Book Review: The Rent Is Too Damn High

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.

In the chapter “The Virtues of Density,” Yglesias offers a powerful counter-argument to “market suburbanists” who argue that land use deregulation amounts to forcing density on people:

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.

  • http://www.webkist.com/ MikeWebkist

    Yglesias has a style which I think is interesting to compare to Robin Hanson and Steven Landsburg. Like the two of them, he’s a classical liberal, but wrapped in progressive clothing (hence the conniptions into which he sends his commenters). Hanson comes across sometimes as a robot with very good emotion emulation software, programmed to avoid the harsh libertarian notes. Landsburg is good at the armchair economics, but comes across as the asshole libertarian you hate to agree with.

    Yglesias though seems to have the Hansonian ability to make the rational, classical core seem youthful and liberal without the Landsburgian snark. The only time it fails is when he says things (like the affordable housing provisions stuff) which it seems like he probably doesn’t believe. He knows better, and we know he knows better. He just needs to say it so people don’t write him off as a conservative — which would be incorrect and bad overall.

  • Emily Washington

    This is a great comment. At work I spend a lot of time messaging free market ideas to those on the right, but it makes sense that the strategy for marketing to those on the left should be different.

  • Raul Groom

    I think there is one problem with Yglesias’ idea of decoupling land value from building value, which is that it is not quite that simple.  This dichotomy:

    Land – a speculative investment commodity, like stocks and bonds
    Houses – a consumption good, like a car or a refrigerator.

    Is a bit of an oversimplification.  You can tell by the interesting array of durable goods Yglesias’ selects as his examples.  A house, a car, and a refrigerator are consumer goods, yes.  But for homeowners (and, in the case of refrigerators and houses, landlords) they are also capital investments.  A car is a piece of capital that PRODUCES, with certain inputs, a very important economic good called “transportation.”  A refrigerator and a physical house are both part of the capital that produces an even more important economic good called “shelter.”  The land the house is on – whose sole salient attribute, as the old joke reminds us, is usually its location – is part of that capital.  

    The physical structure is a separate piece of property from the land, it’s true.  But the fact that it’s located on the property is an inseparable attribute of the structure (most buildings can’t be moved,) and impacts the value of the shelter that the house produces, probably as much or more than any other single attribute of the structure.  

  • Raul Groom

    I think there is one problem with Yglesias’ idea of decoupling land value from building value, which is that it is not quite that simple.  This dichotomy:

    Land – a speculative investment commodity, like stocks and bonds
    Houses – a consumption good, like a car or a refrigerator.

    Is a bit of an oversimplification.  You can tell by the interesting array of durable goods Yglesias’ selects as his examples.  A house, a car, and a refrigerator are consumer goods, yes.  But for homeowners (and, in the case of refrigerators and houses, landlords) they are also capital investments.  A car is a piece of capital that PRODUCES, with certain inputs, a very important economic good called “transportation.”  A refrigerator and a physical house are both part of the capital that produces an even more important economic good called “shelter.”  The land the house is on – whose sole salient attribute, as the old joke reminds us, is usually its location – is part of that capital.  

    The physical structure is a separate piece of property from the land, it’s true.  But the fact that it’s located on the property is an inseparable attribute of the structure (most buildings can’t be moved,) and impacts the value of the shelter that the house produces, probably as much or more than any other single attribute of the structure.  

  • Anonymous

    This makes much more sense in context, he’s talking about the idea that home prices have gone up for so long that people assumed that was because “houses” were a good investment. That was wrong. LAND was a good investment (until, in certain areas, it wasn’t), while the house on that land was declining in value.

    The examples you talk about are good ones. Cars, houses, and durable items could all be considered capital goods. But you buy a car because you want transportation, a refrigerator because you want to preserve food, NOT because you expect them to go up in value. Yglesias’s point is that you should view a structure the same way; it provides shelter, while slowly losing value. It requires maintenance to stay standing, and even if you keep it in perfect shape (an expensive proposition) it will still lose value as tastes and technologies change (no granite counter-tops or Ethernet cabling?). If anything is going to increase in value, it’s the land the house is sitting on (along with the right to have or build a house on the land, which is often a scarce good due to zoning).

    This is just like your car. If cars were bundled with specific parking spaces, like houses, they might well have gone up in value during the housing bubble. But in this scenario, it wouldn’t be the automobiles themselves going up in value, it would be the land they were bundled with (along with zoning permission to park a car there). Does that make a bit more sense?

  • Paul Joice

    Emily, regarding inclusionary zoning (the policy to which Yglesias referred that you don’t agree with):

    Do you consider it acceptable to have neighborhoods where low-income people cannot afford to live? Even if the housing market were completely unregulated, and supply were elastic enough to meet demand, prices would vary across neighborhoods as a result of the different levels of amenities. Should we accept that some neighborhoods — those with excellent schools, transportation access, access to jobs, and parks, retail and other shared amenities — will be out of reach to low income individuals?

    I think it’s fair to argue that housing choice vouchers are a better way to subsidize housing than government managed project-based housing. But there’s a big difference between inclusionary zoning and other place-based subsidized housing (like traditional public housing): inclusionary zoning operates through the market. It only gets built where there is a developer who has identified a market demand and it gets built by private market actors who are (presumably) good at doing their job efficiently.

    Given how important neighborhoods are to economic opportunity, I think it’s a big mistake for public policy to be completely agnostic about the significance of place. Inclusionary zoning is a fair balance of the efficiency of the market and the goal of ensuring access to high opportunity neighborhoods. I wish this blog and its readers were more supportive of it.

  • Raul Groom

    “… you buy car because you want transportation, a refrigerator because you want to preserve food…”

    Certainly true, and I’ll concede until I read the book that I may be misunderstanding the argument without the context.  I like the idea of looking at houses as depreciating capital investments rather than what I think is the dominant conception that a home is basically a financial instrument you can live in.  That’s silly, and it leads to some pretty significant bad outcomes I think we can all agree.  

    I just think it’s important to remember that while the condition of the capital investment does depreciate, and needs to be maintained, the value of the product of the capital is highly dependent upon the value of the land.  That’s because expensive land is desirable land, and the structure most likely takes full advantage of the added value of the premium location.  

    What people here are complaining about is that for them, if the character of their neighborhood is going to drastically change, their existing structure is not going to go up in value but it will actually go down in value, because now its location is not particularly conducive to the type of life they want to live.

    Now, I think I agree with Yglesias mostly anyway because I think this is a perfectly decent argument about WHERE in expensive cities to put new, dense development.  When you use it as an argument (as in DC) for not doing any serious dense development at all, you’re getting into an absurd situation where you aren’t letting people move to a city because the people who live there would prefer they didn’t do so.  That’s not how the system is supposed to work in the US – if people want to relocate to a city and can afford the housing that someone is willing to build them, it’s supposed to be a done deal.

  • Emily Washington

    To answer your first question, yes I do think it’s acceptable that there are neighborhoods where not everyone can afford to live. Living in DC, I am happy to live near neighborhoods where I will never be able to afford to live because I still get to enjoy the amenities that these neighborhoods offer. Being childless, I don’t pay as much attention to DC public schools as perhaps I should, but I’m not sure the neighborhood you describe with the best of all amenities exists at any income level. Obviously, though, I think that DC housing access could be much improved for people of all income levels in a freer land use market. 

    We’re in agreement that inclusionary zoning is a much better avenue for providing low-income housing than project-based housing. And I don’t have any problems with the stated goals of inclusionary zoning, but I think that IZ supporters are too often ignoring its unseen consequences. Again, to use the DC example because that’s what I’m most familiar with, here 5% of new housing developments with 10 or more units or newly renovated housing must be affordable for people 50% of the AMI and an additional 5% for people making 80% of the AMI. (I’m pretty sure these figures are still accurate — someone please correct me if these are wrong.) By requiring developers to provide below-market-rate housing, this policy drives up the price of market-rate housing and also reduces the supply of new housing from what it otherwise would be. Who does this policy hurt most? Anyone making less than 50% of the AMI and those making up to 80% or just over who are not able to secure price-controlled units.

    Also, from a practical standpoint I think it’s silly that IZ typically applies to new or newly renovated properties. In most cases, these would be a neighborhoods’ most expensive housing units in a free market, so why are we seeking to make them go for the lowest prices? Vouchers would give us more bang for the buck if the goal is providing access to desirable neighborhoods. 

  • Jonathan May

    Yglesias writes:

    “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.”

    But this is nonsense.  Traffic (congestion) and noise are examples of negative externalities of higher density.  Negative externalities are costs that are not reflected in market prices.  That is why free markets are not good at producing optimal density.  Either these costs must be internalized through a “density tax” of somesuch, or density must be limited through regulation to prevent external costs from becoming excessive.

  • Paul Joice

    “Negative externalities are costs that are not reflected in market prices.”

    That’s not exactly what a negative externality is. It’s when costs are not fully borne by a person making an economic decision. With traffic congestion, the “economic decision” is whether or not to drive/walk/etc. 
    With noise, it’s the decision to do whatever activity is directly causing the noise. Density is a factor in how common these decisions are, and thus how large the externalized costs are. However, these external costs do affect the appeal of living in a particular place, and if the place becomes less appealing, the density of housing units should stabilize. So I think Yglesias’s point isn’t exactly nonsense.

  • Jonathan May

    Paul Joice,
    You don’t seem to understand.  The fact that density creates costs that are not reflected in market prices means that we cannot rely on market pricing to produce the optimal density.  Density will be higher than optimal because some of its costs are not being paid by the parties engaging in the transaction that causes it.  It’s exactly the same as pollution, which is also a negative externality of higher density.  That is why we have regulations that limit pollution and that limit density.

  • Anonymous

    The cost of noise is “paid” by the people who live in the dense area, so it’s not really an externality. You could argue that it would be an externality if someone was building something high-density in the middle of a mostly low-density area, but not in general.

    And pollution is hardly exclusive to high density: traffic jammed freeways are a symptom of low density suburban developments as much as high-density urban areas with good transit. Plus, it’s pretty trivial to turn that externality into a cost that’s paid by the party engaging in it: congestion tolls.

    Besides, low density has plenty of its own externalities: increased energy usage leading to increased pollution; the need for wider, straighter and faster roads, carrying more traffic (which aren’t exactly welcomed by the people who live next to them); increased utility costs that are borne by all subscribers; requirements on businesses to provide large amounts of parking space; and so on.

  • Nathanael

    All of these highly-specific welfare schemes are inferior to a direct employment guarantee at a living wage: basically promising everyone that they can work for the Civilian Conservation Corps (or whatever) for enough to live on, and setting a wage floor that way.

    But that is a pretty radical move (even if we came close to doing it during the New Deal). It would mean the only remaining specialized programs needed would be for the disabled and sick, which is a huge group of course, but a National Health Service would reduce that problem substantially as well.

  • Nathanael

     So would you say “yes, it’s OK for there to be neighborhoods where low-income people can’t afford to live, but it’s not OK to put up walls and gates around them so that low-income people can’t visit or use the amenities?”  (Include in walls and gates, metaphorical ones like not contributing to the city taxes, or privatized parks, etc.)

  • Nathanael

    You and Yglesias are finding your way back to advocating the Georgist land tax.  :-)

    It seems like a good idea at first glance.  The major problem with it is that it’s actually very hard to put a value on land independent of what’s on it; apart from stuff like agricultural fertility and proximity to water, land is mostly valuable for what it’s next to, which is to say buildings.