The Housing “Theory of Everything”
The Housing “Theory of Everything”
The high cost of housing matters more than you think
When we consider the challenges that civilization faces this century, from climate change, to poverty, to depopulation, there is one issue that lies at the core of everything: housing. The global housing crisis is as close as we may ever get to a “theory of everything” for societal ills. That is, if we can solve the challenge of housing, most everything else follows.
Why the Rent is So High
Housing prices are a function of supply and demand. Housing demand is extremely high in prosperous locations with good jobs and opportunities. Unlike most products, however, be it airplanes, cell phones, desks, or cars, the supply of housing has long been unable to meet that demand in much of the Western world and beyond. For this reason, housing prices have become increasingly divorced from the cost of construction.
Why can’t developers meet demand? The single most important cause is overzealous zoning regulations that unnecessarily restrict land use, limiting the supply of housing. Euclidean Zoning separates land by use, preventing the mixing of commercial, residential, and industrial uses.
But what began as a rational means to prevent some negative externalities of development, such as a factory enveloping a neighborhood in smog, has evolved into an instrument of rent-seeking. After World War 2, zoning was no longer limited to merely dividing land use, but expanded into limiting residential density as well, often by mandating low-density single-family homes to be built on residential land.
This happened because zoning regulations are drafted on a hyper-local level and were “captured” by the homeowners themselves. Incumbent homeowners utilized their Associations, Zoning Boards, and clout in local government to resist all new construction that does not directly benefit them. Through zoning, the culture of the NIMBY (Not In My BackYard) began.
Want to build a convenient shopping center? NIMBY. How about affordable, high-density condos? NIMBY. A wind farm to generate affordable green energy? NIMBY. NIMBYism artificially restricts the housing supply (and the supply of just about everything else). Homeowners benefit as their homes become more valuable, but everyone else loses.
Unbeknownst to NIMBY homeowners, they are creating artificial housing scarcity that is not socially, economically, or morally optimal. Indeed, the social and economic ramifications of NIMBYism are profound, widespread, and very often, hidden.
The Hidden Cost of Housing
As the saying goes: location, location, location. Where you live determines who you date, where you eat, what you eat, how many children you have, and even what religion you might adhere to. Location is destiny, so housing availability determines the destiny of many.
Most obviously, the first victim of high housing costs is disposable income. It now requires two incomes to afford housing in a popular city, whereas it would have taken just one income seventy years ago. This means a mother and father now both must work full-time jobs, leaving them unable to take care of children at home.
The USDA estimates that it costs about $233,000 to raise a child. One-third of that figure is due to the cost of housing alone. Indeed, one study has found that a 10 percent rise in housing prices leads to a 1.3 percent drop in birth rates. It should come as no surprise then that fertility rates are falling globally and are now below replacement level in most developed countries.
This doesn’t even consider the cost of childcare, which is also skyrocketing and placing an undue burden on families. Consider for a moment that part of the reason childcare is expensive is also due to housing. The need for a double income forces high demand for limited childcare slots, and these slots must charge enough to support caregivers who themselves are burdened with the cost of high rent.
Degrowth advocates might celebrate, but a fertility rate below the 2.1 per family replacement level means that eventually, population growth will turn negative. Anything under 1.5, and depopulation can become self-sustaining and self-reinforcing. The US currently stands at 1.6, and no amount of cash transfers is likely to solve this problem absent housing reform.
Fortunately for the US, the fertility gap has historically been compensated by inward immigration. Ironically, however, immigrants are often scapegoated and blamed for high housing costs, further misdirecting policymakers away from the true cause of the problem, and from true solutions.
Another victim of the housing crisis is equality because landowners are artificially boosting their wealth at the expense of non-landowners. Indeed, studies show that wealth inequality in the Western world has little to do with income. Rather, inequality is primarily driven by housing inequality; it is not difficult to understand why.
Additionally, in search of reasonable prices, homeowners are moving further from city centers, promoting unnecessary urban sprawl. This outward sprawl places increased strain on transportation infrastructure, from roads and bridges, bus lines, and subways, to rail. This all necessitates more spending on infrastructure and higher taxes. While we can alleviate some of this through land value capture, as I wrote here, it would be better to avoid the problem entirely.
In terms of productivity, idly sitting in one’s car for an hour-long traffic-ridden commute has an enormous social cost. Americans spend some 54 hours a year behind the wheel stuck in traffic. Commuters to San Francisco, “coincidentally” one of the most zoning-restricted cities in America, spend some 103 hours in traffic every year.
Unsurprisingly, urban sprawl brings with it another victim: the environment. More cars, trains, and longer commutes, means more pollution and environmental degradation. It also makes fighting climate change much more difficult, as pollution-curbing measures require deeper structural changes.
Additionally, as housing prices climbed, some people have become priced out entirely. Instead of taking a high-paying job in an expensive city, they settle for less productive careers in places with cheaper housing. The housing crisis is keeping labor from settling in the most productive locations, dragging down both economic growth and productivity. Indeed, easing housing regulatory constraints in places like New York City and Silicon Valley could raise the US GDP by some 9.5%. The impact is immense.
Economic productivity, over the long term, is driven by another victim of housing prices: innovation. The vast majority of innovation arises out of cities. Some of this can be attributed to what is called “geographic closeness” whereby people of all different backgrounds “bump” into each other, exchanging ideas and thoughts, leading to new developments that otherwise would not have taken place.
When we limit the number of people who can live in the most productive and innovative locations, we are limiting humanity’s ability to innovate. By extension, we are limiting humanity’s ability to solve societal challenges and there is no greater sin than a policy that suppresses maximum human potential.
A Dual Solution
The most obvious solution to all of this is to loosen zoning regulations, specifically, those regulations that limit the density of housing. By freeing the market to build according to demand, the supply of housing should rise, and the cost would gradually converge closer toward construction cost.
Additionally, there is one alternative to Euclidean zoning that has been gaining traction since 1990s: “Form-Based Codes” (FBC). FBC attempts, as Euclidean Zoning attempts, to prevent negative externalities, but does so in a more nuanced fashion. FBC de-emphasizes the use of land, focusing instead on the physical form of the structure built on the land and its interaction with the surrounding city.
FBC-based neighborhoods are often more attractive, more inviting, and walkable than those based on Euclidean zoning. More importantly, because they do not restrict housing density nor mandate a single exclusive use, it is possible to build apartments/condos with businesses and shops on the ground level. While perhaps not a perfect solution, Form-Based Codes offer an attractive alternative to Euclidean zoning.
Ideally, the adoption of FBC should be paired with an effort to replace property taxes with a Land Value Tax (LVT). An LVT levies a tax on the unimproved rental value of land, not the property built upon it. By taxing only the land, we could discourage wasteful land speculation and simultaneously eliminate the de-facto punishment that a property tax levies on development. For more information on Land Value Taxes, see my explainer here.
Taken together, these two measures would bring housing costs down to socially optimal levels. Wealth inequality, pollution, and soul-sucking traffic would ease, while economic growth, productivity, and innovation would accelerate. Solving the housing crisis won’t solve everything, but it’s as close to a panacea as we may ever get.