Stupid Affordable Housing and Other Nonsense
Iskra and I recently bought a condo to rent out in a nice new building in Denver. (See picture!)
Aside: Buying real estate in a growing city is a great investment; I recommend it to anyone who can afford it. If well-chosen, the property should appreciate by a few % a year. (In Denver, prices have gone up 7% a year for a decade!) While you have it, you can either live in it (and thus avoid paying rent) or rent it out to someone else, both of which are huge benefits. In our case, we expect the rent to cover the mortgage payment plus property taxes plus HOA dues. It’s a great deal. By the way, somehow, it seems that interest rates right now are below inflation. (?!)
Anyway, while we were looking at this building, we saw one unit in the building that was surprisingly cheap (https://www.redfin.com/CO/Denver/1750-Wewatta-St-80202/unit-530/home/145681927). It’s advertised for $325,000; I would guess it’s worth closer to $550,000, based on comparable units in that building. (That’s a 1-bedroom. Yes, the prices are that high in this building!)
Why is it so cheap? Well, that is one of the “affordable housing” units that the developer has set aside. It turns out that the city government has a special tax that housing developers have to pay whenever they provide new housing (including when people modify existing housing to increase its size). This tax helps provide affordable housing. The developer of this particular building made some kind of deal with the city whereby they reserved some low-priced units for less-wealthy Denverites; I assume this was in exchange for a tax break.
So, that’s nice, isn’t it?
It’s just too bad that the city government is staffed by simpletons. (Note: This isn’t special to Denver; most governments at all levels are similarly dumb. This is just one illustration of the sort of thing governments do.)
Let’s set aside all controversial philosophical questions about the proper role of government, etc. Let’s say we completely agree with the government’s goals, we don’t have any moral constraints on how to pursue those goals, and we also don’t care about wealthy people’s interests. With all that assumed, it’s still a stupid policy.
1. Who bears the cost?
Let’s say you want people to be able to get some product, and a lot of people presently can’t afford it. Here’s the last thing that you would want to do: Impose extra costs on people who provide that product. You need to reward, not punish people who provide the product. This is Economics 101: you increase the costs to providers, you increase the prices.
In case you’re now thinking that you can just impose price controls, that will just cause less of the product to be produced, so fewer people will have this thing that you think is so important. (Though it won’t any longer be that they can’t afford it. Compare how everyone in the Soviet Union could afford bread; they just couldn't get it because the stores kept running out.)
If something is “too expensive”, the price is not fundamentally the problem. The price is a symptom of the real problem, scarcity – there isn’t enough of the thing to go around. So suppose you then say, “We’re going to make a bunch of bureaucratic hoops and extra big taxes for all people who provide that product. That way, they’ll have to serve the poor!” No, they won’t. What products and services people are going to provide is not set at birth; people don’t just automatically provide whatever products they’re providing. If the costs (in time, money, annoyance, etc.) of providing some product go up, people have the option of not providing it. And those who still provide it will of course charge more.
So the absolute dumbest way of trying to make housing affordable is to impose extra costs on people who provide housing. If you wanted to put more low-income people in homes, you could impose the extra cost on literally anyone else, anyone other than the people providing housing, and it would make some sense.
The lesson applies to any other product. Say you think health care is really important, and you’re worried that some people aren’t getting it because they can’t afford it. Well, providing health care is costly. Who should bear that cost in the case of indigent patients? Worst possible answer: “Health care providers. We’ll just force them to provide free care to the poor!” What that actually means is “We’ll prohibit anyone who doesn’t want to provide free health care to the poor from providing any health care at all.” Any other answer makes more sense. For example, “We’ll tax Twitter users to subsidize health care for the poor” makes more sense.
2. Who benefits?
As is often the case with government programs, this affordable housing program isn’t even aimed at the poor. It’s aimed at the middle class. To qualify to buy the affordable housing units in that building, your income has to be between something like $40,000 and $75,000 (for a couple). Seriously. That’s not exactly poor.
Why are we running welfare programs for the middle class?
3. What form should the benefit take?
Programs like this provide a large benefit to some people. But they require you to take the benefit in a particular form which might not be what you most want. E.g., if you qualify, you have the chance, in essence, to spend $325,000 and get $550,000 worth of housing. So it’s like a $225,000 transfer from the developer to the resident.
But you might not have wanted an extra $225k worth of housing. Most of these buyers would much rather just have $225,000. They would probably spend it on lots of other goods that they value more than the extra-fancy housing. But they can’t do that. Once they buy the unit, they cannot resell it at its market price. Nor can they, say, rent it out to a tenant at its market rate and then use the extra money to buy stuff they really want. Those things are prohibited.
What this means is essentially that the value to the recipient of this benefit is much less than the value of $225,000. Which is to say, the government has essentially found a way of expending $225,000, while giving the beneficiary much less than $225,000 worth of value. In this case, I’d bet that the actual value to the recipient is a fraction of the $225k, perhaps closer to $40k or $50k. (In other words, I’d bet that whoever buys that unit would rather have had a unit that is actually worth $325,000 plus have an extra $50k.)
A minimally competent person who wanted to help the poor would just have raised taxes slightly, costing the same total amount to the economy overall, and then distributed cash to all poor people in the city. The actual government decided it would be better to destroy most of the value, while only benefitting a few random, middle-class people.
This, again, applies to all benefits, not just housing. E.g., food stamps are stupid. Just give people the money value of the food stamps and let them buy whatever they actually want. By forcing them to only spend it on a particular product, you’re lowering the value of the gift to the recipient, but you’re still costing the same amount to the economy.
4. Gaming the system
Whenever you’re trying to fight the market, people are going to try to circumvent what you’re doing. When I heard about the affordable housing program, I quickly started to think about what people would try to do. First I thought they’d just buy the unit and resell it; unfortunately, that’s prohibited. Then I thought buyers would rent their units out, but that’s also prohibited.
Note: The program would be much better if the buyers were allowed to do those things. Then they could reap the full value of the windfall that the city is trying to give them. Think about it like this: Imagine that a lower-middle-class person just inherited a $500,000 house. She doesn’t need it, so she plans to sell it. Imagine the city passing a law that prohibits that person from selling the house, renting it out, or in any other way trying to extract its monetary value. “No,” the city says, “the only thing you’re allowed to do is live in that house!”
Obviously, that would be completely stupid. That just harms the poor owner and benefits no one. Well, the affordable housing program is just like that.
Anyway, my next thought was this: The affordable units are probably going to be bought mostly by people whose current income meets the requirements, but who expect to shortly have an increase in income. Like, say, recent college graduates who are starting their careers. I assume that if your income goes up after you buy the affordable unit, you don’t get kicked out or anything; you get to keep living there.
Why would this happen? First, these are the people who would most value those units. They’re the people who, if they got an extra $225k, it would actually make sense for them to spend it on extra fancy housing. Second, they’re the people who would be the most desirable buyers; e.g., they’re the least likely to default on the loan. So those people are going to find it easiest to get a loan, and are also going to be most motivated to get that loan. The developer would probably prefer to sell to those people too.
The result: after a few years, the building will probably be mostly occupied by very similar people, regardless of whether they got the affordable units or not; it’s just that some of these yuppies will have gotten a gift of a couple hundred thousand dollars.
This is just an educated guess, of course. Time will tell what actually happens.
But I'm very confident of the general principle: If you believe in wealth-redistribution, the most efficient way is to give cash (not in-kind benefits) to all (not just a handful) of the poor (not the middle class), and pay for it with a general tax (not a burden on one industry).