Removing The Constraints on Supply

On today’s show we’re going to look at one of the largest barriers to housing affordability. But before we do, we’re going back to basic principles. We’re going to start with the law of supply and demand. If demand goes up and supply goes down, then it follows that prices will rise until a new equilibrium is reached.

That’s exactly what we’ve seen over the past year. But in areas of highest prices, we have seen that the acute shortage is not of construction materials, nor has it been the ability to construct, but it’s been the cost of land.

But it’s not just land that is expensive, but low density is expensive.

Some communities have tried over the years to maintain their sense of community by restricting zoning. Property values have risen accordingly.

Let’s look at the Township of Southold on Long Island. This is an area near the North-east fork at the far east end of Long Island.

The community is extremely wealthy. Properties are expensive, and the community is decidedly anti development.

According to the Township’s own zoning guide, land use within the Township has not changed much in the past decade.

But here is the one statistic that fully describes the story. There are only a little more than 13,800 homes in the entire community. That’s a density of 1.27 units per acre in the residential zones. That’s extremely low density. The community has averaged only 30 new construction building permits per year over the past decade. It means that prices have risen to the point where people who live in the area could not actually afford to buy into the area. If they sell their home, they would have to leave. They can’t afford to stay.

This situation describes so many communities across North America.

But it’s not that Southold lacks land. On the contrary. They have plenty of it. Their zoning specifically is designed to be exclusionary. By artificially creating scarcity, these communities create an aura of exclusivity and therefore they keep the values of property high.

Lack of affordable housing is a problem, yes. It’s mentioned in their 58 page zoning guide. But it could be argued that the lack of affordable housing is not really a problem, it’s a feature.

Under the recently announced 3.1T Biden infrastructure bill, hidden deep within the pages is a provision to make housing more affordable.

The proposed program of at least $5 billion would offer grants to cities and towns that relax restrictions on new construction.

This initiative was reported this week in the Wall Street Journal. It’s interesting because it’s attacking the issue of affordability at one of the root causes of the problem.

Many of the constraints on development are entirely artificial. It’s not that there is not sufficient land available. It’s that local governments are not allowing you to build projects that would result in affordable housing. They do this by limiting density.

The Biden administration said in a fact sheet that the program would award “flexible and attractive funding to jurisdictions that take concrete steps to eliminate such needless barriers to producing affordable housing.” The White House won’t penalize cities if they don’t want to participate, according to some administration officials.

Earlier this year I reported that some towns like Minneapolis have taken steps to relax their zoning code and allow for higher density in order to bring more affordable housing into nice areas.

The link between value and entitlement has never been more clear.