This article by Strong Towns is a good one, read this before reading my commentary on it.
I mostly agree with this article. I do not believe there is a free quick fix to ending the insane housing inflation we are experiencing in this country. We have had restrictive zoning which has reduced the quantity of housing significantly as our population has grown. We see the same pattern in Canada, to an even greater extent.
We do not see the same pattern in Europe. Europe has slower population growth, actually declining in many places, which reduces pressure on housing in the region. They also tend to have more lax laws regarding building which allows housing stock to keep up with population growth.
This has created a structural change in the market for housing. As demand for housing has increased, supply has been unable to keep up, especially in the growing tech hubs around the country. Increase demand, keep supply the same, price will go up.
The article is absolutely correct, relaxing zoning laws is not going to necessarily reduce the price of housing, but we have seen the cities which have done the most to loosen zoning laws have seen the slowest growth in rents, regardless of their job markets. We need an economy which can respond to market demands, and is best done through a free market which is allowed to respond to market pressures.
Everywhere in the country has significantly restricted the market’s ability to respond to changing conditions, leading to supply being unable to catch up with demand, which is why rents have climbed. Only a few places have reversed these policies lately, and that is where inflation has slowed.
There are two ways to make an economy to work, depending on market structure. In naturally competitive markets, like housing, the best thing to do is limit regulation to things regarding health and safety. Do not overly restrict the market, since that will only cause inflation.
Naturally monopolistic markets, markets with high structural barriers to entry such as utilities, however typically work best when they are publicly owned. There is thriving competition between couriers, you have DHL, UPS, FedEx, and many more regional courier companies competing with each other for business. They are able to do this in an open market because the highway system is publicly owned. Anyone can use it. If the highway system however were private they could make deals with one courier or another preventing the market from being competitive, and the industry would devolve into regional monopolies, stifling competition, leading to higher prices for all. That’s how America’s railroads work. So this goes to show that simply making every market as free and private as possible will not necessarily lead to a better economy. It depends on the industry, it depends on the market structure.
In the case of housing, it is clearly not a natural monopoly. The best thing to do is allow developers to build housing, following standard safety protocols, and allow said housing to be built tall to increase the number of people living in a square kilometer. This increases the supply of housing, reducing pressure on housing prices.
While there might be other policies to reduce the price of housing, the best way to do it, the cheapest way to do it is to increase supply.
The one thing you don’t want to do is chase inflation with more money supply. That never works.
References:
https://worldpopulationreview.com/state-rankings/average-rent-by-state
https://fred.stlouisfed.org/series/USSTHPI