

The ACS data don’t let me distinguish market-rate from subsidized rentals, so these include LIHTC and other subsidized rentals. Those, however, can’t explain away the core result, and the data don’t show the bifurcated market that some people imagine, with a huge gap between market and deed-restricted rents.

The post Market Affordable appeared first on Market Urbanism.

EDITED 3/3: I’ve edited the post to take into account pushback from the authors I’ve criticized. Edits are in boldface.

The touchstone of YIMBYism is the sensible idea that housing markets follow the normal patterns of supply and demand.

It’s true. But it’s a deuce to measure, because housing markets don’t have sharp boundaries – they bleed across distance, tenure, and unit type. Suppose 200 new one-bedroom apartments open up in Bushwick. Do those mostly steal business from similar buildings in their immediate neighborhood? Or do they compete with all types of housing throughout the tri-state area? Or something in between?

Further complicating the story, new investment in a neighborhood can have “amenity” effects (positive or negative). These don’t work like supply and demand, but in any specific case it’s hard to distinguish the amenity effect from the supply/demand effect.

Neighborhood effects

A few years ago, most economists and urbanists (myself included) believed

1. At the metro-area level, a broad increase in supply will lower rents.
2. At the neighborhood level, amenity effects dominate.

That is, we thought the [edited 3/20] West Palm Bushwick apartments had a mostly-regional supply effect but an entirely local amenity effect. The evidence for this included many gentrification anecdotes: new “luxury” apartment buildings were accompanied by rising rents.

Enter Xiaodi (and friends)

Around 2017, a few economists started testing these beliefs. Could there be local supply effects after all? And do new buildings accelerate or decelerate gentrification? To my surprise, Li and others found that yes, there do appear to be hyperlocal effects from supply and demand.

In Li’s case, identification is based on timing: tall New York buildings take several years to build, and the unpredictability of the end date allows us to treat the year when new condos become available as essentially random (whereas the application date is not random). Li finds that new housing lowers rent within a 500-foot radius, but doesn’t have a statistically detectable in the 500 to 1,000 foot “donut” beyond that.

What Li’s paper doesn’t ask or attempt to answer is a different, broader question, what is the citywide effect of new supply on rent?

Cards on the table, I remain skeptical that Li is interpreting her core finding correctly (she can’t fully rule out disamenities). But Holleran and Schragger aren’t expressing skepticism – they’re misinterpreting her answer to one question as the answer to a very different question.

Clearing up a little misunderstanding

I expect that randos on Twitter (don’t harass them) are going to misapply Li’s work, assuming that the hyperlocal effect – a 10 percent increase in housing supply within 500′ decrease rent by 1 percent – represents the entire supply effect. But when housing scholars are taking it out of context, we need a reminder.

Law professor Richard Schragger cites Li’s paper in footnote 177 here, using it as evidence that new housing supply has “very limited” effects on “overall rents” in “specific locations”:

Some studies indicate a decrease in overall rents from increased market-rate housing, [176] but there are others that indicate the opposite or very limited effects overall. [177]

Schragger, The Perils of Land Use Deregulation, U. Pa. L. Rev. (p. 164)

Sociologist Max Holleran misunderstands it in a slightly different way:

One New York City study showed that every 10 percent increase in market-rate housing in a given neighborhood would result in a 1-percent reduction in rental prices: a supply effect but notone that gives much optimism to public policy officials tasked with solving the affordability crisis.

Holleran, Yes to the City (p. 13)

Both authors appear to clearly think that Li’s estimate is evidence about the overall effectiveness of housing supply in lowering rent. But that’s simply not the question she’s asking; her paper offers no evidence one way or the other on what the market-wide rent effect of a market-wide 10% increase in housing supply would be. Both authors identify Li’s study as a localized one, but then interpret her findings pessimistically. That’s the reverse: this study (along with those of Mast, Pennington, and others) made economists more optimistic about supply effects.

Li’s study doesn’t tell us what would happen if new buildings were simultaneously completed every 1,000 ft through New York City. It instead asks what happens when one – literally one – building is completed.

When Schragger returns to the question Li is actually answering
a few paragraphs later (“Places with a relatively low cost of living may lose that attribute once enough wealthier people move in”), he doesn’t cite her work.

The paper you’re looking for

What papers should they have cited? My go-to estimate is
Albouy, Ehrlich, and Liu‘s: a 3 percent increase in housing stock lowers rent by 2 percent. Older estimates were often in the 1:1 range, which is more optimistic about supply. I dug into this in a recent blog post here, highlighting that broad affordability and unit-specific affordability usually come from totally different channels:

I confronted the hard truth that supply changes need to be very large to make a real dent in prices. If, as Albouy, Ehrlich, and Liu estimate, it takes a 3 percent increase in the housing stock to bring prices down 2 percent, then a major metropolitan area needs a massive increase in housing to make a real dent in rent.

Can we get there faster with composition effects? Let’s do a quick back of the envelope. First, assume population and housing stock would grow 10% each at baseline, with no resulting change in price.

–> Supply only approach: we add 40% to the housing stock without changing the mix of housing types. Result: 20% affordability gains.

–> Composition-only approach: we add 10% to the housing stock, but with the average price just 50% as high as the norm. Result: 5% affordability gains from lowering average price.

–> Mixed approach: we add 25% to the housing stock, with the average prices 75% as high as the norm. Result: 15% affordability gain (10% from supply, 5% from lowering average price).

How realistic are any of these scenarios? I’m not sure. But my takeaway is that supply remains the primary avenue for broad-based affordability gains. But the “you get what you pay for” and “only pay for what you want” channels are far more important for the affordability of a particular new housing unit.

Salim Furth, Is affordability just, “You get what you pay for”? Market Urbanism

There are questions worth asking about the impact of broad-based housing supply, and unresolved questions in the hyperlocal housing supply literature, but they’re different questions with presumably different answers.

The post Xiaodi Li, Misunderstood appeared first on Market Urbanism.

The most famous example of this argument is from Ian Mulheirn. He argues that the collapse in the mortgage interest rate since the 1990s, as well as growing demand from international investors, has made it easier to purchase property causing a rise in demand. To him, this is the biggest reason for the crisis.

However, simple price theory tells us that prices only rise when supply grows less than that rise in demand. Whilst lower interest rates have made it more affordable to buy houses, if supply were to rise simultaneously by the same amount then we should expect prices to remain stagnant. Indeed, we can observe this in history – after the Great Depression, Great Britain reduced interest rates massively. However, rather than causing a boom in prices they remained stagnant, due to an increase in housebuilding. Moreover, this is unhelpful from a policy perspective given increasing interest rates would risk higher unemployment. The argument is therefore unhelpful at best, and insufficient at worse in explaining why rents aren’t increasing as quickly as prices.

A recent paper published by the Centre for Economic Performance at the LSE has sought a better explanation. Here, Christian Hilber and Andreas Mense argue that the price to rent ratio only increases with a demand shock where supply is sufficiently constrained. Indeed, they find that in Greater London, one of the most toxic areas to house building in the world, local labour demand shocks account for 63% of the increase in the price to rent ratio. So why do supply constraints affect house prices so much more than rental prices in superstar cities?

Since rental markets depend largely on short-term demand and supply, then the elasticity of this supply curve will determine the impacts of a demand shock on prices. This means that markets will experience higher rent inflation after a demand shock where housing supply is less elastic in the short run.

What they find is that short-run supply is a lot less elastic than the long run (which is a determinant of prices). This is because demand shocks lead investors to update their expectations of risk premiums and growth rates. Given rental markets will be determined more by the short-run than house purchasing markets this will have the effect of the impacts of a demand shock being less substantial.

This can be explained through the diagram below:

The blue line represents location A and the red line location B. In location A supply (an area with less price constraints) is a lot more elastic. This is because there are less planning constraints to building more housing. The effect of this is that where housing rents increase in the short run the market can react leading to rents falling from RA1 to E(RA2).

However, in the less elastic market (representing a city with more planning constraints) supply does not react as substantially. This results in the demand shock (D1 to E(D2)) having a significant effect on prices rising from RB1 to E(RB2).

So, prices rising faster than rents, as Ian Mulheirn holds, doesn’t tell us that supply constraints are an improper diagnosis for the cause of our housing woes. Instead, it is the opposite. The main reason why this discrepancy exists is down to supply constraints.

Therefore, challenges to the conventional wisdom that higher house prices are down to supply constraints made through appeals to the price-rent ratio should be ignored. Instead, we should focus on increasing supply as a vehicle to help bring down both rental and buying costs of housing.

The post Why rents aren’t keeping up with house prices appeared first on Market Urbanism.

Two major themes permeate the book: (1) the ways in which government has consistently intervened in the housing and land markets and (2) how these interventions were designed to pick winners and losers. The federal policy of underwriting loans for specific kinds of development (single family detached housing) and for specific people (whites) is an example that the author explores in depth. And after reading his account, I can safely say that I have a far better understanding of how nearly a century’s worth of policy interference has distorted markets and doled out privilege and oppression in equal measure.

Throughout the book, Rothstein brings in the stories of specific people and places to add depth to his account. This both keeps things interesting and serves to humanize the story in a way that many tracts on policy fail to do. When he’s describing the lives of black Americans who were forced into soul crushing commutes because they were legally prohibited from living near their jobs, or families who had their houses firebombed for daring to move into a segregated neighborhood while police stood on their front lawns and watched…you remember that policy matters because it affects real people. And that real people suffered terrible wrongs for no other reason than the accident of their birth.

Again, if you care about US housing policy, you must read this book. It’s impossible to understand where we are today without retracing the steps we took to get here and it’s been some time since I’ve read anything that accomplishes this so well as Rothstein’s The Color of Law.

The post The Color of Law: A Forgotten History of How Our Government Segregated America appeared first on Market Urbanism.

One common argument against new urban housing runs as follows: “If we build new housing, it will all be bought up by rich investors who will sit on it.  So new supply doesn’t restrain housing costs.”  This argument (at least as I have phrased it) strikes me as absurd.  Here’s why: for the argument to justify restraining supply, the argument presupposes that if you build 100 new condos/houses/apartments, every single one of them will be bought by an investor, and every single investor will irrationally choose to sit on the unit rather than renting it out.   I can’t prove this is wrong, but it seems really hard to believe.*

Even leaving aside the logical weirdness of the argument, it seems to have a questionable factual basis.

If there was really a wave of nonresident investors in expensive cities, we might find (1) that the most expensive markets had the highest housing vacancy rates and (2) that these vacancy rates have been rising as housing costs rose.  But Census data suggests otherwise.

Here’s some data: (all for central cities, not metros)

By and large, the expensive cities have lower vacancy rates- exactly what you would expect in a free market.  The only exception is Manhattan.  But it seems to me that if pied-a-terres led to higher rents, Manhattan’s empty-house rate would have climbed as rents did- which does not seem to have been the case.

The only way to save the “empty house” theory is to suggest that expensive cities’ empty houses are different from everyone else’s – that is, they are especially likely to be prime properties held by investors, while Chicago’s empty houses are more likely to be rotting-out houses in tough neighborhoods.  But I do not know of any way of proving or disproving such a theory.

*I note, however, that there is a much more reasonable version of the argument- that even though new supply does some good because some people buy the housing units and live in them, the supply would do even more good if cities did something to discourage investment by nonresidents.  This argument would not justify restraining supply, but might justify policies to discourage investment by nonresidents.   I am not going to address such policies in this blog post.

The post The “Empty House” Theory appeared first on Market Urbanism.

It seems to me that this argument, if applied with even a minimal degree of consistency, leads to absurd results.  For example, suppose that Grandma has a spare room in her house, and instead of renting it on Airbnb she allows the room to be unused.  Should Grandma be forced to rent out the room?  Of course not.

A home-sharing critic might argue that an unused room is different from a room that is likely to be rented out to a long-term tenant.  Indeed it is- but in fact, Grandma’s failure to rent the room to anyone is more socially harmful than her renting the room on Airbnb.  In the latter situation, a traveler benefits (from a cheaper rate than a hotel, or at least for a different kind of experience) and Grandma benefits by getting money from the traveler.  By contrast, in the former situation, no one benefits.

It could be argued that Grandma’s rights should be unimpeded, but that regulation should be targeted towards the amateur hotelier who seeks to rent out an entire building all-year round, rather than using the building for more traditional tenants. Even here, the argument based on housing scarcity leads to absurd results.  Suppose the evil landlord Snidely Whiplash decides, instead of renting out his building on Airbnb, to use the building for a vacation house one day a year and spend the rest of the year in Tahiti.  I doubt anyone would support a government regulation forcing Whiplash to rent out the building.  But if he uses the house one day a year, the impact on housing markets is worse than if he had rented out the house on Airbnb.  In the former situation, no one benefits- while in the Airbnb situation, at least short-term tenants benefit.

And if turning long-term rentals into short-term rentals is socially harmful, isn’t it even more harmful to prevent those long-term rentals from being built in the first place?  Yet government does exactly that through zoning codes- often at the behest of neighborhood homeowners.

The post Home-Sharing and Housing Supply appeared first on Market Urbanism.

In the last two years, the the cost of housing in San Francisco has increased 47% and shows no signs of stopping. Longtime residents find themselves priced out of town, the most vulnerable of whom end up as far away as Stockton.

Some blame techie transplants. After all, every new arrival drives up the rent that much more. And many tech workers command wages that are well above the non-tech average. But labelling the problem a zero sum class struggle is both inaccurate and unproductive. The real problem is an emasculated housing market unable to absorb the new arrivals without shedding older residents. The only solution is to take supply off its leash and finally let it chase after demand.

Strangling Supply

From 2010 to 2013, San Francisco’s population increased by 32,000 residents. For the same period of time, the city’s housing stock increased by roughly 4,500 units. Why isn’t growth in housing keeping pace with growth in population? It’s not allowed to.

San Francisco uses what’s known as discretionary permitting. Even if a project meets all the relevant land use regulations, the Permitting Department can mandate modifications “in the public interest”.  There’s also a six month review process during which neighbors can contest the permit based on an entitlement or environmental concern. Neighbors can also file a CEQA lawsuit in state court or even put a project on the ballot for an up or down vote. This process is heavily weighted against new construction. It limits how quickly the housing stock can grow. And as a result, when demand skyrockets so do prices.

To remedy this, San Francisco should move from discretionary to as-of-right permitting. In an as-of-right system, it’s much more difficult to stop construction. As long as a project meets existing land use requirements, city planners have to issue a permit. And although neighbors can sue based on nuisance, they don’t have any input in the actual permitting process. As-of-right permitting would go a long way toward defanging NIMBYs and overzealous planners.

Yellow equals a height limit of 40 feet or less than 5 stories. Credit Mike Schiraldi

But even if San Francisco opened up the permitting floodgates, height limits, floor-to-area ratios, zoning designations, and minimum parcel sizes all prevent land from being put to its best use. Land use restrictions like these can increase the price of housing by as much as 140% over construction costs. Relaxing–if not abolishing–these types of restrictions would be hugely beneficial.

But for as much as regulatory reform would help, there’s another way of encouraging supply to catch up with demand. And, interestingly enough, it involves raising taxes.

Tax the Land

The more you tax something, the less of that something society produces. Raise taxes on income and you discourage labor. Raise taxes on capital and you discourage investment. Raise taxes on property and the same logic applies; the higher the tax rates the greater the burden on new construction. But property taxes aren’t just a tax on buildings, they’re a tax on the land underneath as well. Separate the two in favor of taxing land alone, and construction is not only unburdened, it’s encouraged.

A pure land tax would amount to fixed overhead for each assessment period. This would encourage landlords to use their holdings as intensely as the market would bear. Holding a valuable parcel vacant or underused would become prohibitively expensive.

In San Francisco, where land is incredibly valuable, a land tax would encourage denser development. Credit Ascher, Kate. (2011).

There are a few different proposals for implementing land taxation. The most aggressive approach calls for a 100% fee on land values and the abolition of all other taxes. A slightly more moderate proposal favors an 80% land tax to allow for some margin of error in assessment. The most realistic plan would be to retire San Francisco’s property tax in favor of a land tax and make the change revenue neutral. Considering the city’s property tax rate is barely over 1%, a revenue neutral land tax probably wouldn’t deliver the sun, the stars, and the moon like it would at much higher levels. That said, it would still be an improvement over the existing property tax.

Fix the Market, Not the Price

Neither rent control nor inclusionary zoning will fix the housing crisis. Both amount to price controls. Both drive up the price of market rate construction. Both create a gap between subsidized and unsubsidized housing. And as long as San Francisco can’t set its own immigration policy, there will never be enough subsidized housing to go around. It’s simply not a scalable solution. But that doesn’t mean there’s no room for a safety net.

Housing vouchers are like food stamps for….well, housing. They put resources directly in the hands of those who need them while avoiding the negative side effects of price fixing. It’s welfare that doesn’t try to mandate a price, but instead ensure that the least well off can pay whatever that price might be.

Funding via a land tax would tie the amount of revenue available for vouchers to the state of the housing market. When housing costs increase, it’s not the buildings themselves that are becoming more expensive, it’s the land that they’re sitting on. Houses aren’t wine, they don’t typically improve with age. The actual ground they sit on, however, can become more valuable if more people want to move into a neighborhood. If a sudden surge in demand sends land prices through the roof, a land tax would ensure that funding for vouchers would increase as well.

Funding through a land tax would also prevent vouchers from becoming a subsidy for landowners. Pumping other sources of revenue into housing might simply make the market more competitive and allow landlords to charge higher rents. A land tax would limit this by moving resources from landlords on one end of the market to tenants on the other end without increasing the total amount of dollars chasing housing. Regulatory reform would also limit any price increases from a voucher system since an increase in demand would better stimulate an increase in supply. The extra supply would then put downward pressure on prices.

Slowing down–let alone turning back–the rising cost of housing will require a massive amount of new construction. Relaxing land use rules will clear the path. Changing the tax code will hurry things along. And rethinking the social safety net will ensure that no one gets left behind.

The post How to Fix San Francisco’s Housing Market appeared first on Market Urbanism.

If you haven’t read the entire series, you can catch up with these links:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict

Conclusion

Rent control is not just a simple price control setting the price at which willing renters and landlords are permitted to do business, it is much worse.  It is a coercive act that gives landlords no legal option, but to rent to a tenant against his will, often at a financial loss.  Rent control adds a non-voluntary burden to landlords which deepens over time because landlords do not have the option to rent to a tenant at below market rates. 

Not only does rent control cause huge distortions in the housing market, but the burdens fall disproportionately on the poor and underprivileged people it was intended to benefit. Although particular people are able to live with the comfort of low rent payments, even those renters will see their living conditions deteriorate as landlords neglect repairs and maintenance. As the situation gets worse, middle class residents are able to move away, leaving behind the poorest residents who have become reliant on the reduced rent.

In effect, rent control grants property rights to renters, that originally belonged to the original property owners. Rent control becomes a redistribution of wealth to rent control tenants away from apartment owners, market apartment renters, and newcomers to the area. Nonetheless, over time the quality of life decreases for all residents of a city where rent control is imposed.

Solutions

So, it wouldn’t be very productive for me to rant about the problems rent control creates, if I didn’t discuss solutions to the problems. Cities can flat out abolish rent control, like California’s Proposition 98, phase it out through vacancy decontrol, or use other methods to end rent control. However, ending rent control, without ending other burdensome policies, doesn’t solve the problems of limited housing options, particularly for low income people.

Abolition

Abolishing rent control overnight would bring many market rate units onto the market at once, and would greatly reduce prices for market units. However, it would force many poor residents to move all at once and would cause a shock to the overall rental market. This would correct itself over time if proper action were taken by municipalities to allow additional supply to the market.

Most importantly, developers need to be allow to bring housing supply to market. Many of the places that have the strictest rent controls are also cities that have very restrictive zoning. As new development comes to market, prices will ease on the previously regulated apartments. In fact, I would argue that development restrictions should be eliminated several years before rent control is fully abolished, in order to give developers time to bring sufficient supply to the market in preparation of full decontrol.

Vacancy Decontrol

Vacancy decontrol is a more moderate method that has been used by many cities to phase out rent control or lessen the scope of rent control. Vacancy decontrol usually means that rent controls are enforced in apartments only until the tenant leaves. At the time a tenant leaves, the landlord is permitted to return the unit to market rates. California’s Proposition 98 is, in effect, vacancy decontrol where current tenants will not be effected as long as they stay in their current apartment.

Vacancy decontrol is typically a compromise between advocates of rent control and apartment owners. While it is preferable over fully-regulated rent control, there are serious drawbacks. The biggest drawback is that it increases the incentive to hoard. When a tenant knows that a unit will be deregulated when he moves out, he will try to stay as long as he can to maintain the benefits. Tenants may have family members stay there or maintain a second residence to ensure he will not loose the benefits of rent control. As a result, controlled units are likely to stay occupied by current residents for a long time, before being let back into the market.

Unfortunately, vacancy decontrol also incentivizes landlords to try to evict tenants in order to deregulate their apartments. There have been many horror stories of landlords harassing tenants, allowing horrible living conditions to prevail, and invading the privacy of tenants as ways of encouraging tenants to move out.

Rent Control and Property Rights

What if we look at rent control as an appropriation of property rights from the landlord to the tenant? A landlord has certain limited rights, while the tenant has extensive rights to the apartment granted through rent control. Since this appropriation typically happened many years ago, one could argue the apartment is more the property of the tenant than the landlord under rent-control policy.

If one accepts this point-of-view, one way to end rent control is to force a sale of the complete property rights either from the owner to the tenant or from the tenant to the owner. The tenant would be forced to offer a price to the landlord to purchase the remaining property rights of the apartment. If the landlord accepts the offer price the unit will be sold to the tenant at that price and become a condominium.

If the landlord rejects the offer price, he will have two choices. Either buy out the renter’s contract at the same price as renter’s offer or sign a contract extending certain rent controls indefinitely for the duration of tenancy. Such a mechanism would ensure the tenant would offer a reasonable amount. In effect, this forced sales will return all apartments to the market immediately, whether they now be owned by the original tenant, original landlord, or controlled only by contractual agreement.

If the tenant could not afford the purchase price, which would likely be below market, he would be permitted to resell the condo unit at any price or forfeit all rights to the property upon failure to execute.
There would be complications if a landlord suddenly lost control of an entire building, creating a fractured ownership of the building. Allowing the landlord the option to extend the lease or buy out the tenant would enable the landlord to maintain ownership of entire buildings at his discretion.

Of course, if one believes rent control was a theft of the original property rights from the landlord, you would be hesitant to reward the tenant for years of hoarding another person’s property. However, if one believes it is theft, should the government be forced to pay reparations to landlords for lost earnings? Perhaps, with a forced sale, the government would be required to remunerate to the landlord, a certain percentage of the transaction as a form of reparations.

Vouchers

For those who believe we need to "do something" for housing affordability, there are solution which are much better than rent control.

Federal housing assistance programs began during the Great Depression. In the ’70s, Congress passed the Housing and Community Development Act of 1974. This act shifted the focus from the quality of housing to the affordability by creating the Section 8 program. Learn more about the Section 8 program here. Many state and local authorities have implemented voucher programs as well.

Low Income Housing Tax Credits

Federal programs offer tax credits to developers of low income housing (LIHTC). These tax credits are more valuable than tax deduction and are often purchased by corporations who pay high tax rates. (learn more here)

Of course, there are consequences to subsidizing housing, (which is another topic altogether) but most would agree that a system of subsidizing housing for lower income people with vouchers or tax credits are certainly less less-bad solutions than forcing the burden on the providers of housing and rental apartment market through rent control.

Zoning and Regulation

The difficulties of phasing out rent control could be lessened by the market more quickly and effectively if zoning and other regulations are loosened at the same time. The private market needs to be allowed to meet the demands of market renters, so that lower quality, and smaller apartments remain affordable to people with lower incomes.

Most importantly, municipalities need to end exclusionary regulations that forbid affordable housing that would be used by low income residents. The most widespread example is that of many suburban communities that regulate the number of housing units per acre. Such regulations prevent developers from creating multi-family housing that is typically more affordable to lower income families. Often times, these regulations are aimed at keeping certain people out in order to maintain an upscale community.

Most cities also have provisions in their zoning codes that prevent development of affordable housing. Chicago, for example, has strict restrictions on dwelling units per acre that in many instances are more restrictive than density restrictions. These restrictions are supposedly implemented to encourage more housing for families, but forces developers to build less units, thus larger units. This discourages development of smaller, more affordable units, such as studios and single room occupancy units; and instead encourages development of larger, luxury units.

Almost all municipalities have restrictions on density, usually through FAR (floor area ratio) and height restrictions that inhibit the amount of development that can happen in a certain area. These restrictions directly burden development of market rentals, which in turn, causes shortages in lower quality housing as middle class renters are forced to choose lower quality units that would otherwise be rented by low income families. Thus, destroying affordability for all demographics.

In order to "protect jobs", many cities have implemented zoning restrictions that prohibit residential development on under-utilized industrial land. These prohibitions are very short-sighted, and in effect, keep land prices low in industrial areas since alternative use of the land is prohibited. These days, industries tend to be location insensitive since transport costs have come down significantly over the last century.   Industries typically choose to locate where land is cheap, so in order to attract manufacturing jobs, a municipality must put a huge burden on the housing market.  Forcing land prices down in urban areas to attract industries does more harm than good by preventing redevelopment of the land as housing, driving housing costs higher, elsewhere.

All things considered, most currently affordable units will remain relatively affordable if the market is allowed to satisfy the needs of the wealthy and middle class renters, preventing prices from rising across the board and preventing gentrification of lower housing stock by more wealthy persons.

Property Taxes

Many municipalities tax rental housing at a much higher rate than they tax home owners. This is mostly due to political pandering to homeowners who tend to be a reliable block. Nonetheless, much of the additional tax burden gets pushed on the renter as the landlord shares the burden by raising rents. Removing this redistribution of wealth would ease the burden on rents, as would lowering real estate taxes by cutting spending.

Tax deductions for home ownership also create a misallocations of housing resources away from affordable rentals.

A Free Market for Housing

In conclusion, supply controls do as much damage to affordability as price controls. Eliminating rent control needs to go hand-in-hand with loosening exclusionary zoning and density restrictions in order to allow the market to perform as it should. A truly free-market incentivizes investment in quality affordable housing for all residents by allowing individual decisions to determine living patterns and location preferences based on quality, availability and affordability.

For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.

The post Rent Control Part 4: Conclusion and Solutions appeared first on Market Urbanism.