August 12, 2003

The Roots of the Housing Shortage

Gene Callahan explains how government intervention makes houses more expensive:

There are few things that reduce the price of a good like an increase in its supply. But the very people who decry the lack of "affordable" housing in New York and other places are often the ones who are most agitated about "overdevelopment." While the idea of "a lack of affordable housing" is itself suspicious, as pointed out elsewhere, it is clear that one effect of many government programs is to make housing less affordable than it otherwise might be.

Besides laws designed to halt "overdevelopment," the government reduces the supply of housing and drives up its cost in a number of other ways. Wetlands regulations often require extensive environmental studies before building is allowed to begin, and they completely prevent building on many otherwise viable sites. Licensing requirements restrict the supply of contractors, raising the cost of hiring them. Rent control laws reduce the attractiveness of investing in residential property. Government agencies that insure mortgages, such as Fannie Mae and Freddie Mac, reduce the cost of housing for those who qualify for their programs, since qualifiers can borrow at a lower interest rate with the government insurance than they could without it. But such programs drive up housing costs for everyone else, as those who do not qualify are faced with increased competition in bidding for houses.