Many Americans are becoming increasingly disillusioned with the ability of the free market to bring down skyrocketing housing prices. More and more Americans believe that home prices are being inflated by the greed of landlords and lobbyists, combined with the inability of policymakers to effectively regulate housing costs. Proof of this is that rent control has become mainstream again. By 2024, 22 statewide rent control/stabilization bills were introducedand the Biden administration proposed ceiling rent increases across the country annually by 5 percent. Rent control advocates agree with Bryan Caplan on one thing: housing prices are artificially high. In his latest appearance on EconTalk, Caplan and Russ Roberts discuss why housing regulations are the disease, not the cure, for rent increases.
Roberts and Caplan both dispel myths from both sides of the debate about why housing is so expensive. They mention that anti-regulation advocates often argue that high housing prices are caused purely by supply and demand; people are simply willing to pay more to live in cities like New York, Los Angeles and San Francisco. While the other side believes that corporate greed is responsible for the 21 million households with rental costs in America.
Both sides miss the point that housing regulations themselves increase the cost of housing. Caplan outlines how local governments often make it extremely difficult to build new housing, especially high-density housing, due to aesthetic, environmental and urban planning considerations. This causes the costs of housing production to rise, which is passed on to consumers, for example, through rent increases. Moreover, reducing supply creates an artificial shortage of housing, causing consumers to raise prices. Caplan’s solution is the title of his book, Build, baby, build; eliminate regulations that stifle supply, and unleash the market power that incentivizes developers to produce affordable housing.
Caplan qualifies the public choice position that inefficient regulation exists because special interest groups and self-interested politicians benefit from it, despite greater, dispersed costs to the community. Caplan disagrees. He argues that people 1.) do not believe that deregulation will lower prices, and 2.) prefer regulation due to risk aversion. People want to make sure that all concerns, even trivial concerns, are addressed. Because it is so difficult to completely avoid risk, very few projects will meet that threshold.
There is a common view of public choice that interest groups, not public opinion, determine policy. One of the most important things I’ve said in my career is that democracies actually pay a lot of attention to public opinion, but public opinion is so different from what economists think it would be… It’s really normal for tenants in the United States to oppose new construction… people are very focused on everything that can go wrong, and the government must protect us from that long list. If we build more stuff, there could be parking problems, the character of the neighborhood could be damaged, birds could be displaced. Economists may think these are just lame excuses, but they strike a chord with most of the population.
But why would people want regulation, given its negative effect on supply? Roberts and Caplan acknowledge that deregulation has costs; one of the many issues discussed during the podcast are aesthetic concerns. As Roberts argues, it is possible that allowing the construction of more high-density housing in San Francisco would diminish the neighborhood’s character. Caplan responds that developers want to provide an aesthetic product not out of the goodness of their hearts, but out of self-interest, because they can then charge higher prices to individuals to live in nicer buildings. For Caplan, a world with less regulation would produce more homes and more aesthetically pleasing homes. This is creative destruction in action, as historic buildings are demolished and replaced with aesthetically and technologically enhanced buildings.
In the book I Have a Time Machine, Ed Glaeser and I go back to 1931 to see the original Waldorf Astoria Hotel, which was just beautiful, so it’s just a crime to have torn it down, right? Well, guess what emerged two years later: the Empire State Building, perhaps the most beloved building ever created. You always have to think about the future. Whenever you see something you really like, there was normally something before it was cut that someone previously thought was great. I’m saying that you should at least be open to the possibility that developers want to make things better.
Roberts points out that restrictive housing guidelines weren’t always common, so what’s behind the shift in regulatory appetite? Caplan attributes a significant portion of the red tape pile-up to local governments paying more attention to activists and to better organizing by concentrated interest groups. Many of these activists are motivated by environmental concerns, centered around population density and new construction. However, cities have lower CO2 emissions per person than sparsely populated areas, and new construction is more CO2 efficient. According to Caplan, preventing the construction of new homes comes at a high environmental cost, and true environmentalists would appreciate the harm reduction that new construction brings. However,
…You can’t protect the planet in California because if you prevent people in California from getting affordable housing, they will move to another place in the country where emissions will be much higher. If you are concerned about global warming, what matters is not which part of the country the emissions come from, but what the total emissions are. A true greener would want to give a massive green light to the tons of construction work in California.
Roberts argues that proponents of both regulation and deregulation function as if there exists a regulatory mechanism that can be perfectly placed at the optimal level. The problem with the dial is that it is too vague; people tend to focus on the amount of regulation rather than the laws on the books themselves. But this tells us little about what constitutes an optimal housing policy is. Roberts challenges Caplan on what specific policies he favors, saying it’s too simple to cut half the regulations. Caplan is proposing a by-right development, which would require approval for a project if zoning rules are met. This would limit the ability of councils to stop development at their discretion.
Caplan suggests that Houston is a blueprint for success: a city with lower housing prices and a population explosion. Caplan makes sure to mention that Houston is not an unregulated Kallipolis, but what the city has done is diminish the public will to regulate by contractually internalizing the preferences of certain neighborhoods.
…Houston is successfully reducing popular pressure to regulate by respecting not only homeowners associations but also restrictive covenants. In neighborhoods where people want to regulate, the government lets them do so contractually, meaning that if people have an intense demand for regulation, they can. Meanwhile, neighborhoods where people are more apathetic remain open. You just have a lot more variety, which is crucial if every major city were half strictly regulated and half wild west, which would probably solve 80% of the problem.
The consequences of excessive restrictions extend beyond the housing market. As Roberts notes, housing regulations that limit supply make it harder for people of low socioeconomic status to live in areas of high economic productivity. But there are reasons for current renters and homeowners to support deregulation. Home prices would fall and it would become easier for homeowners to sell their home to a developer or upgrade from a starter home. Housing regulations are popular, even though their costs are high because they are largely invisible. This is why Caplan wrote his book, to make visible the abundant benefits of the invisible hand.
Related EconTalk episodes:
Jenny Schuetz on land regulation and the housing market
Judge Glock on zoning and local government
Katherine Levine Einstein on neighborhood advocates
Charles Marohn on strong cities, urban development, and the future of American cities
Alain Bertaud on cities, planning and order without design
Related Liberty Fund content:
Emily Hamilton on housing deregulationThe Great Antidote Podcast
How to fix the broken housing marketby Jason Jewell, at Law and Liberty
Solving the housing crisis, by Mark Pulliam, at Law and Liberty
Not enough housing? Let the market inby John Phelan, at Econlib
Is California’s housing policy a form of central planning? by David Henderson, at Econlib