Deludedly Deeming Deregulation a Disaster
I posted this on Twitter two weeks ago.
Suppose housing deregulation drastically increased housing supply.
Housing prices fall 50%.
Living space per capita doubles.
What share of the U.S. population would nevertheless call housing deregulation a “disaster”?
— Bryan Caplan (@bryan_caplan) November 13, 2019
The results were much as expected. Housing deregulation could deliver everything its proponents promise. Housing deregulation could bring back a world where high school grads commonly buy shiny new homes in high-wage regions. And if my respondents are correct, this seemingly rosy scenario would still outrage a great swath of the population. Note, moreover, that if a third of Americans would decry deregulation as a “disaster,” then we can safely assume over half would at least deem it a “mistake.”
Most people would probably chalk the disaster rhetoric up to human selfishness, but don’t be hasty. Consider the myriad ways that homeowners could nevertheless selfishly benefit from deregulation:
1. Homeowners who own little or no equity could walk away from their small, expensive home in favor of a larger, cheaper home.
2. Homeowners who eventually planned to move to a larger, more expensive home could easily find that their losses on their old home are smaller than their savings on their new home. And they wouldn’t have to wait as many years to upgrade.
3. The grown children of settled homeowners could much more easily afford to live near their parents – and wouldn’t need so much help for a down payment.
4. Yes, higher local population means more congestion. Yet it also means better shopping, entertainment and employment opportunities. What’s the net value of all the good effects of more people bundled with all the bad effects of more people? The very fact that prices are much higher in densely-population areas strongly suggests that the net value is highly positive. “New York would be great without all the people” is sadly naive, because without all the people, New York would no longer be great. Upshot: When prices fall in half, established homeowners get at least some offsetting gain in consumers’ surplus.
5. If you’re willing to move, improve, or subdivide, deregulation allows even established owners with lots of equity to readily profit. If you suddenly gain the right to legally subdivide your lot into three homesites, a 50% fall in the value of the home you own is a fair price to pay. The same goes if you can now build up. Replace your home with a 10-story apartment and pocket the difference. Cha-ching.
Do I seriously believe that many – perhaps most – existing homeowners will profit from deregulation? Earnestly, I do.
Doesn’t this mean that tens of millions of homeowners are simply confused? Indeed it does.
Isn’t that an absurd view? So it might seem – until you realize that much of the population rents, but only a tiny minority of the population sees housing regulation as a problem. Deeper research confirms that renters strongly oppose deregulation, too! Since tenants are plainly deluded on this, why is it so hard to believe that homeowners are deluded as well?
Personally, I own a lot of home equity, and hope never to move. If housing prices fell 50%, it would directly cost me hundreds of thousands of dollars. Yet even from a totally selfish point of view, I still say deregulation would be awesome.
Why? Because I want my kids to be able to afford to live in my neighborhood when they grow up.
Nov 26 2019 at 9:46am
Eh. I’m sure Caplan has nice kids and all, but I’m not really that interested in where they live.
Nov 26 2019 at 10:37am
I largely share Caplan’s view. But I suspect he misses much of the point of people’s concerns.
People invest in property in part out of a desire for control: They want to limit their exposure to uncertainty. But we live in a world awash in externalities. Thus, my ability to enjoy my land is heavily dependent upon whether someone installs a giant, blaring, smoke-emitting toxic waste incinerator next door. So the same impetus that prompts people to buy a home also prompts them to favor all kinds of regulations designed to lock in the status quo.
Proponents of laissez faire policies generally make two arguments in response.
First, they tell people that they are WRONG to value the status quo, and that they should value growth and change instead. Again, I largely share this view. But when it comes to telling people what to value, we’re in the realm of religion, and I like to respect people’s religious preferences.
Second (and more successfully), laissez faire proponents argue that efforts to lock in the status quo are simply unworkable. Historic preservation rules may let you lock in a certain housing stock, for example, but the kinds of people who can afford to live in the preserved neighborhoods will change–which will inevitably change the neighborhoods. Or you may try to lock in status quo rents with rent-control laws, but you’ll see a deterioration of the housing stock–which will inevitably change the neighborhoods.
I don’t know that every effort to lock in the status quo is doomed. But it’s not hard to find examples of failures.
The archetypal example of doomed efforts at preserving the status quo can be seen in small town rural America. (Admittedly, I don’t know that these efforts have focused on housing regulation.) Some small towns have experienced influxes of Hispanic immigrants who have brought unfamiliar restaurants, put up weird Christmas lighting, demand church services in Spanish, and switch the high school’s emphasis from football to soccer. And spending on public assistance increases.
Other small towns have kept out immigrants, thereby preserving their status quo. But they have failed to stop time. Without new blood, these towns age, wither, and die. The schools close. Then the restaurants. Then the churches. No one puts out Christmas lights anymore. And with the collapse of employment and churches, spending on public assistance increases FASTER, while the tax base to support the spending shrivels. So who, exactly, has preserved the status quo?
Nov 28 2019 at 12:01am
I would say I’m pretty close to declaring that nearly all efforts to preserve the status quo are doomed. Housing regulations help keep people out, but they can’t keep people in, and once some members of a community decide to leave, with no one able and willing to replace them, demand falls within the community, inducing still more people to give up on the preservation project and leave. You can preserve the status quo in the short term, but often at the cost of condemning a community to callapse in the long run. And communities that try to preserve the status quo and thrive? They fail as well. How many thriving neighbohoods in major cities have similar ethno-cultural composition today to just 30 years ago? The thriving examples of highly controlled neighborhoods thrive because people keep managing to get in despite the control.
Nov 28 2019 at 12:18pm
Of course all policies to preserve the status quo are doomed on a long enough time scale. But you can at least, sometimes, be effective at slowing the rate of change. Which is often enough for most people. As people age, they’re naturally going to desire different things at different stages of their life, and moving a few times isn’t all that traumatic. It is a lot different if your neighborhood changes at such a speed that you hardly recognize it a couple of years later, and your options are to move or settle for living someplace you no longer like.
Nov 26 2019 at 11:25am
Yes, higher local population means more congestion. Yet it also means better shopping, entertainment and employment opportunities. What’s the net value of all the good effects of more people bundled with all the bad effects of more people? The very fact that prices are much higher in densely-population areas strongly suggests that the net value is highly positive. “New York would be great without all the people” is sadly naive, because without all the people, New York would no longer be great. Upshot: When prices fall in half, established homeowners get at least some offsetting gain in consumers’ surplus.
I’m in favor of housing deregulation, but I think you don’t give enough weight to people’s preferences here. If I’ve lived in a neighborhood for awhile, there is a good chance that the reason is because I like it the way it is. Almost any change will be perceived as bad to those residents, including the ones you mention.
I’ve lived in a gentrified neighborhood in Brooklyn for a decade and have seen this first hand. For the long time residents, sure, they all of a sudden have more restaurants, bars, and other entertainment, but those establishments are generally catering to the new arrivals, not the current residents. And they have the impact of pushing out a lot of businesses that people did use for shopping, entertainment, and employment. The grocery stores now carry quail eggs and kombucha on tap, but a lot less of the kind of produce and specialty ethnic ingredients they used to carry.
So, more crowds, harder to get a seat on the subway, the closure of businesses that catered to me, higher prices in the grocery stores, longer commutes, as the businesses they used to work at move further out of the city, what’s not to love?
Nov 26 2019 at 1:40pm
That’s the glory of deregulation! If you don’t like the direction of a neighborhood, you can buy it up to prevent the change from taking place. In other words, you can “throw a bag of money at it” as Dr Caplan would say.
Nov 26 2019 at 3:14pm
I think prices would have to fall by a lot more than 50% for that to be a viable strategy for most neighborhood residents. Conversely, the present strategy of banding together politically to make changes to your area extremely difficult, seems to be pretty effective in lots of places.
Unfortunately, my preference for freezing things in that precious short period of transformation where there’s a mixture of old and new, abandoned warehouses next to pop-up art galleries, equal representation for taco joints and hipster dive bars, doesn’t seem to have much of a constituency.
Nov 27 2019 at 10:19am
Prices don’t need to fall (though they would help). One could always secure a loan to make the desired purchases. Rather, it’s a question of costs versus benefits.
Nov 28 2019 at 10:05am
Happy Thanksgiving Jon. Hope you’re having a good start to your holiday.
I’m not sure that I’m getting the exact free market mechanism you’re thinking would work to perpetually freeze a neighborhoods characteristics in amber? Take my neighborhood, which is mostly a mixture of 3 family homes and small apartment complexes of maybe 6-8 units in the core area, and warehouses and factories that have been converted into larger apartment buildings on the periphery. These have been too expensive for most of the residents of the neighborhood to own for a very long time, and so of course the area is predominantly made up of renters. If I, as a low income renter, wanted to try to keep my home the way it is, I could maybe try and team up with the other residents of the building and collectively buy the building from the owner…but it is unlikely that we would be able to give the highest bid, because other buyers have higher economic plans for the same building.
The economically efficient outcome is of course to go with the highest bidder, who values the building more than anyone else. But, for me, the current resident, that plan sucks. We may not have the economic clout to get our preferred outcome, but together we may have enough political clout to prevent the owner from selling to the highest bidder. This is a bad outcome for the owner of the property, and for all the people that may want to move into that area, but for current residents it seems pretty rational.
The only thing that I can see that would prevent this rational self interest is devolving the decision making process over land use up to a higher level of government authority, that is big enough to not be susceptible to small scale neighborhood lobbying. Similar to what California is trying to do with SB 330, essentially forcing local governments to approve new housing permits as long as it meets the requirements already in place. That comes with it’s own set of problems, is hardly what one would consider a libertarian solution, and it isn’t clear yet if it will even be effective. I think people for housing liberalization greatly underestimate people’s attachment to the places that they live, and desire to keep almost all change out.
Nov 29 2019 at 8:48am
“If you don’t like the direction of a neighborhood, you can buy it up to prevent the change from taking place.”
Nov 29 2019 at 8:50am
Sorry, meant to comment on the above. Isn’t this what NIMBYism is? No need to buy up the property as it’s already owned by those who have voted to keep the neighborhood the way it is.
Nov 29 2019 at 4:06pm
Not quite. NIMBYism is when you use the State to get your way.
Nov 26 2019 at 3:16pm
Also, can someone give me a step by step instruction on how to use the quote buttons correctly? I’ve got it to work sometimes, and other times I swear I’m doing the same thing, and no luck.
Nov 27 2019 at 10:17am
I can do this for you.
Step 1: Press the Blockquote button on the toolbar (the ” symbol). Your cursor should be indented now.
Step 2: Type (or copy and paste) your desired quote.
Step 3: Press the “enter” key to start a new paragraph
Step 4: Press the Blockquote button again to turn it off. Your cursor should no longer be indented and what you type will not be in the quote box.
Nov 28 2019 at 9:28am
Thanks Jon for the tips.
Block quote seems to work
Step 2: Type (or copy and paste) your desired quote.
Using the brown block quote with the same steps doesn’t seem to work, or at least I can’t tell that it is working as I write this.
Nov 28 2019 at 9:30am
Hmm…now I see that the block quote adds the color as well. I thought I’d tried that once and it was just indented, but without color added, but maybe it was just because it looked that way as I was typing, and I didn’t actually post it?
So, what is the purpose of the brown and blue block quote buttons?
Nov 29 2019 at 9:20am
I don’t use the brown or blue buttons. I use the regular quote button (fifth from the left, next to the “numbered list” button)
Nov 26 2019 at 11:52am
On point 5, I expect the concern is that current homeowners might not end up benefiting, or actually lose slightly, and that most or all of that profit would be distributed to large developers that have the capital to make those large investments. And perhaps even if current owners benefit, but only slightly, I expect the socialists will hate the resulting “rising inequality,” even though it enriches us all… “it’s better for us all to be equally poor than others to have more than me!”
Nov 26 2019 at 12:06pm
“Personally, I own a lot of home equity, and hope never to move. If housing prices fell 50%, it would directly cost me hundreds of thousands of dollars.”
Wouldn’t it actually save you money? Your property taxes would go down, and none of your other expenses would go up. It wouldn’t even cost your heirs any money, because the consumption value of the asset would remain unchanged.
Nov 27 2019 at 11:46am
Having just made my second and final property tax payment for 2019, I can tell you that 3/4 of our assessment is on the land and only 1/4 is on the actual dwelling. This is a just inside the Beltway, Bethesda MD, home that is very modest. Land is king around here in our neighborhood which has mostly homes constructed between 1955 – 70. When homes are sold they are either knocked down for a new build or drastically remodeled.
Deregulation won’t do much at all without reasonable transit planning. Downtown Bethesda is morphing into high rise apartments and condominiums that are all high end construction. Even if we sold our home, we would only have enough for a 1 or maybe small 2 BR condo. Things are being built for those with lots of money or those who want to assume a lot of debt.
Nov 28 2019 at 7:12am
The tax rate would go up because the costs of services per housing unit would remain fairly constant, requiring the same tax revenue.
There are places where falling prices force lower costs, but those are dying towns. Many can be found in rural America. Kids leave town and the remaining residents have stagnant and declining incomes, so schools, public services are cut, so now few people are willing, or even can move into town.
Nov 26 2019 at 1:01pm
I don’t see housing prices falling in half, I see the land price dropping that much, and the structure value falling little to none.
So, San Francisco (and etc) housing prices would plummet, but middle America housing prices wouldn’t move that much (which is exactly what happened in 2007-8).
I am in an in-between area now, the land price dropping in half would eat up almost all my equity, but I would still be above water. The problem would be for people who had small amounts of equity, shifted to underwater, and had to move quickly.
Nov 26 2019 at 2:39pm
Seems less about housing prices falling than finding how many are wedded to opposing deregulation in the face of overwhelming good outcome from deregulation.
Nov 26 2019 at 4:15pm
Plus people not understanding that if you’ve paid 20,000 dollars toward your 300,000$ mortgage, you don’t really own a 300,000$ home, you own a small fraction of it and the right to any gains from selling it in the future, with the catch that you’re also liable for any loss in value.
Nov 27 2019 at 9:37am
The problem is that the overwhelming good outcomes aren’t necessarily for the people already there.
If you have bought a single family home in San Francisco, building deregulations may not be good for you. It will be great for everyone who wants to live in SF but can’t afford to today.
SF needs entire neighborhoods of single family homes bulldozed and replaced with 9 story condo buildings (for an example). This would have happened at least a generation ago if it had been allowed. SF should look like Manhattan and Manhattan should look like something from a Sci-Fi movie.
But the current residents (or, at least, the powers that be) won’t allow that to happen.
Nov 26 2019 at 3:40pm
Hmmm. I would favor the deregulation on principle, but I think I would personally be worse off in your scenario. I would like to move in 3 years, and I would be underwater if my house lost 1/2 value right now. The equity I would have used to pay the down payment for my new home would be gone, and if I default on this loan, who is going to give me a new loan? Given the destruction of tangible wealth due to the deregulation, I think banks would be gun-shy about housing loans in general. I have no children, so no familial benefit.
I’m sure there would be offsetting gains, but I don’t think it would be enough to make up for the equity loss and bank problems.
Nov 26 2019 at 4:03pm
Prices are set at the margins, so it would completely screw the Boomers. That is a feature in my book (full disclosure: I sold my San Francisco house 6 months ago).
Nov 29 2019 at 1:30pm
No, it would screw the Boomers’ children. The youngest baby boomer is in his 60s right now, and the oldest half are dead. If they haven’t already sold their houses, they’re unlikely to do so before they die.
Nov 26 2019 at 7:24pm
People in the US seem to hate change in the built environment, even if that change would benefit them greatly in financial terms. I don’t know why they hate it so much, but they do. I don’t think that they are deluded; I just think that their evaluations of the benefits and costs are different.
Nov 26 2019 at 7:27pm
It seems particularly funny in the SF Bay Area, where you have all these tech companies committed to transforming this or that industry.
Nov 26 2019 at 10:47pm
I think that’s right, it’s fear of change more than anything. And there is a worry about high-density cities: they are not car-friendly. In China they build high-density. Now, as car ownership ramps up, they’re having real problems. Thousands of families living on a 500m x 500m estate makes for intractable traffic, if they all drive. High density means a lifestyle change, as well as just changes in house prices.
Nov 26 2019 at 10:49pm
It’s worth thinking about what Caplan is recommending. Clearly the US has many public choice mechanisms, in many different locales. A very large number of them have generated these building regulations. Caplan says: that’s not OK. In his model, the *only* acceptable public choice mechanism is the market.
That philosophy goes directly against most conceptions of democracy. Not necessarily a flaw, but worth thinking about in a lot more detail.
Nov 27 2019 at 9:29am
Isn’t that exactly why we have a constitutional republic instead of a direct democracy? Tyranny of the majority is still a thing, even if its the tiny tyranny of housing regulations.
To me, this is the kind of the thing the courts are supposed to stop cities from doing. “We don’t care if the voters approved it overwhelmingly, property rights matter.”
Nov 28 2019 at 7:03am
Deregulating housing would create streets, water and sewer, schools, transit?
Deregulating housing would turn the American Dream of living in a detached single family home with land for playing, gardening, parking old cars, boats, toys, bikes into the the Dream of living in a tenement with severe restrictions on what you do outside your apartment and only slightly fewer inside?
In California, the driving force behind Prop 13 was opposition to the high growth, opposition to building lots of new or expanded infrastructure to accommodate a rapidly growing population.
Want more housing, repeal Prop 13.
Note, California offers many options for inexpensive new housing, as do the dying towns in the Midwest, etc. California City was created to offer tens of thousands of buildable lots, all with paved streets, water and sewer, utility service for every lot. What California City did not, does not offer, are the public land “wasted” on parks, recreation, universities, arts, etc, the things that attract both business and people to SF and LA in large numbers. Before Prop 13, SF and LA expanded in land area conceptually by surrounding towns taxing and spending on infrastructure to connect vacant lots in the metro economy.
Btw, if you wanted to raise your family in a ten story apartment, why did you buy a detached single family home? Surely they existed back when you bought the detached single family home you want to eliminate in huge numbers by deregulation.
More important, why should your kids be denied the choice you made, but instead forced to live in a condo or apartment?
Nov 30 2019 at 7:56pm
Sorry, I was there and in California, the driving force behind Prop 13 was to prevent rapidly increasing property taxes as the State attempted to consume more and more of the economy.
But yes, “Deregulating housing would create streets, water and sewer, schools, transit”, because if needed, that can be funded via impact fees on new construction, the same way the rest of the country does it.
Saying “you have to pay for the impact costs of your development” is very different than “you can’t develop anything until you get everyone nearby to agree and then you still have to roll 2d10 to see how many years it will take until you can actually finish your multi-million dollar investment.”
Nov 28 2019 at 4:28pm
The devil is in the detail. Depends on which regulations one is talking about. Liberalizing land use regulations, such as allowing taller buildings, raises property prices, benefiting existing homeowners.
Nov 28 2019 at 5:23pm
I suspect opposition to deregulation from progressive city councils and state legislatures will focus on environmental degradation and increased energy consumption contributing to (necessarily bad) climate change. The more basic reasons are that politicians are energized by increasing their personal political power, and that they are enabled by large contributors who favor regulatory capture.
Nov 28 2019 at 11:47pm
“1. Homeowners who own little or no equity could walk away from their small, expensive home in favor of a larger, cheaper home.”
Only after declaring bankruptcy and then waiting years to establish a reasonable credit rating.
Nov 29 2019 at 1:41pm
I have some sympathies for these arguments but as many others have said, there seems to be a blindness to the actual reasons people have these preferences, rendering the anti-deregulation position a bit of a straw man in the essay.
I lived in NYC for five years before moving to a smaller (but still quite large) city in North America, where the housing market is nearly as overheated (if not more so) but density is much, much lower. I immediately experienced a noticeable increase in my psychological well-being. It’s not the people that are the problem in NYC, it’s the buildings and the infrastructure. It’s a famously claustrophobic and alienating city. Where I live now, there’s space to breathe. I can see the sky once in a while. I even glimpse the occasional tree. They don’t pile the garbage bags up on the sidewalks in the summer. The noise in the subway is typically lower than 600 decibels. I bought my house in my neighbourhood so I could live in it, not so I could move my family from one neighbourhood to another every few months, raking in megaprofits on my real estate in a hyper-kinetic, dynamic housing market, until I die of old age.
I recognize that these things (air, trees, sky, familiar faces on my block, my kids’ ability to keep the same friends at school for more than 6 months) are luxuries, and as a commie I am officially in favour of more high-density housing, especially in bourgeois tree-lined neighbourhoods like mine. But to pretend that these preferences are irrational… well, I guess you have to be a trained economist to be that clueless as to what human beings care about and why.
Nov 29 2019 at 10:56pm
Its not that the preferences are irrational. It’s that the loss incurred to the people who would move in supersedes what is gained (or preserved) for the beneficiary of the regulations, but addressing such matters through regulations prevents net beneficial exchanges from occurring. After all, if enough people want to cram themselves into New York, and some current residents would find it too cramped afterward, then after the former move in, the latter can just leave. The new residents gain at least as much as the former residents lose. Unless we are automatically weighting the interests of those who happen to already be there more than everyone else’s, these preferences of status quo residents are not a good justification for regulation.
Nov 29 2019 at 4:11pm
Rather than make up some guess about what people might do, why dont you provide an example where deregulation did everything you claimed and then show us people’s reactions. I AM thinking that if it did everything you claimed, and there were no unforeseen bad outcomes, few would declare it a disaster.
Dec 2 2019 at 9:49am
Dr. Rajan’s book, “The Third Pillar: How Markets and the State Leave the Community Behind”, makes a valuable contribution to this discussion. There is a large cost in community upheaval that isn’t discussed here.
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