The Horrors of Housing Regulation

The consequences of a bad policy with good intentions

Modern policy discussions often drift towards what the government ought to do to alleviate poverty. While this is necessary, we rarely end up discussing what the government can stop doing to increase poverty. In this blog post, I will discuss the harms of housing regulation and how it contributes to American poverty.

What Is Housing Regulation?

Housing regulation generally takes the form of land-use planning, zoning laws, or some other attempts to plan economic development in the real estate industry. These laws regulate when, where, and what kind of housing can be built. By definition, they make building housing more difficult.

The Supply and Demand

The economics of this issue is quite simple and can be represented reasonably well on a basic supply and demand graph. The graph below represents what happens with an increase in housing regulation.

As you see in the graph, the supply curve shifts left causing an increase in price and decrease in quantity. This is problematic because this means that people will be priced out of owning a home. The empirical data validates this claim.

Furthermore, regulation inhibits the ability of companies to build housing in response to higher demand. For example, a surge of demand for housing might occur in a city. This will drive prices up, which will create profitable opportunities for companies to build. The suppliers’ sensitivity to price changes is called elasticity of supply. This logic is borne out in the empirical data. A study from the American Economic Association Notes:

“For unregulated cities, the IV estimate of the price elasticity of supply is approximately 0.36. For regulated cities, the estimate is zero.”

Essentially, if there is a boom in the industry of a city that lacks substantial housing regulation, there will be an increase in housing prices due to the increase in demand, followed by a decrease in housing prices due to the corresponding increase in supply. This will allow a higher standard of living for everyone. However, if the city has substantial housing regulation that makes it difficult to build, then the companies will not be able to provide housing to respond to the surge in demand and prices will remain high.

Effects on Labor Allocation

There are various externalities to housing regulation. Among them is labor misallocation. By increasing housing prices, housing regulation makes labor less mobile. This decreases labor productivity and economic growth. According to an NBER Study

“We find that the increased spatial misallocation of labor due to housing supply constraints in cities with high productivity growth rates lowered aggregate growth by almost 50% between 1964 and 2009.”

Consider the following example, someone has a deep desire to be a country music singer and, unlike me, actually has the talent for it. The country music industry is heavily concentrated in Nashville. This person would likely be most productive in Nashville. That said, if there were not available housing for him to live in, he could not move there and would be less productive than he could otherwise be. This means lower wages, this also means lower quality country music (how tragic).

The Human Cost

While I am an advocate of using data in public policy decisions, I think it is important to point out the uniquely human cost of these sorts of policies. While housing regulation does indeed decrease economic efficiency, economic well-being is only part of human flourish. A necessary component to flourish, but not a sufficient one. Another aspect of human flourishing is the freedom to live where you see fit. Some people are perfectly content to live and die in the town they were born in, but others find themselves drawn to a different path. Even within the United States, we are blessed to have a diverse group of states with different cultural atmospheres. People ought to live in a place where they feel as they can flourish. Housing regulation disrupts this ideal by limiting mobility. People ought to have the right to live in a community where they can flourish financially, socially, and spiritually.

It’s Not Even A Progressive Policy

Tragically, housing regulation policies harm the very people they are intended to help (a common trend in government policy). A report from the Mercatus Center found:

The political process that favors homeowners’ interests over renters’ interests systematically favors older constituents over younger constituents, as 73.6 percent of homeowners are over 45 years old,75 whereas this age group makes up just 40 percent of the population. Based on this age distribution, landuse policy favors a relatively older demographic. In this way, the distribution of the costs and benefits of land-use policy is regressive because it tends to benefit those ages 45–54, the highest-income earners, while harming many under 35 who tend to earn less.76 Because policymakers face strong incentives to formulate housing policies that cater to incumbent homeowners, those policies tend to benefit wealthier and older people at others’ expense.

Because it benefits policymakers to support the interests of homeowners, policy produced to help the poor repeatedly does them harm. While the intentions of a policy may be noble, policies ought to be analyzed by their consequences. As the great 20th-century economist Milton Friedman once said:

“One of the greatest mistakes is to judge policies and programs by their intentions rather than their results.”

While zoning laws and land regulation may have good intentions in the form of promoting safety, efficiency, or beauty, they have utterly disastrous consequences.

A Cautionary Tale

In his book The Fatal Conceit, Frederich Hayek notes

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." 

The issue of housing and zoning regulation is caused by the same prideful impulse that has convinced planners they may implement their will into reality.

The real world is never that simple. Genuine study of economics and sound economic policymaking requires a certain humility of understanding not just of how little we know, but how little we can know. With these insights in mind, it is necessary to oppose land-use regulation and allow Americans across the country to pursue greater opportunity in accord with human flourishing.