Satoshi's Sidewalk #3

The Affordable Housing Problem

Market Urbanism @MarketUrbanism

How is this affordable to working families? Car manufacturers should be required to set aside AT LEAST 25% of cars affordable to people making 80% of area median income. The same huge cars they sell at market, not poor door cars. Trickle-down used car economics doesn’t work

Jon Geeting @jongeeting

Cars are expensive https://t.co/ly8yuw4zda

The above tweet is a play on affordable housing - a policy which is all the rage these days. Affordable housing policies aim to reduce the cost of rent for low income earners. Local government set a range of rent targets based on median incomes in a given area and grant incentives to developers to build below-market rent apartments. Local governments give developers permit fee discounts, grant relaxed parking requirements, additional density, etc.

There are many ways for government to reduce government-induced costs.

Affordable housing policies only treat the symptoms and not the underlying cause. Rents increase for an assortment of reasons. The two main factors being 1) supply and demand and 2) inflation. Supply and demand is measured by occupancy rates in a given area. CPI is the “go to” government statistic for measuring inflation (Bitcoin Urbanism uses the Chapwood Index). Occupancy rates are good indicators of submarket supply and demand - a 95% occupancy rate is something to write home about to investors.

Inflation is where the damage is done. High occupancy rates signal the market to create more supply. Inflation is a false positive for rent increases unrelated to supply and demand. Not a market signal to create additional supply. More money in a market chasing the same goods - in this case, shelter for rent - does not bode well for those who have the lowest incomes. The poor are the final recipients of the Cantillon Effect - which is the losing end of the deal.

Throw in restrictive development regulations and the cake for trouble is baked.

Affordable housing is built precisely for low income earners. The math is not hard. Less money earned = less money available for rent. To provide this “affordable” housing costs must be reduced wherever possible. Local government policies like zoning, planning codes, building codes, and design rules add layer upon layer of price distortions. All of which impact rental rates and are unnecessary costs in time, fees, and consultant expenses.

If a market can be served, it will be served.

If there’s no honest signals in a market, as determined by undistorted prices, there is no way to accurately serve the market without inducing poor investment choices that would not have otherwise occurred. This is called malinvestment.

A catalyst is required to induce malinvesment - affordable housing policies are that catalyst. Malinvestment cannot continue forever. Market realities win out in the end.