As rents soar in many parts of the country, government officials and housing advocates are increasingly looking to rent control—caps on what landlords may charge—to moderate prices. However, rent control ignores a basic principle of economics.
One of the fundamental principles of economics is the law of supply and demand. This principle holds that if the demand for a value increases while the supply remains the same, prices for that value will increase. Conversely, if the supply increases relative to the demand, prices will decrease. When the supply and demand are in equilibrium, the market is said to have cleared.
The housing crisis is one of supply. The demand for affordable housing far exceeds the supply, particularly for low- and moderate-income families. The rising demand causes rents to increase. However, if the supply were dramatically increased, rents would ultimately decline.
Many housing advocates complain that very little new housing construction is for low- and moderate-income families. However, because they do not consider the full context, they generally fail to identify why this is the case.
Despite the immense demand for affordable housing, it simply isn’t profitable to build. And the primary cause is zoning and similar land-use regulations. By limiting land uses, these regulations drive up the cost of the land necessary to build housing, and this is particularly true in popular neighborhoods. In addition, the permitting process associated with zoning adds significant costs to new construction.
We have already seen that many jurisdictions are revising their zoning regulations to remove some of the restrictions. While this is certainly a step in the right direction, the remaining regulations still add substantially to the cost of building new housing. So long as those regulations and the associated costs remain, it will be difficult, if not impossible, for developers to build less expensive housing.
Increasing the supply of housing relative to demand ultimately drives down prices for all levels of housing as the market clears. This is true even if that housing is primarily for high-income families. This is a process known as filtering.
To illustrate the process of filtering, let us assume that a developer builds a luxury apartment building a block away from a moderately priced apartment building. Let us also assume that all of the residents of the lower priced building move into the new building. The owner of the moderately price building would have a supply that greatly exceeds the demand. To clear the market, he would lower his rents to attract tenants.
Admittedly, filtering doesn’t occur this cleanly or dramatically. Filtering often requires several years to occur, but it does occur. And we can see this in regard to automobiles. When an automobile is new, it might be unaffordable for low- and moderate-income families. However, as that vehicle ages, its value decreases and it slowly becomes more affordable to lower income families.
For decades, the demand for affordable housing has grown far faster than the supply—some estimate a gap of 100,000 units per year. The only way to close that gap is to dramatically increase the supply. And that means removing the restrictions and regulations that make affordable housing unprofitable.