More Housing, Not Outrage, Is The Answer To Higher Rents

An article in the New York TimesNYT, “The Rent Revolution Is Coming,” is worth commenting on not because it matters all that much in terms of policy, but because it is another pump on the bellows of an emotional and incoherent effort to seize private property and end private rental housing. Sure, it sounds like a conspiracy theory. Maybe I’ll be banned. But the Times article adds no light but heat to the notion that people who build and operate housing are bad actors and the idea of paying for the use of something that belongs to someone else is somehow obscene. Most Americans understand the idea of renting something until it comes to housing. The deep flaws in the Times story lay bare the dangers of fanning these flames.

Let’s step back to the basics of how prices for rental housing work. When there are lots of new jobs created in a community, what follows is an increase in demand for housing. If that demand exceeds the supply of available vacant rentals, prices go up. Something else happens; the incentive to build. Higher rents mean a greater possibility of paying for the costs and offsetting the risks of buying land, building, and operating rental units. Usually, these spikes in rent, rather than motivating a community’s elected leaders to step back and encourage more building, rising prices tend to motivate them to try and regulate housing to ensure outcomes for consumers.

The Kansas City Tenants group highlighted in the Times story “is one result. Pairing aggressive protests with traditional lobbying, the group exploded onto the political scene during the pandemic and has since become instrumental in passing tenant-friendly laws like an ordinance that gives renters a lawyer during eviction proceedings.”

The problem with these measures is they add risks and costs. When they multiply, it makes responding to demand more difficult and expensive. I posted about risk and certainty in this space and elsewhere. What’s notable is that building housing is more complicated than many consumer products like tacos or pizzas. It takes time. If I order a taco and it takes a week to produce, and prices for tomatoes, meat, and lettuce double in that period, either my taco gets more expensive or the taco truck loses money.

If rules go into effect that mean I have a risk that tenants will be empowered to not pay their rent with free lawyers and bans on eviction, my risks increase. It’s not about profit, but usually about debt service. Housing is always financed, so owners of rental properties have to deal with costs of operation as well as paying back the loans they got to build the housing. Add increasing rules to building in the first place and housing gets more challenging and expensive to build. All of this foment leads, ironically and tragically, to higher prices which only creates more outrage.

A developer interviewed in the story laid this out indelicately and incorrectly suggesting that “the cost of development is now so high that the most reliable way to make money is by building apartments for tenants who regard the cost of rent as ‘a matter of curiosity.’”

But the attitude and disposition of the person paying the rent is irrelevant as long as they pay it. The developer plays into the notion that development of housing is based on aiming at a certain demographic, in other words, “I’ll make more money building for rich kids.” This is simply false. The great strides that cities like Seattle had in microhousing production, for example, were based on creating a product priced much lower than larger apartment units but with higher yield per square foot in terms of return on investment. What drove smaller units before they were outlawed.

The story does lay out the conundrum that local officials find themselves in once they overregulate the housing market; prices keep going up and there isn’t enough money to build more and more subsidized units of housing. Elected officials can go to the angry mob of KC Tenants and tell them that the rules they’ve made have caused price increases and thus should be repealed, or they can try to find more sources of revenue to pay for subsidized housing. The federal government is more than happy these days to dump tax credit equity onto non-profit developers to build more. But it is never enough.

“As part of a new housing plan, [Kansas City] Mayor Lucas had proposed a $50 million bond issue to fund low-income housing, but at the same time he wanted to loosen the city’s regulations for apartment projects that receive tax break.”

For this balancing act, trying to pair more money with more incentives, the Mayor was attacked and protestors had to be hauled, screaming, out of the City Council Chambers when the measure passed. Incentives work. And so could cash to offset “cost burden.” But an increasingly radicalized groups wants more than help, they want power, to ultimately control housing in places like Kansas City and other growing areas. That’s not the answer. As Deng Xiaoping famously said, I can redistribute poverty or I can redistribute wealth.

Crushing private rental housing won’t increase housing supply but discourage it leading to more shortages and, instead of higher prices, rationing by bureaucrats. Local officials in Kansas City and elsewhere have to resist the urge to regulate, tax, and control their way to affordability.