Dr. Kaplan is a professor of economics at George Mason University and author of Build, Baby, Build: The Science and Ethics of Housing Regulation.
July 11, 2024
If economists claim to know some kind of panacea policy, some surefire way to solve every single social problem in one fell swoop, I would be the first to tell you, common sense dictates, that you stop listening.
So I feel uncomfortable claiming to know of a panacea — a big reform that would raise living standards, reduce wealth inequality, increase productivity, increase social mobility, help men who are struggling without a college degree, clean up the planet, and raise birth rates — the kind of sweeping reform that Democrats and Republicans, progressives and conservatives alike, can all be proud to support.
The panacea policy I see is housing deregulation. Research confirms that there are significant benefits to being in favor of high-rise buildings, apartment complexes, dense single-family home development, and expedited permitting. The growing YIMBY (Yes In My Backyard) movement has already scored high-profile victories in Minnesota, Oregon, California, and elsewhere, but even YIMBY adherents rarely understand the extent of the benefits of deregulating housing regulations.
Supply and demand
The case for housing deregulation starts with introductory economics: if you give home builders the power to dramatically increase housing supply, prices will fall dramatically. This is by no means wishful thinking. Before regulation became stricter in the 1970s, the textbook model worked well: when demand pushed prices above the cost of production, construction increased and prices fell. Data for the US has been good since the 1950s, with no long-term upward trend in prices until recent decades. Now, despite the declines during the Great Recession, an upward trend is evident. Current inflation-adjusted (and quality-adjusted!) home prices are well above previous peaks.
U.S. home prices have skyrocketed in recent decades
House prices are indexed to 1953.
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Today’s price is 25% higher than the previous record.
House prices peaked in 2006, just before the global financial crisis.
How do researchers say excessive regulation is causing high house prices? By a process of elimination. The U.S. population was growing faster when house prices were roughly stable, so high house prices aren’t due to increased demand. Nor are they due to higher construction costs: Inflation-adjusted construction costs have remained roughly flat for decades.
On the other hand, there is strong evidence that stricter housing regulations and limited supply drive up home prices: Highly regulated urban areas like New York City and the Bay Area have higher home prices and less construction, while less regulated areas like Houston and Dallas have much lower home prices and much more construction.
Housing prices tend to be higher in metropolitan areas with stricter housing regulations
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Source: Wharton Residential Land Use Regulation Index, Federal Reserve System
Note: All data is for metropolitan areas, which includes large cities and their surrounding suburbs. For Wharton Index, which is based on a voluntary survey, the data better reflects suburbs than city centers.
Standard of living
What would happen if home builders were free to build again and home prices fell to cost price? Conservative estimates suggest that prices would eventually fall by about 50% on average across the country, with significant and far-reaching effects. The most immediate impact would be a sharp rise in the economic well-being of the average American. With housing costs currently taking up about 20% of the average American’s budget, a halving in home prices would reduce the cost of living by 10% and increase living standards by 11%. This would be good news for people struggling to pay rent or buy their first home. And while current homeowners would see their home prices fall, those who sold to developers could still make a killing.
Wealth inequality
The distributional effects would be almost as striking. A decade ago, economist Thomas Piketty’s book Capital in the Twenty-First Century reignited the international debate about growing wealth inequality and argued for a progressive wealth tax to counter this trend. But what the public has hardly heard is how economist Matthew Loganley almost immediately presented evidence that rising house prices are the main cause of the widening gap between rich and poor.
Housing prices are rising in metropolitan areas where the wealthy tend to own property, and their wealth is growing faster than homeowners in less affluent areas, and even faster than the poor, who spend a larger share of their income (25%) on housing and are much more likely to rent. This is true not only in the United States, but also in Japan, France, the United Kingdom, and Canada. Free construction would therefore be both enriching and equalizing.
Rising house prices are increasingly fuelling wealth growth around the world
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Social mobility
Inequality aside, many people yearn for an economy with greater social mobility. What most don’t understand is that excessive housing regulations prevent people from taking the typical American path of moving to higher-wage areas of the country to secure a better life. A paper by economists Peter Ganong and Daniel Shoug shows that housing costs now routinely outpace wage growth. Cleaners and waiters are certainly well paid in the Bay Area, but they have to spend far more on rent than their additional income. The programmers and lawyers who moved to the Gold Rush areas are still at an advantage, but the rest of the workers are gradually moving out. In a functioning society, workers move to where they are most productive in their own self-interest. In our society, strict housing regulations decouple mobility from value, leading to mass migration of low-income residents from the geographic centers of technological progress and economic growth.
Between 1940 and 1960, Americans tended to move to higher-income states.
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However, between 1990 and 2010, that association disappeared or even reversed.
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Men who struggle
Housing deregulation would be especially beneficial for non-college men, one of the lowest class populations in America. Anne Case and Nobel Prize winner Angus Deaton famously drew attention to the poor job prospects and “deaths of despair” of non-college men. But more than 80% of construction workers have no college degree, and almost 90% are men. Construction is already a big sector, employing about 10 million workers who make an average hourly wage of more than $37, well above the average for non-college men working full time. Thus, allowing even mild deregulation would create millions of promising career paths (and well-paid ones at that), and full deregulation would add millions more, without forcing disaffected young men to learn to code.
Carbon Emissions
Environmental protection is one of the biggest reasons for restricting building. But relaxed regulations allow housing to be built in areas with naturally lower carbon emissions. Central cities are almost always greener than the surrounding suburbs; higher density, smaller housing and less driving tend to lower the environmental impact. Temperate regions, such as California, conversely, have the strictest housing regulations, steering the country’s population to areas with higher heating and cooling demands and emissions.
Restricting housing construction in areas that would be best encouraged to curb climate change
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Source: EcoDataLab, Wharton Residential Zoning Index
Note: Emissions data is from 2017, regulations data is from 2018. All data is for metropolitan areas, which include large cities and their surrounding suburbs. As the Wharton Index is based on voluntary surveys, the data better reflects suburbs than city centers.
Fertility
If US birth rates continue to fall, the housing shortage problem will eventually solve itself. But if we want to avoid the many dangers that come with a society-wide decline in population, relaxing housing regulations as soon as possible may be part of a far-sighted response. Culture matters, but high housing costs often lead young people to live with their parents for longer, delaying marriage and childbirth. Research on the YIMBY-baby connection is admittedly small, but it supports common sense: looser regulations lead to lower housing prices, and lower housing prices generally lead to higher birth rates and earlier childbirth.
Many sympathizers believe housing deregulation will never happen, blaming self-serving voting and arguing that most Americans own their homes, so any policies that would make housing more affordable would be blocked.
But opponents’ confidence is misplaced. In general, it’s ideology, not self-interest, that drives votes. Compared to Republicans, Democrats have long supported higher taxes on the wealthy and increased benefits for the poor. But there are still more wealthy Democrats and poor Republicans. National surveys show that 35 percent of renters, along with 42 percent of homeowners, favor a total ban on new construction in their neighborhoods. This isn’t surprising, given other survey results that show most Americans, whether homeowners or renters, don’t believe that an increase in housing supply means lower prices. About 35 percent believe that an increase in supply leads to higher prices, and another 25 percent believe prices will remain unchanged. The big obstacle to deregulation is not homeowner self-interest, but the denial of Economics 101.
Neither Democrats nor Republicans have yet embraced housing deregulation. YIMBY activists, while leaning to the left, are just one vocal voice in the progressive coalition. Republican states typically have weaker housing regulations, but that is more out of tradition than principle. But given the many proven benefits of housing deregulation, this policy agenda deserves bipartisan support. Democrats should celebrate the benefits of equality, social mobility, and the environment. Republicans should be happy to see free markets spreading broad prosperity, creating new opportunities for the working class, and encouraging family formation. In a rational world, the panacea policy of housing deregulation would be the default. I hope whoever wins the next election agrees.
