Many politicians and bureaucrats claim that there is a housing shortage in California. Some get more specific and claim there is a shortage of “affordable” housing. What exactly do they mean? First of all, does the term shortage mean the same thing to economists who study the allocation of scarce goods? Probably not. Bureaucrats tend to think of a shortage in an absolute sense whereas economists think of the term in a relative sense. Economists would define a shortage as dependent on the price of the good. At some prices, buyers want more goods than sellers are willing to supply. The cure for this type of shortage is for the price to increase and eliminate the shortage. The “market” price that is arrived at in an open market will clear any shortage. A shortage in a market can only be sustained if there is a restriction placed (and enforced) on the price of the good. So it would seem that any short-term shortage of housing could be resolved by letting the price increase. In the long-term, higher housing prices could lead to an increase in the supply of housing.
So how could there be a shortage of “affordable“ housing? To politicians and bureaucrats, a shortage of “affordable” housing means housing that’s subsidized (and price-controlled) below the market price and available only to people of certain income levels. Of course, you could say there is a shortage of any necessary or unnecessary good. As my title suggests, there could be a shortage of $5,000 new Teslas. There could also be a shortage of $1 T-Bone steaks or $5 designer clothes. In a sense, economists would agree with these statements about housing, cars, food, clothing, and any other type of good priced below its market price.
In any market, there would be a shortage of goods priced at zero. The demand for goods at a zero price would exceed the amount sellers would be willing to supply. The problem of course is that politicians feel compelled to have the government provide “necessary” goods at subsidized or “free” prices. Of course, everybody knows or should know that “free” government-provided goods, like K-12 education, are not really free.
Before I get to the housing issue, let me suggest there are simple ways to provide “affordable” necessary goods. Markets for cars, food, and clothing have many types of used and lower quality markets. The used car market can provide cars priced at $1000 that are affordable to people at lower income levels. There are many cheaper types of meat or protein sources available than just T-bone steaks. Similarly, new clothing has a wide spectrum of style, quality, and prices, and there are markets for used clothing available. All of these affordable goods are provided voluntarily by private markets. In the housing market, there is a used housing market for older homes.
So why do politicians feel obliged to provide “affordable housing” to their residents? Generally, they will cite statistics claiming that low-income residents are paying too much for housing. Of course, they fail to explain that these expenditures are completely voluntary. Low-income owners of housing have qualified to receive mortgages that are based on federal standards that restrict the amount of money one can borrow to purchase a home (30-35% of monthly income). Similarly, low-income renters must apply and qualify on a similar income basis to get a landlord to accept their rental application. It’s odd how on the one hand politicians argue that housing is unaffordable but fail to acknowledge that the individuals they cite as paying too much are somehow able to afford the housing they are living in.
Politicians believe that low-income residents are entitled to high-quality newly produced housing that they cannot afford. That’s why I titled my blog referring to “affordable” Teslas. Rather than allowing the market to provide housing that low-income residents can actually afford, politicians tax new developments to provide “affordable” housing to low-income residents. This tax restricts the supply of housing and makes it more expensive for those that are not low-income residents.
In my next blog, I will discuss a specific policy, Inclusionary Zoning, and provide the numbers and conditions that are imposed on new development to provide “affordable” units.
