Suffocating Regulations Keep the Poor Out of the Housing Market

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When discussing the lack of affordable housing, many are quick to refer to the government to ask for help.

Affordable home advocates often urge officials to take on more projects—and create more laws—in order to aid those who cannot afford their own homes, but often ignore the root of the problem altogether.

A recent piece of research carried out by Mercatus Center’s Sanford Ikeda and Emily Washington shows that instead of urging officials to take on new projects, what is truly needed to make housing more affordable across the board is to simply remove regulatory obstacles.

Across the United States, land use and development is mostly regulated by local government bodies. These regulations include zoning rules, density restrictions, and even policies known as “smart growth” initiatives, which are often designed to limit urban sprawl.

Researchers claim that while on the surface these rules appear to promote positive outcomes, they often add restrictions to the mix that hurt the housing supply. The result is the inflation of housing prices, and a great deal of individuals who are locked out of the housing market simply because their income is too modest.

The creation of the first zoning regulations in 1916 in New York City made the regulatory model popular, and in no time municipalities across the country were passing similar zoning rules. In many cases, zoning rules price particular demographics out of certain neighborhoods, making said areas inaccessible to low- or middle-income consumers. According to the Mercatus Center research, “Well-intentioned regulation often represents the preferences of the wealthy by regulating otherwise negligible risks.” By artificially driving the cost of living in a certain neighborhood up, government regulations have “disproportionately negative or regressive effects on the poor.”

The research paper explains that these regulations often focus on risk-reduction strategies that target low risks. Just the kind of low risk that many people in the low- and middle-income brackets would accept handling on their own if it wasn’t for government’s interference.

Over time, constructors and companies in the housing industry are forced to handle the costly burden tied to the mitigation of low risks, and the prices tied to housing go up. Dramatically.

Here’s an example from Mercatus Center’s research:

“For example, a sales tax on staple goods has regressive effects because people with low incomes spend a greater proportion of their incomes on such goods. …

Compared to potential private risk-reduction strategies, regulation tends to target low risks that are extremely expensive to mitigate. Such regulations, therefore, represent the preferences of the wealthy and come at the expense of low-income households.”

As housing becomes inaccessible to a greater number of people as a result of older policies, local governments adopt new policies requiring builders to develop a portion of new constructions for low income residents, forcing companies to sell or rent these units below the market price. While the “inclusionary zoning” policies are often adopted with good intentions in mind, researchers found that they also restrict the supply of housing.

The result of these policies is similar to the result of the implementation of rent-controlled rules, meaning that the “price-controlled portion of such developments” will lead to shortages and even “discouragement of production.”

If companies aren’t willing to build because they will lose money in the long run, there will be an even more scarce supply of houses in the market, and the poor are the first ones to suffer.

To fix this issue, many experts mentioned in the research paper claim, policymakers must remove obstacles, which would eventually offer builders the extra incentive to develop more affordable houses. With a greater supply, the market will be able to provide a greater number of lower-cost housing units, and the regressive effects of restrictive policies will be finally reduced over time.