• mattmacpherson

Housing in Utah

I thought I would write a about the first issue I have been asked about so far, how to keep up with the demand of housing, and by implication housing costs, rental costs, etc. This is a good and interesting question right now as COVID 19 has depressed the residential and commercial markets for housing in the past few months. It will be interesting to see how things change in the recovery period.

Aside from my own business experience, my studies in economics gravitate towards the Milton Friedman and Henry Hazlitt school of thought, and I highly recommend Hazlitt's book, "Economics in One Lesson" for a great starting point for those interested in basic economics. In regards to housing in Utah therefore, my thoughts can be boiled down to four key points upon which I will attempt to explain in the following paragraphs:

  1. Economic and natural (births vs deaths) growth has led to an increase in consumers for housing and a desire for housing development, especially in our district where we have some of the last undeveloped land in the valley.

  2. Government policies artificially restricting the supply of housing with zoning restrictions or trying to slow housing development tends to lead to higher housing prices and decreased economic production overall.

  3. Artificially bolstering prices with housing subsidies and credits also leads to an increase in housing costs.

  4. Not all government regulation/subsidies on housing are bad things. In fact, much of it is important, but nearly always will result in the increased cost of housing wherever it is applied and must be balanced with these things in mind.

Housing Subsidies

Normally, when the number of consumers increase for a product (lets say housing in this case), the prices increase with this demand as there is a natural limit to the number of homes available at any given time. If 10 people want the same home, a bidding war begins and the price goes up. If a home is on the market with no offers, the price goes down. The same applies to rent.

Lets look at a scenario where a landowner of an apartment complex sets his rent at $1,000 a month last year and found himself 100% occupied. The next year, he will raise the rent, as the demand for the property keeps him 100% occupied. I would be happy to talk about the virtues and vices of "profit motive" another time, but for this article we will simply acknowledge it as a byproduct of the situation without going into the moralistic concerns.

If a landowner is renting out property at only a 50% occupancy rate, you will see the prices drop to the level in which people are now interested in renting it. Perhaps at $800 per month, the property is now 100% occupied. The price of the rent fluctuates with the demand. He can assume that $800 a month will be what his rental property can demand from the market.

Now what happens when subsidies are applied? Say the rental property is 50% occupied with homeowners that could afford the $1,000 a month, and the remaining 50% are paying $800 a month and receiving $200 in subsidies to cover the remainder of their rent. The landlord does not have a decrease in demand at his $1,000 rent rate and in fact he will raise his rates next year to keep up with the (artificial) demand. In addition, these subsidies are simply taxes, and those taxes may help a small group of people in the short term, but lead to higher housing prices overall, decrease supply of housing and rising taxes as subsidies are increased to keep up with the rising prices. Sometimes government enact rent control policies that force rent to remain at certain price which even further raise prices and reduce supply while raising taxes. (A discussion for another day).

I will stop here and say quickly that I am not advocating for ending housing subsidies, as we are already in this messy situation and simply cutting it will dramatically impact those receiving this assistance negatively. I am simply stating that increased demand, higher prices and higher taxes are a natural byproduct of these policies and must be considered.

Housing Restrictions via Zoning, Regulation and Other Restrictions

The other side of this equation is when government policies artificially restrict the supply of housing with regulation, zoning controls, red tape and delays. The thought process usually runs like this: If we let builders build whatever they want, they will build homes that generate the most profit. This will not necessarily be best for our citizens, so we will limit their building by setting zoning rules requiring certain sizes and restrictions in certain areas or at certain times, thereby controlling how many single-family homes are being built along with the number of high volume homes and apartments.

Now I do not appose zoning. There is a finite amount of land in the Salt Lake Valley and in West Valley City. Zoning is required to ensure we have room for the infrastructure, businesses, public services and recreational spaces that a city needs to thrive.

But what happens in the above scenario where a government limits availability? Here the government tries to ration demand for certain items by imposing controls on the availability but they do not stimulate the supply in any way. The "producers" produce goods at a rate proportional with demand, if they are allowed to do so.

To illustrate, lets look at another scenario with toilet paper as an example. When toilet paper was flying off of shelves, three things happened. First, the supply was diminished because of the increase in demand. Second, the price of toilet paper increased in reaction to the short supply. Third, this increase is price led to the increase in production. Toilet paper companies increased the supply of toilet paper because of the profit motive. There was now more profit in making toilet paper instead of napkins, for example. Toilet paper saw a nearly 120% increase in production as prices rose about 18% overall by early March. This is a good thing in a free market. Now as the supply goes out to consumers, the demand lowers because the shelves are no longer empty every time you go to the store. Unsold toilet paper is left on the shelves at night again, the stores do not order as much as they used to and do not pay as much. The suppliers stop making as much because they are not getting the quantity and price they were getting previously. The equilibrium is restored and the shortages end and prices level out again.

So how does rationing effect this? In the scenario we just described, many stores were limiting toilet paper purchases to two per person. What is the result? You have limited demand arbitrarily (you want 5 but can only buy 2), stores are not selling as much as they could be selling so they order less from the suppliers, the supplier produce less because of the reduced demand. There is now less toilet paper available to be purchased than before because of the reduced supply, which leads to hoarding and shortages. Now this can also be blamed somewhat on supply chain disruptions with the pandemic, but the profit motive of companies virtually guarantees this to be solved when there is an increase in prices to match demand.

Here is another great place to stop and mention that I do not believe there is no place for market regulation. It just needs to be understood that regulations of market controls through pricing controls or restrictions on demand do not generate the results desired by those who justified the regulation in the first place. Sometimes those regulations are still necessary (wartime or even pandemic-time production of profitless but necessary goods, for example).

Going back to housing, how does our toilet paper scenario inform our decision on government restrictions on housing? I would say it depends. If the desired outcome is a decrease in housing costs, or a decrease in demand, government controls will surely cause the opposite effect as well as increasing taxes, as we have discussed. If the reason is for a community/city/state to impose regulation that serves a need and the losses in economic productivity are understood and reasonably traded for the proposed regulation, then that could be acceptable. But that rarely seems to be understood, and almost never by bureaucrats themselves.

My views

Therefore, my personal goals would be to seek to slow and reverse the increase of regulation of housing, price controls, zoning restrictions where these factors are not being weighed properly. I would seek to slow and reverse the growth of subsidies in order to return housing costs to a normal equilibrium. I would not punish housing developers for making huge profits, as this is great for housing developers and encourages them to develop more homes as long as the profit motive remains. The increase in supply will lower the prices if we can stop artificially inflating prices with subsidies and limiting supply with rationing or restrictions. We will run into the problem of the finite supply of real estate, but this is only exacerbated, not solved, by the government policies restricting land use as they are today. Market forces will send more companies outside of heavily populated areas and allow expansion into new areas within the greater region. Housing, business, zoning- these things are not static. They should be looked at all the time as things change and flow. Empty commercial districts of today can be residential neighborhoods of tomorrow, and vice-versa. As we swell beyond our borders, we look backward, forward, outward, upward. Take off the blinders that tell you where to look and what to see. We may find we have a great view of prosperity and productivity in front of us.

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