Matt Yglesias’ new Kindle single, The Rent Is Too Damn High, is a quick and engaging read on the reasons that much of the conventional wisdom about housing markets is wrong. While Yglesias has many progressive views, with regard to land use he takes a classical liberal stance. He explains that the “rent is too damn high” because land use regulations restrict housing supply, keeping prices above the free market equilibrium.
My favorite part of the book was Yglesias’ discussion of unbundling the supply and demand for land from the supply and demand for buildings. He provides a very clear explanation of the differences between the two, explaining that rising land values benefit land owners, but rising housing prices serve only to decrease everyone’s real income. Under a system where land use is regulated to constrain the supply of buildings, landowners earn long term rents (higher than they would otherwise earn) that cannot be eroded by other landowners building more densely.
People worry that a denser neighborhood will have more traffic and more noise. Generally speaking, they’re correct. But all this means is that allowing higher density will be a self-limiting process. Balancing the different costs and benefits involved in denser building is, after all, precisely the sort of thing that relatively free markets are good at. Different people have different preferences about noise, commuting mode, lawn size, amenities, and employment possibililties. . . . To say that some of America’s neighborhoods — especially in coastal cities with strong economic opportunities and limited space — should be denser is not an argument for infinite density. Nor is it an argument for central planning and coercion. It’s an argument that places ought to grow to the point where the costs of additional density outweigh the benefits and no more people, on net, want to move there. This is precisely the sort of balancing act that markets perform better than planners.
Compared to similar books on this topic, Yglesias more heavily emphasizes that land use regulations move us toward a Ricardian vision of the economy, where non-land owners pay increasing shares of their income to those who own the most desirable land. This problem can also be viewed from a market process perspective; Kirzner explains in Competition and Entrepreneurship that landowners in a regulated world are not earning entrepreneurial profits on their resources, but rather monopolistic rents because they are shielded from competition.
Yglesias provides only one policy recommendation which I found misguided. In the chapter “The Mirage of Gentrification,” he writes:
Particular projects are always controversial, but nobody opposes the idea of better schools, safer streets, and otherwise improved public services. We should, however, worry about whether urban reforms will actually end up benefitting poor people. The only way to ensure that it does is to ensure that if demand for living in a particular neighborhood increases, so does the quantity of available housing units. Requiring that some portion of new housing in a given are meets some standard of affordability can help, but it doesn’t solve the core issue.
I completely agree with him on the importance of allowing urban housing stock to expand, but if we are going to subsidize housing, it makes more sense to do so through vouchers to individuals rather than requiring developers to do so. Vouchers provide affordable housing recipients with the power to determine the best place to live for themselves, rather than having to live where the affordable housing is provided. Also, vouchers can be administered more fairly with a simple income cutoff rather than affordable housing units which are distributed somewhat by chance and are most likely to go to those who are most adept at using government services.
However, even the least-bad voucher system of affordable housing comes with negative consequences. Subsidizing housing for a select group makes housing more expensive for all other residents in a city, including those just above the income cutoff line for whom the policy would be most painful. I find it odd that Yglesias offers any support for affordable housing provisions given his critique of rent control in an earlier chapter, which leads to many of the same unintended effects.
The Rent Is Too Damn High would be enjoyable for anyone who likes reading Ed Glaeser or Ryan Avent, and Yglesias’ armchair economist style allows him to discuss the problems of land use regulation from a common-sense perspective. In the closing chapter, he concludes with an idea I liked a lot:
Typically, the last chapter of a public affairs book — the one where the author presents his proposed solutions to the problem discussed at length — is the most disappointing one. But as building regulation is an inherently local matter, there is no better general solution than to try to persuade people to understand the issue better. Many on the Left — starting with my inspiration, Jimmy McMillan — are confused about the relationship between housing affordability, regulation, gentrification, and quality of life over the long term. On the Right, the problem is one of myopia and indentity-driven resentment.
[. . . .]
Beyond ideology, the basic terms in which we discuss housing policy and home prices in this country are badly confused. The simple step of getting political figures and the media to better distinguish between the price of land (a speculative investment commodity, like stocks or bonds) and the price of houses (a consumption good, like a car or a refrigerator) could work wonders.