Government Mandated Housing: Intentions and Outcomes

by Sameer Warraich A recent news headline on Housing Action Illinois’ website reads: “Recession over, but poor renters still at risk of homelessness” After proposed state budget cuts for shelters, Housing Action Illinois has advocated maintaining federal and state funding for affordable housing programs. The ultimate irony, however, is that government intervention in the housing market has...

by Sameer Warraich

A recent news headline on Housing Action Illinois’ website reads:

“Recession over, but poor renters still at risk of homelessness”

After proposed state budget cuts for shelters, Housing Action Illinois has advocated maintaining federal and state funding for affordable housing programs. The ultimate irony, however, is that government intervention in the housing market has generally made housing less affordable and of a lower quality than before.

In the video above, Thomas Sowell explains how government intervention and attempts to equalize housing produces shortages and misallocation of resources.

Despite market trends and empirical research showing contrary results, politicians continually attempt to increase the amount of “affordable” housing by intervening in the marketplace. Unfortunately, this creates perverse incentives and distorts the supply and demand of housing. It can also punish individuals who have acted responsibly. Thomas Sowell asks, “Why should taxpayers who live in apartments, perhaps because they did not feel that they could afford to buy a house, be forced to subsidize other people who could not afford a house, but who went ahead and bought one anyway?”

One way the government tries to make housing “affordable” is through  price controls, wherein, the government puts a limit on the price at which a seller or a developer can sell his/her property for. But the price controls do not make housing cheaper in the long-run. In fact, price controls cause a shortage of low income housing. Developers stop building new houses because of a lower rate of return than before rent controls were enacted, and instead focus materials and efforts into other types of construction. This keeps the supply of affordable housing below the market demand.

Similarly, the government has mandated land-use restrictions to an attempt to make housing affordable and of better quality. This has caused the price of housing, especially in cities, to increase. Some might attribute the elevated prices to high demand for scarce land, but in reality, the high prices are due to housing regulations such as restrictions on density, height design, building fees, slow approval processes, restrictions of growth and preservation laws. In addition to land-use restrictions, government drive up housing prices for lower-income families by dictating improvements in housing quality that families might not otherwise choose. Governments do this by, for example, setting minimum lot sizes. Economist Ben Powell concluded that government permission to build is a substantial input for housing. Estimates show that:

Only 10 percent of the gap between construction costs and home prices is caused by intrinsically high land prices; the other 90 percent is caused by zoning and land-use regulations, no matter where they exist.

If more affordable housing is the goal, the government should pursue policies that encourage, not hinder, the production of new housing and buildings in general. Even Chicago Mayor Rahm Emanuel had to wait five to six months for a permit for an addition to his home while serving in Congress.Researchers have found that “to the extent that a city makes it easy for any type of housing to be built, it will also enhance the available stock of low-cost housing.” Restrictive policies will only continue to impede the availability of affordable housing in Illinois.

The recent fall in prices of middle-high income houses has drawn considerable government attention as well. On one hand, policy makers have been trying to make housing increasingly “affordable” by offering subsidies that distort market signals, and now, the government is showing concern over the 5.1% home price drop nationally. The fall in home prices is largely due to low consumer confidence since individuals are reluctant to spend on property because of uncertain future job and income prospects. More government intervention in the housing market would further complicate the scenario instead of solving it. Politicians should realize that even though they might have the good intentions, the outcome of their policies suggest residents would be better off without their interference.