The Cure For Rising Housing Prices Is Always More Housing

One of the deepest divides in the United States is the one between people who see inflation as the enemy of working people who earn and have fewer dollars, and those who believe that prices are the result of specific decisions by greedy people. The dispute is even internal in most people; when prices rise, even the most rational consumer can believe that the cause is gouging, not scarcity. Those who believe scarcity is the problem tend to support more production, while those who see greed push for regulation of markets, price controls, and more money for subsidies to offset rising prices. The discussion of housing policy is riven by this dispute, but it shouldn’t be. Rising prices are caused by lack of supply in the face of rising demand, and the solution, therefore, is more production.

Housing price inflation is caused by lack of supply

I remember the first time I used the word “supply” in a discussion about housing. I was at a lunch meeting with a Seattle developer sometime in 2010 and as we discussed housing, I shared something that I could no longer resist: the problem we were having with rising housing prices in Seattle was lack of supply in the face of rising demand. The developer agreed with me, but she said, “You can’t use that word.” I understood what she meant. “Right. Too Republican.”

Later on, at a meeting with a member of then Mayor Mike McGinn’s staff, I deployed the word. The City was in the throws of its first municipal panic attack about rising housing prices as demand returned after the financial crisis of 2008-2009. The smart, Ivy League educated staff person said, “Yes, increased supply can’t hurt, but more supply will never lower prices.” I sat there somewhat stunned; this was a person that should know better.

In deep blue Seattle and almost everywhere else, the notion of supply being the answer was resisted. I called it the “Galileo Effect,” the stubborn notion that somehow new housing cannot possibly relieve price problem. For many, the notion that allowing people to build more housing, make a profit, and reduce its price is just as counterintuitive as it seemed to some that the Sun was stationary when it could clearly be seen moving across the sky.

I wrote about an elected official who I met with in an effort to convince her that if the legislature pushed local jurisdictions to reduce regulations, we’d get more housing supply, and thus lower prices. She followed the argument, agreeing even that fewer regulations and faster permitting times would reduce input costs. But she couldn’t shake the suspicion that developers would just pocket that savings and keep prices high. I tried to explain competition would obviate that; lower costs would allow a race to capture customers and lower vacancies. That was not persuasive.

The truth is that our public policy should be aiming for an outcome in which people make money producing housing for working families regardless of their incomes. Almost everyone in the United States has a cell phone. Prices for phones are reasonable for almost everyone who has a job because they aren’t regulated in the same way housing is, by thousands of local jurisdictions that have a myriad of regulations and requirements laid over basic building codes.

Unless and until we can reach an accord across ideological divides that our enemy is inflation and that inflation is the product of scarcity and rising demand, we simply won’t make progress on addressing the difficulty rising housing prices create for families with less money. Adding more money to the mix only makes prices worse by subsidizing bad local policy decisions that create housing scarcity in the first place. There is a place for subsidies, but that place should be supporting people with cash rent support and building only for people who simply can’t earn enough to cover the costs of housing, people who are aged, disabled, or struggling with mental health and addiction.

And finally, the word, supply, has been coopted. Now when you hear “We need more supply!” the word is usually preceded by the word “affordable” which means subsidized housing, usually though tax credits. That means more money, and it’s why I often use the phrase, we don’t need more affordable housing, we need more housing so that it is affordable. We won’t beat inflation by playing games with language that allow people uncomfortable with the truth of supply and demand to sound like they’re smart while at the same time holding on to ideas like housing is a “right.”