Politicians, pundits, and housing activists have offered a variety of policies for making housing more affordable. While many admit that building affordable housing for low-income households isn’t profitable, virtually nobody recognizes the fact that the profit motive is the solution to the housing crisis. A statement from the president of the National Multifamily Housing Council illustrates this point.
She says that America has relied on private sector investments to build housing at a variety of price points.
But unless that money comes into the market and investors see that as a better investment than some other kind of equity or some other kind of investment, they’re not going to come.
The reason that sufficient money isn’t coming into the market is because the profit motive hasn’t been allowed to operate in the housing market. Rent control is the most obvious example.
Under rent control, an investor’s profit is arbitrarily limited by government edict. When that limit is lower than the return on other investments, money won’t flow into the housing market. The sad irony is, rent control is frequently justified on the grounds that housing producers are making too much profit (as if there is such a thing as too much profit).
Zoning is another example. Under zoning, a property owner can’t use his land as he deems best—most profitably. He can only use his land as the government permits. Again, his profit is arbitrarily limited, and so, the investment doesn’t occur.
If we want more investment in affordable housing, we have to allow the profit motive to operate.
When the demand for a product exceeds the supply, prices and profits rise to clear the market. This attracts new investment to expand production. As production increases, prices moderate and perhaps decline. But this isn’t happening in housing because government policies stifle the potential profit.
Incentivizing investment in affordable housing can only occur when investors are free to pursue the highest possible profits, not those dictated by government officials. We don’t have a shortage of affordable flat screen televisions, smart phones, automobiles, and countless other products. The profit motive incentivizes the production of these values in a variety of price ranges. It is time that we allowed the profit motive to do the same with housing.