Housing Affordability

Imagine living in an indigenous, pre-modern and traditional community such as existed in the Amazon prior to the invasions by Brazilian miners and farmers. Would anyone in such a community be homeless? Of course not.  Any capable member of the community would be able to go into the forest, gather some wood, and build a shelter. This person would not need to buy or rent land; a portion of the community’s land would already be available for him or her to occupy and build upon.

Then why (apart from the fact that pre-modern societies often had different concepts of ownership and communal responsibility), are there people, in our much richer and highly developed world, with no decent place to live? Moreover, why are their families who spend half their income for minimal housing? In high-priced places such as along coastal California, many families must reside far from their place of work and encounter high commuting costs.

Aboriginal Huts on the Amazon River (from “Woman Triumphant”; the story of struggles for freedom, education, and political rights.)

Is housing affordability an inherent feature of a market economy? The problem is not one of population growth. Even though the amount of land is fixed, dwellings are variable. When there is a greater demand for housing, a free market responds with an increase in dwellings, either on more sites or with taller buildings on existing sites.

Our current housing problem originates in the price distortions caused by taxation and subsidies. Even poor people pay taxes. Low-income earners pay the same sales tax per dollar of goods as the rich. Low-income workers also pay substantial payroll taxes. Moreover, taxing employers of labor reduces employment and ends up reducing net wages. As a result, property taxes on buildings make it more expensive to build and to improve structures, and in the end this increases the cost of housing.

A person who is both a worker and tenant gets double-billed for government services. Most people want to live near services such as public transit, schools, security, parks, and streets. The demand for these locations generates higher land rent and land value. Since the cost of these public goods falls mostly on wage taxes, either when earned or when spent, those who own land receive the subsidy of greater rent and land value, while worker-tenants pay both taxes on wages and the higher rentals to landlords.

This is how the tax system pushes down net wages while inflating land values. And this is how housing becomes increasingly unaffordable. The solution to this problem is to do the opposite: no longer tax wages and shift the source of public revenue to a tax on land value. Workers would have higher wages, while housing would become less expensive and more affordable.

The elimination of excessive restrictions on new construction would also increase the supply and reduce the cost of housing. This includes zoning where, in some places, there are restrictions on greater density, making the land more expensive, while also reducing the supply of housing for lower-income people.

The high cost of housing generates a call for rent control. But government cannot control rents. Policy can only control who receives the rent. If the law prevents the landlord from collecting the rent, then in effect, the benefitting tenant is receiving the corresponding rental value. Rent control produces both waiting lists for dwellings and a conversion of rental units to owner-occupied houses and condominiums.

Instead of having some lucky tenants receive the rental value, the whole community would benefit from the collection of the land rent. Rent control would not be needed if the imbalance of high rent and low wages were corrected. The tax shift from wages to land value would rectify the root cause of housing unaffordability, and then there longer would be a need to address the problematic effects.

If indigenous, pre-modern and traditional communities in the rain forest could provide housing for all their members, then there is no good reason why there should be a problem providing families in our much richer, more developed and high-tech communities with housing. The solution is to un-tax labor and to share the rent.

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