Progress on Exclusionary Zoning, Regression on Rent Control

Many jurisdictions are alleviating housing shortgages by cutting back on zoning. Unfortunately, there is also a trend towards expanding rent control, which is likely to have the opposite effect.

The impact of exclusionary zoning. (NA)

Housing shortages caused by harmful government policy are a serious problem in many parts of the United States. The good news on this front is that many jurisdictions are making progress towards easing zoning restrictions that are the principal culprit behind many such shortages. After years of seeming stagnation, zoning reform is hot. The bad news, however, is that rent control is also gaining momentum. Even as zoning reform helps alleviate housing shortages, rent control is likely to make them worse.

At this time last year, I wrote about the growing momentum for cutting back on exclusionary in various parts of the country. That trend has continued in 2019. In July, the Oregon state legislature passed a law banning single-family home zoning requirements throughout most of the state, thereby enabling construction of multifamily housing in many areas where there are severe shortages. The city of Seattle has also made some progress here.

The Democratic takeover of the Virginia state legislature in November has led to consideration of a major zoning reform law in my home state. If it passes, it would legalize construction of duplex housing in any part of the state currently zoned for single-family homes, thereby expanding housing availability in the the increasingly expensive northern Virginia region. Other jurisdictions are also considering similar reforms.

A major reform bill stalled for a second time in the California state legislature earlier this year. But the very fact it had a real chance of success bodes well for the future, in a state that has some of the nation's most severe housing shortages.

These and other recent zoning reforms have mostly been passed in jurisdictions dominated by liberal Democrats. The political left has begun to take notice of and act on the broad agreement among policy experts that zoning is a major obstacle to affordable housing, and also excludes millions of people from job opportunities.  Zoning thereby harm both the excluded  workers themselves and the broader economy, which loses the additional productivity they would have provided.

If zoning restrictions make it difficult or impossible to build new housing in response to rising demand, basic economics 101 indicates that prices will go up, and many will be priced out of the relevant market. By contrast, the experience of cities like Houston shows that developers are more than capable of keeping up with rapid growth if they are allowed to build.

Part of the reason why recent zoning reform efforts have been led by liberals is that liberal jurisdictions tend to have  the most onerous zoning regulations in the first place. Still, credit should be given where credit is due. Many on the left are making a real effort to clean up this awful mess.

Republicans, by contrast, have often been on the wrong side of the issue lately, despite the near-universal criticism of zoning by free market economists and housing specialists. For example, the Oregon GOP opposed the recent zoning reform in that state. Some on the right oppose it based on fear that it might "urbanize" suburbs and allow more poor people to move there. On the other hand, Trump administration Housing and Urban Development Secretary Ben Carson—whom I'm no fan of on many other issues—deserves credit for his strong advocacy of cutting back zoning.

While the struggle is  far from over, there can be little doubt that we are making progress on the zoning front. That is excellent news.

Unfortunately, the good news on zoning is coupled with bad news on rent control. The same Democratic-controlled Oregon state legislature that recently passed a strong zoning reform bill also enacted a sweeping rent control law earlier this year. California and New York has also enacted  major new expansions of rent control this year. After a long period during which rent control seemed largely moribund, it has once again become a major cause of much of the political left. Bernie Sanders, the favorite presidential candidate of the growing "democratic socialist" wing of the left, has even called for the enactment of a national rent control law.

The expert consensus against rent control is at least as broad as that in favor of zoning reform. Economists across the political spectrum overwhelmingly oppose it. Expert critics of rent control range from the very liberal Paul Krugman on the left to Thomas Sowell on the right. The issue is often used in introductory economics classes as an example of a question on which nearly all economists can agree.

That consensus arises from the simple point that, if landlords cannot raise rent in response to growing demand, they are likely to put fewer rental properties on the market. For similar reasons, rent control is likely to reduce new construction in high-demand areas, and also lead to worse maintenance of existing properties. Real-world evidence backs up these theoretical predictions. Stanford economist Rebecca Diamond summed up the results of recent studies on the subject in an article published by the liberal Brookings Institution last year:

Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. These results highlight that forcing landlords to provide insurance to tenants against rent increases can ultimately be counterproductive.

While current tenants get a windfall (at least in the short run), rent control reduces the availability of housing for everyone else, and also reduces economic growth by excluding people from areas where they could find new job opportunities and become more productive. Its effects are actually similar to those of exclusionary zoning. Thus, regression on the rent control front could well offset some of the progress being made on the zoning front, especially in cases—like Oregon—where the same jurisdiction pursues both agendas, despite the contradiction between them.

In addition to having opposite effects on housing shortages, zoning reform and rent control are also based on opposing assumptions about the way housing markets work. The former relies on the assumption that increasing demand will lead to increasing supply, so long as the government allows new construction to occur. In short, market incentives work. Increases in demand lead to increases in price, which in turn incentivizes new production, thereby alleviating shortages and—eventually -reducing prices.

By contrast, rent control implicitly assumes that landlords and developers will not cut back on the quantity and quality of housing, even if prices are artificially lowered by government intervention. For this to work, either market participants must be irrationally indifferent to prices and profits, or there must be some sort of unusual market failure that makes supply insensitive to demand. Neither scenario is plausible. The many liberal Democrats who oppose exclusionary zoning while simultaneously favoring rent control are implicitly making self-contradictory economic assumptions. In one area, they accept basic Economics 101; in the other, they utterly reject it.

I am tempted to say that simultaneous revival of zoning reform and rent control is a prototypical example of the left hand undermining what the right hand is doing. But, in this case, it is really the left hand working at cross-purposes with itself, since it is the political left that has been the biggest driving force behind both developments. Hopefully, they will resolve the inconsistency in the direction of embracing good economics across the board. That means opposing both rent control and exclusionary zoning.

UPDATE: Matthew Yglesias has a valuable article on the emerging politics of zoning at Vox, here, which came out a couple days after this post.