Ive heard repeatedly when trying to learn about our housing situation that we don’t have enough homes. I don’t understand how that’s the case or if it’s even true. Who or what is stopping more homes from being built exactly? If the demand is so high and the supply is so low then the suppliers would obviously ramp up production, right?
In: Economics
Everyone points at zoning policies but there are *three* things that hinder housing production.
Zoning and other regulations are definitely a big point. They make it harder to build things. This is a tough pill, because if a city just let anyone build anything anywhere you’d get a chaotic mess. On the other hand, if a city isn’t diligently changing zoning policies as its needs change, it can end up with outdated policies that make it impossible to build what the city needs. So the first thing that messes with housing supply is definitely government regulation, but government regulation can also *encourage* growth if used properly.
The next is *investment*. A ton of people have a significant portion of wealth tied up in their house. Part of their retirement plan is to sell it, buy a much more modest house in a place with low/no property taxes, then use the profit as part of their retirement fund. For that to work well, they need their selling price to be higher than their buying price. Problem: if their city changes zoning and causes housing prices to fall, it interferes with this plan. So every time a city tries to change zoning, you usually see big protests from the people nearby. They don’t WANT the housing supply to go up too much because it can mess with their property value. They don’t WANT nearby places to get zoned to allow more dense housing because it ruins “the character of their neighborhood”. So they fight it.
The next is *capitalism*. The builders aren’t stupid. They know if they build too much too fast, supply will outpace demand. That affects how much they can sell their new houses for, which affects their profit. So even if zoning is perfect, they do careful market analysis and decide how much to build and still maintain their desired amount of profit. The only way to make them go against this is… more regulation. The city can make zoning policies incentivize the kinds of housing they need, and may even introduce tax advantages or subsidies to coax builders into that. But if builders decide what a city needs isn’t profitable, they’ll pack up their tools and build somewhere else. And nobody wants to saturate the market.
So zoning and regulation are how a city has to balance the needs of investors/builders vs. the city’s sustainability. It’s hard to get that right. It never makes everyone happy.
But you have to figure in a lot of markets, to build a house you need to be able to pay $200,000 or more up-front. There’s land to buy, lumber to build, plumbing to lay, electrical work to do, framing, finishing, roofing… all of those people want to be paid even if the house doesn’t sell. So it’s not like if a person thinks local builders are too profit-driven and are going too slow, they can just go get a loan and start building new houses. You have to have a TON of capital to make an impact on a city. My city built 30,000 new units one year and it *wasn’t enough*. This year 40,000 more have entered the market and it’s only had a small effect. Good luck getting a $60 million loan because you want to fix housing. The only people with that much capital are the people with an investment mindset. So it’s not the normal, simple supply/demand curve you see in a microeconomics course. It’s a much more complex system with multiple variables.
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