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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?

gerrit
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    Idea spitball: land-value tax, progressive consumption tax (on housing purchases), no longer politically pushing for and subsidizing home ownership, getting rid of various land use and zoning restrictions (FAR limits, height limits, single-use zoning), and improving transit. – Kent Shikama Mar 01 '20 at 00:16
  • I'm also skeptical of the supply creates demand argument. Enough supply should eventually outpace demand even though there might be a local minima in which it looks like supply is inducing demand. – Kent Shikama Mar 01 '20 at 00:18
  • @KentShikama The linked question on supply induced demand could still use a good quality answer. I agree that there should be a limit (after all, number of people who can move to a city is limited by migration law, for example). Can we calculate where that limit lies? Is that limit of practical significance, or is it so far out that it's unfeasible to build so much that this limit actually kicks in? What are FAR limits? – gerrit Mar 01 '20 at 00:22
  • I think a high quality answer for that question needs to do a fair amount of data gathering that I'm not up for doing right now. However, reading through the question has reminded me of another item to add to the idea spitball: requiring higher down payments for mortgages and higher interest rates. – Kent Shikama Mar 01 '20 at 00:26
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    I do not believe in population limits to cities. Cities exist, among other things, to act as a giant labor market and to promote agglomeration effects. There are benefits to having more people who can reach other within a reasonable time frame (e.g. 1 hour). Most cities with zoning laws have restrictions to building heights and FAR (floor to area ratios), and sometimes they have nothing to do with safety/practical concerns (e.g. buildings shouldn't be so high that planes would normally be in risk of crashing into them) but are just used as negotiating tools for city planners and NIMBYism. – Kent Shikama Mar 01 '20 at 00:37
  • The last bullet point could be improved by focusing on the biggest and most expensive cities, as presumably you're asking about London and NYC, not Cardiff and Billings. Most cities around the world are actually quite affordable, as they're not a global metropolis. – JonathanReez Mar 01 '20 at 02:38
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    "In cities, it appears supply creates demand". No. All we have is that one politician somewhere in the world once made this claim. Economists don't actually believe that increased supply is always offset one-for-one by increased demand, so that there is never any point increasing supply whether in housing or any good (as that politician seems to believe). –  Mar 01 '20 at 02:39
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    The Economist had a recent (Jan 2020) special report on housing you may be interested in. (Note: may be paywalled) –  Mar 01 '20 at 03:28
  • Note that "rent control doesn't work" means it [likely] produces contrary effects in the long run. – the gods from engineering Mar 01 '20 at 07:57
  • Regarding your 3rd bullet, maybe look at https://link.springer.com/article/10.1007/s10901-012-9276-7 I'm not very familiar with research in this area either. The [US and other] experience with providing "insurers of last resort" may also be relevant (and not just the domain of housing, but almost anything that can be insured, e.g. auto insurance, deposits.) You've basically left you gov't support for (private) rent, which I think is a big area, especially in some countries like UK. – the gods from engineering Mar 01 '20 at 08:09
  • @JonathanReez Good point, added list of the type of cities I'm thinking of. – gerrit Mar 01 '20 at 12:28
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    Frame challenge. Most economists use antiquated pseudoscientiic models; only a handful of heterodox economists predicted the 2007 financial crisis, and few today understand the global macroeconomy. Rent caps obviously work and how you assess the social impact against the benefits depends on if you look at it through a private microeconomic lense or a political one, or a sociological one. If, as you state, your provided aims are political, flimsy economic theories hold little relevance. – Frank Mar 01 '20 at 22:32
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    Your problem is in the political objective which is a form of "central planning." Those types of objectives are rarely achievable without sacrificing the individual liberty of the population. Why not simply leave people alone to live out their lives without being controlled by the government every step of the way. Why does the government need to plan and control everything? – FreeMarketUnicorn Mar 01 '20 at 22:59
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    @FreeMarketUnicorn Because in that naive model the assumption is that 'individuals' constitute an important part of the economy when in actual fact rent control is often in reaction to corporate buying, and we live in a world where a tiny number of corporations produce 90% or more of what the whole world consumes. Leaving things to 'individuals' is just propaganda aimed at giving corporations the keys to the governmental castle. – Frank Mar 02 '20 at 06:09
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    @FreeMarketUnicorn Landlords aren't leaving people alone. Individual freedom is a communist utopia that no political system can ever achieve. – gerrit Mar 02 '20 at 08:44
  • @Frank Rent caps obviously work at reducing rent, but I think the question is whether they have other bad side effects and whether there's a good way for the government to reduce rent without significant side effects. – user253751 Mar 02 '20 at 12:46
  • @user253751 incorrect. The question asks about affordability. Affordability can be improved for example through helicopter cash drops on population segments. So affordability can be achieved without rent reduction. Rent cap side effects would in any case need to be presented as 'side effects' according to some metric, again political sociological economic etc, so it begins to look all quite circular. Perhaps the population is collectively suicidal. What set of interests do we want to support and how do we measure success? – Frank Mar 02 '20 at 22:39
  • Why is this attracting so many downvotes – gerrit Mar 03 '20 at 08:34
  • @Frank That does not improve affordability in a free market because landlords will just raise their rent to account for it, see? The paradox of https://en.wikipedia.org/wiki/Tax_incidence applies equally well to subsidies (negative taxes). This happened in NZ when the government tried to pay part of students' rent. – user253751 Mar 04 '20 at 12:07
  • @user253741 no I don't see that as being likely. If corporations are buying up property to boost sale price as a speculative measure then giving workers more money satisfies landlords, it would be irrational for them to evict these payers unless they were interested in selling – Frank Mar 04 '20 at 14:07
  • @iser263741 also can we please stop referring to 'free markets 'as if it were a real thing. We might as well discuss neverneverland – Frank Mar 04 '20 at 14:21

3 Answers3

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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.

quarague
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  • Very interesting. It costs money now, but it's an investment that may well pay off and be profitable in the long run. – gerrit Mar 02 '20 at 14:56
  • That's socialism (in housing anyway)! The local gov't indeed seems to control 62% of the local market https://www.huffpost.com/entry/vienna-affordable-housing-paradise_n_5b4e0b12e4b0b15aba88c7b0 – the gods from engineering Mar 02 '20 at 18:46
  • Interestingly however that doesn't translate into the private sector rents as much as you claim: "While the rental prices on the subsidised market have moved along the lines of inflation, rents on the free market have risen up to 43% between 2008 and 2016, according to a report by Austria's chamber of labour." So yeah, your post is a bit misleading. – the gods from engineering Mar 02 '20 at 18:52
  • They also have a rent control law in force in Vienna and it dates back to 1917 https://ucalgary.ca/cities/files/cities/forster_the-vienna-model-of-social-housing.pdf – the gods from engineering Mar 02 '20 at 19:09
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    @Fizz If the government owns enough housing to rent out at below-market-rent to those who need it, then the aim to improve affordability is still met, so I don't find it particularly misleading. – gerrit Mar 02 '20 at 19:22
  • Actually it still is so; a lot of the privately owned rents in Vienna (42%) are rent-controlled via this 1917 law https://www.immobilienwirtschaft.tu-berlin.de/fileadmin/fg287/ERES/Presentations/Funk-Rent-control-in-Austria.pdf not through indirect effects of the government owning a lot. – the gods from engineering Mar 02 '20 at 19:29
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    Just to be clear that this is not an "alternative that economists may prefer" (as may be suggested by OP's question "what are the alternatives that economists may prefer?" and OP's decision to select this as an answer). –  Mar 03 '20 at 04:24
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    @KennyLJ That is true. My answer essentially says, rent control does work for the goal to achieve affordable housing but only if accompanied by suitable other measures and only in rare circumstances. – quarague Mar 03 '20 at 07:48
  • OP asked what strategies could be used to achieve affordable housing for the poor. My answer is saying that a combination of rent control, increasing housing supply and government social housing can work for this goal if well implemented (and gives an example where it does work) and also explains why this is hard. Please explain why this is down voted. 'I think rent control is wrong' is not a valid reason. – quarague Mar 03 '20 at 09:25
  • You should probably edit the answer to make it a bit more clear, given your last comment, with which I agree, i.e. there was combination of measures. There's a fair bit of material linked in my prior comments with which you can make the answer more factual. – the gods from engineering Mar 03 '20 at 14:02
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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.

FreeMarketUnicorn
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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.

FreeMarketUnicorn
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    I deliberated whether to ask this on [Politics.SE] or here, and settled for here. Although your question might have been on-topic on the former, I don't think it's an answer on site about economics. It also lacks sources and is, frankly, obviously incorrect — for example, virtually all road infrastructure is centrally planned, and although there are some cases of spoil, it would be extreme to say you're controlled by the government every time you drive on a public road. Urban planning is another example where the right planning can prevent inefficient urban sprawl. – gerrit Mar 02 '20 at 08:45
  • @gerrit: The field of politics often intersects with economics as it often does with other fields such as the field of law, for example. Consequently, it's possible to be simultaneously on-topic in more than one field at a time. For example, you specifically mentioned politics in the body of your question when you wrote, "This may be a political aim." My answer makes reference to that part of your question. Also, you specifically asked if the political objective might be "impossible." My question directly addresses those two parts of your question. – FreeMarketUnicorn Mar 02 '20 at 08:51
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    From an economics point of view, the political aim is a boundary condition. We want to achieve X, what does economics tell us about what measures Y can achieve X. Yes, your line "it's impossible" does answer the question, but is not useful without sources. It is possible to introduce rent control, it is possible to build 1 million new homes in high density, to reduce/abolish mortgage deductions, to make rent tax-deductible, to subsidise rents, to build social housing, all have economic side-effects but your answer merely states "it's impossible" before continuing with political commentary. – gerrit Mar 02 '20 at 09:23
  • @gerrit: Sources won't help because 1. your question lacks sufficient detail for sources to be useful and 2. experts won't agree regardless. The only way to know the answer for any given scenario is to empirically test a given policy as a hypothesis. But your question begs the "impossible" answer as you list all the available options then argue why each, in turn, won't work. Taking your arguments on their face (because of the aforementioned lack of specificity in the question) it's often useful to ask ourselves "why" we are attempting to do X. Often that answer is political. And ill-advised. – FreeMarketUnicorn Mar 02 '20 at 09:54
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    As comments on my question indicate, the list of options I have listed in the question is not exhaustive. I disagree that it's ill-advised for protect people's right to live in their home city. – gerrit Mar 02 '20 at 09:57
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    @gerrit: But we don't have a right to live in our home city. We don't have a right to live in any particular place that we do not own or have a contract to rent. You must examine the premise of your questions. – FreeMarketUnicorn Mar 02 '20 at 10:05
  • Let us continue this discussion in chat. – gerrit Mar 02 '20 at 10:23