Price Controls Won't Build Homes in L.A.
California Gov. Gavin Newsom must allow prices to rise if he wants homes to be rebuilt as quickly as possible.
Wildfires in Greater Los Angeles have claimed at least 25 lives and over 12,000 structures. To help the city rebuild faster, California Gov. Gavin Newsom waived burdensome California Environmental Quality Act (CEQA) reviews and Coastal Act requirements for properties damaged and destroyed by the fires. Newsom also declared a state of emergency that triggered various provisions of California's anti-price-gouging law.
Suspending CEQA reviews and Coastal Act requirements will expand housing by reducing the time and cost of construction. Outlawing prices from rising according to market forces will produce the opposite effect.
Section B of the anti-price-gouging law, effective until January 2026, forbids sellers from increasing the price of food, emergency services, and housing by more than 10 percent relative to pre-emergency prices. Section C, also active until January of next year, applies the same restriction to reconstruction services. Sections D, E, and F prohibit similar price increases on hotel and motel rates and rent, while outlawing evictions, until March 8.
These sections of the law include some version of the caveat that prices may increase by more than 10 percent, provided that a commensurate increase in the price of inputs causes this increase. But market-clearing prices for goods and services are not determined by input costs—they are driven by supply and demand.
The wildfires destroyed thousands of residences in a matter of days, sharply reducing supply without similarly decreasing demand. As a result, prices for temporary and permanent housing increased dramatically. These high prices encourage producers to enter the market, expanding the housing supply and lowering the average price of housing.
Anti-price-gouging laws do not create more housing; they merely alter its distribution. Even before the fires, Angelinos faced significant housing restrictions: Over 77 percent of Greater Los Angeles is zoned for single-family housing, legally preventing the creation of high-occupancy residential buildings. Rent control, which applies to 44 percent of the city's housing stock, further constrains supply by disincentivizing new construction. Despite these interventions, LAist explains that 59 percent of L.A. renters spend more on housing than what the Department of Housing and Urban Development considers affordable. The only way to make housing affordable is to build more of it.
Allowing prices to rise to market levels is the best way to accomplish this goal. Unlike other allocative mechanisms—such as queuing, lottery, or dictum—markets and their supply-sensitive prices encourage "bringing new supply in…and substituting for less-scarce goods when we can," explains John Cochrane, author of The Grumpy Economist and the Rose-Marie and Jack Anderson senior fellow at the Hoover Institution, in an article for the Chicago Booth Review.
Newsom understands that lower costs incentivize producers to build and provide more housing by increasing the profitability of doing so. Newsom should realize that reducing government intervention in the market and allowing prices to rise will enable Californians to be housed as soon as possible following the catastrophic wildfires.
