The Million Dollar Affordable Housing

Some thoughts about the issues of allocation by price rather than by waitlist and the significance of expensive subsidized housing.

Some progressive economists have equated rent control with minimum wage with respect to how it’s treated in economic literature. Academic convention is that rent control worsens economic conditions for consumers by rationing in a shortage in which there are winners and losers. Stockholm, Sweden is frequently held up as an example of rent control at its worst, where wait-lists for rent-regulated housing stretch up to 20 years long.

A housing market system makes tenants bid the price up to receive housing and thus the wealthier ones win; a command economy allocates by who’s applied first; and a mix of the two is whoever can afford the price gets waitlisted. I’ve seen quite a few market-oriented people assert that the price mechanism is doing its job at fairly allocating housing. I’ve seen them argue, in response to leftist progressives who push for market abolitionism and price controls, that a waitlist process is too rampant with discriminatory favoritism and corruption compared to market allocation.

For starters, I don’t agree with Capitalist advocates who insist allocation by wealth is inherently morally superior to allocation by waitlist — at least the poor ones have a chance with a waitlist. There’s also all kinds of ways discrimination and favoritism seep their ways into market systems and any perfect market system is as idealized as a corruption-free allocation system. However, my problem with a command economy — which proponents of strict rent control and no further market-housing supply prefer — is that price setting becomes a product of politics rather than a reflection of the cost of production. If this isn’t moderated well, it often results in a collapse or severe inefficiency in meeting demand because, well, there’s no free lunch. And this is what I find concerning about how these debates on subsidized housing occur on the left.

Many leftists in the online housing debate seem uninterested in knowing why housing costs so much to build. Some online progressives complained about the Twitter discourse around the $1.1 million per unit cost of a 100% affordable housing project in S.F.

Of course I’m outraged about it — it’s insane. If one subsidized housing unit costs $1.1 million (often more) then there’s no way San Francisco could ever provide enough subsidized housing for everyone. More broadly, any public institution with such high costs, if they’re largely not hard costs, cannot and will not meet the scale of production needed to help even a large amount of even the poor population.

Low Income housing in the Bay Area is reaching $1 million per unit to construct, with a half-dozen examples in Oakland, California alone. At some point you’re going to have to examine what's inflating the costs of public goods. In reality, it’s often the same soft costs that make market-rate housing expensive.

The problem is that many housing advocates are either oppositional or agnostic about measures that would lower soft construction costs such as abolishing parking requirements or speeding up permit entitlements. Some YIMBYs are somewhat simplistic that the high costs are solely the product of NIMBYism, obviously inflation and supply chains for materials play a major cyclical issue, but simultaneously they are right that excessive meetings and parking requirements force many projects out of financial feasibility. Notably, organizations actually tasked with constructing subsidized housing are in agreement with the YIMBYs with respect to the cost issue.

Plainly, it makes no economic sense to price housing below its cost unless it’s a non-profit program AND revenue-positive programs are being generated elsewhere. Here’s a timely example out of San Francisco where a subsidized housing owner under the city’s affordable homeownership scheme is going bankrupt for being required to sell their deed-restricted unit below what they paid for it. That model, if the norm, doesn't work for developers or homeowners. It just doesn’t make any sense to not focus on the high cost of production as a key means of lowering rents.

Let us use the USSR’s housing system as an example. The country famously had extremely cheap apartments to distribute to almost everyone, in part because rents were covered by government subsidies. That is a system where a home (but not necessarily housing that meets your needs) is truly a human right as it’s independent of your income. But the revenue to cover those rents were compensated by more expensive cost of goods and services that were not deemed as essential as housing.

More importantly, when their command economy failed to provide enough housing that met people’s needs, the market reared its head with underground market-rate homes which the USSR was also infamous for. That’s why market abolitionism is so remarkably silly of a goal, especially when the United States is short on millions of homes and it didn’t even work in the largest Communist state on earth. By definition, the Soviets didn’t abolish the housing market.

Exclusively building deed-restricted housing from here on out and rent control, if the per-unit costs are $1 million, are not going to abolish the housing market or come anywhere close. Markets will sprout up when the command economy fails to produce housing which is why Swedish Tenants Union, who have great rent control but poor housing production, call for increasing housing supply as a general strategy to help tenants.

When YIMBYs try untangle unhelpful regulations that inflate soft costs like density zoning, excessive community meetings or aesthetic-based building codes, opponents respond by calling it “deregulation.” The implication being it’s akin to right-wing deregulation of social safety nets and environmental protections for profit-oriented companies. But deregulation can be good or bad based on the social benefit of that regulation.

Ironically, flattening regulation to a good or bad category is itself a Ronald Reagan-era propaganda strategy to lump in needed protectionist regulations with bureaucratic red tape that was widely understood to be corrupt or inefficient. Regulating the height of apartments is an aesthetic benefit and a bad regulation; regulating the structural integrity of apartments is a health benefit and a good regulation.

This was not lost on leftist regimes throughout history: Nikita Khrushchev’s famous reform of housing construction standards in the USSR resulted in prefabricating buildings and simplifying architectural design which reduced costs tremendously and gave modern housing to more people than any nation in the 20th century. Khrushchev “deregulated” Stalin’s requirements on building designs which not only reinforced class structures the Communist state was supposed to abolish, but the burdensome requirements weren’t producing the housing needed. The USSR then adopted prefabricated housing, streamlined approvals and simplified design.

In conclusion, while progressive discourse should get real on high construction costs making subsidized housing unrealistic for mass consumption, market-oriented advocates should also understand that for poor people, the market isn’t actually preferable over the state or waitlists in providing housing. That’s why tales of long housing wait-lists for middle class people ring hollow to rent control advocates.

For tenants waiting in endless lines for Section 8 vouchers, it’s not obvious why housing allocated by capital is superior to housing allocated by the state. But total faith in price controls and disinterest in supply economics is simply going to run into predictable immobility problems and supply inefficiency that have frequently dogged effective public institutions throughout history.