If rent control "doesn't work" and supply induces demand, how can cities improve affordability?

Question

Suppose we aim that moderately poor people (let's say 1.5× minimum wage) can afford the rent for an apartment meeting minimum quality standards and located within city limits. This may be a political aim.

What economic policies are effective to achieve this?

• Rent control. Popular, but economics appears to tell us it creates more problems than it solves. See also the questions Why did Berlin freeze the rent prices as opposed to letting the market set the price? and What is the likely result of rent control in Berlin?.

• Increase supply? In cities, it appears supply may create demand (the more people in a city, the more services, the more people want to live there) so this may not always work either, or only under limited circumstances (perhaps unless building huge amounts, but developers hate vacancies, so I doubt that limit would be surpassed in a free market).

• Social housing, owned by the government? I don't know what economic theory says about this.

• Reduce demand? Not sure how that would work without harming the city.

• Impossible? Should we give up on the idea that poor people can live in alpha world cities such as London, New York, Tokyo, Paris, Singapore, Amsterdam, Seoul, Berlin, Hong Kong, or Sydney?

• Something else?

I'm aware that most economists say that rent control "doesn't work" — what are the alternatives that economists may prefer?

Answer 1

Disclaimer: this answer was significantly rewritten to spell out explicitly how it answers OPs question and to add some sources (thanks to @Fizz). The gist remains the same.

The only case I know where housing policy seems to work the way you envision is Vienna (the Austrien capital). They use a combination of several of the policies on OPs list, they have been doing this for a long time and they seem to be very good at implementing them in productive ways.

First, the city owns a significant proportian of all apartments, enough to have pricing power in the market (about 60% according to source). Additionally there are rent control laws on the privately owned housing (see for example here for some housing policies). Nevertheless private housing is more expensive than public housing (source).

Second, the city is engaged in long term planning for housing and they do that wholesale. So they are not just building houses on existing ground attached to existing infrastructure but they are creating entire new suburbs including attachment to public transportation, schools and all the other infrastructure needed for a successful city. The sources above also talk about that in more detail.

This is hard to pull of because it takes much longer to bear fruit that a typical election cycle. Doing things that cost money now and are very useful in 20 years is difficult for elected politicians. So even if politicians or people in general in other cities like to copy the Vienna model, it is not just a few simple policy changes.

Answer 2

There are three major economic reasons for rising house prices:

• Building restrictions (height restrictions in zoning laws, urban growth boundaries/green belts, difficult building permissions processes, minimum lot sizes, minimum parking requirements, floor area ratio)
• Speculation (prices increasing due to the expectation of future increases)
• Demand stimulating subsidies (mortgage deductions, housing allowances etc.)

So if you want to make housing more affordable, you need to reduce obstacles to build, reduce speculation and phase out demand stimulating subsidies.

For the first one, the problem is that a lot of these restrictions are in place to protect people's building (read: land) values, so we have a system in place where people's wealth are tied to their land, that they want to protect by avoiding tall buildings in their neighborhood, buildings on green space near them, 'poor people' on smaller lots next door, etc.

For the second one, since housing has become an investment, people want to be part of the wave of wealth (or at least not miss out while everyone else gains) from owning land. These people are rational and it is not only foreign investors or developers, it's everyone who can add "it's a good investment" to the list of reasons for buying a house. The problem is that owning land is inherently a good investment as long as populations rise while land is fixed in supply. The wealth earned from this is called economic rent.

For the third one, politicians like subsidies because they make voters happy in the short run, but almost every economic institution are telling governments to stop these, because they raise house prices for everyone, which is great for owners or the small subset of people who become able to buy a home due to the subsidy in the short run while making it more difficult for the next ones.

The problem here is tied to the problem of economic rent. The earnings from owning a scarce resource. Without it, people wouldn't need to protect it from development and people wouldn't tie all their wealth to it instead of more productive savings or investment. And people wouldn't urge politicians to increase it by making subsidies raising it.

According to Knoll et al., 80% of the increase in prices are due to the price of land.

Economists like Adam Smith and Henry George argued that to solve this we need to start taxing land separately from buildings. More recently, economists like Josh Ryan-Collins or Joseph Stiglitz have tied problems of increasing house prices and increasing inequality to this economic rent.

Answer 3

The best solution would be to minimize red tape and restrictions on new construction. If cities make it easier for developers and builders to construct more dwelling units, it would increase the housing stock and decrease rents and property prices to affordable levels. Also, experimentation of different alternative housing types could help. What alternative types of housing? One could be single-room-occupancies (SROs), which are like studio apartments, albeit without private en-suite bathrooms and kitchens. Instead all the residents in a particular portion of the SRO building share a bathroom or set of bathrooms in the hallway, and there's usually only one kitchen for the entire building. Another alternative housing type is microapartments, which are the attached, multifamily version of tiny houses. Like tiny houses, these apartments are usually under 490 sqft (47 sq m) each, and incorporate ingenious space saving features, and unlike SROs, microapartments contain private ensuite bathrooms. For families, a cohousing apartment building or pocket neighborhood would work well. Co-housing is like a typical roommate situation, except that each person or family gets an entire suite or small cottage with its own private bath. And a pocket neighborhood is a small development of rowhomes or cottages built on a site that would usually have only one single family dwelling built on it.

Answer 4

What cities ought to do if they really want housing to be affordable to practically everyone possible, is to relax some of the restrictions that stifle new builds and ban density. That way, builders and developers would be able to construct the number of dwelling units necessary to meet, and maybe slightly exceed demand.

Answer 5

The only way to stabilize or reduce prices is for supply to increase faster than demand.

Many cities that consider price controls also happen to have high barriers to supply. In other words often those cities have intentionally zoned their city in such a way as to intentionally create obstacles to new housing being built. This is the result of politicians with a bias toward central planning but lack understanding of economic principles enough to predict the unintended consequences on prices resulting from their zoning restrictions. So one way to ease upward pressure on housing prices is to encourage more supply by easing zoning and other regulations that present obstacles to developers.

Also, look at removing similar barriers to the supply of financing.

Answer 6

In many cases, it's impossible.

This may be a political aim.

Your problem is the political objective is a form of "central planning." Central planning objectives are rarely achievable without sacrificing individual liberties. Why not simply leave people alone to live out their lives without being controlled by the government? Why does the government need to plan and control where people live?

The answer is: it doesn't.