The Political Economy of Housing

The housing affordability crisis in the United States and much of the Western world has emerged as a major political and economic problem. In the popular discourse that pervades the media, and the world of punditry, the issue has been reduced and trivialized to a matter of providing adequate supply by removing restrictive zoning regulations and government red tape. The conventional theory says that if we just had more upzoning, the process of changing local zoning regulations to allow for the construction of more high-density housing units, then housing would magically become affordable, or at least notably more affordable than it is now. If we just boosted the supply of housing, we could fix this issue once and for all. That's the promise.

The reality is very different, and far more complex. Getting it right on housing costs and housing supply implicates the totality of the social order, and specifically a society's regime of political economy. The United States provided enormous housing supply in the 2000s during the Bush years, but then it all unraveled with the foreclosure crisis in the Great Recession, pulverizing the dream of affordable home ownership for millions of Americans. China is the global master of building mass housing, putting up more housing capacity than any other nation and erecting entire ghost cities where few people live. And yet that didn't prevent the emergence of a major real estate bubble that has upended much of the Chinese economy. We have the resources and the knowledge to establish a stable and affordable housing regime, but doing so will require carefully considering and balancing the different political and economic forces that have a strong causal impact on housing costs.

America's affordability crisis, in housing and other areas, is not just an issue of supply constraints, but a broader challenge that involves the fundamental structure of our political economy and the way that structure then shapes the management of supply and demand.

The Centrality of Political Economy in Housing Supply Dynamics

China and Eastern Europe have the highest rates of home ownership in the world, in some countries exceeding 90 percent. How come? History clearly shows that the most reliable path towards affordable housing is the expansion of public housing. Socialist governments constructed massive public developments that all but eliminated homelessness. After the collapse of the communist governments in Eastern Europe, most people obtained these homes from the government for pennies on the dollar, often paying just a small registration fee and acquiring full legal ownership as a result. And the market for these communist-era apartment homes remains quite strong. The Czech Republic is a great example, as the panelák building complexes from communist times still housed, as of 2005, roughly one-third of all Czechs, an astonishing 3.5 million people (see Figure 1). It’s a glaring reminder that private capital often struggles to produce affordable housing because doing so would be unprofitable. Only a strong public housing program coupled to effective regulations can deliver on the promise of universal housing at affordable rates. 

Let's take a closer look at what happened in China and Eastern Europe. World War II destroyed or damaged many Eastern European cities and communities, especially since the Eastern Front was the biggest and deadliest sector of the entire war. As communist governments were installed after the Soviet victory, they launched a large-scale building campaign to provide housing for their devastated countries, using pre-fabricated housing components to construct things cheaply and quickly. The modularization of this housing boom created massive efficiency and productivity gains, allowing governments to build millions of units in a rapid amount of time. That historic push led to a wave of new apartment towers and city blocks, providing mass public housing to millions of people. The apartment blocs have often been stereotyped as ugly and unappealing in the West, reflecting the bourgeois sensibilities of those making the criticism. But for hundreds of millions, they were a vital lifeline that provided cheap and stable housing, automatically eliminating one of the great stresses of life.

The land and homes were usually state property, with people making a modest monthly rent payment that was heavily subsidized by the state. A similar system still operates in China, where the government owns the land and individuals lease it for a set period of time, usually 70 years for residential purposes. Chinese people have private property in the sense that they own the houses or apartments built on the land, but they do not own the land itself.

There are a few interesting facts worth highlighting from the historical experience of China and Eastern Europe. First, these housing booms were directed and carried out by the state. Socialists don't hire private consultants to waste time and make generic recommendations. They mobilize and deploy resources to accomplish big things. Second, the state provided all the money necessary to finish the projects on demand. No construction company had to spend time wondering about its interest costs. In China, state-owned banks provide loans to private developers with artificially ultra-low interest rates, precisely to keep costs down and to encourage more development. Third, restricting customization through modular manufacturing and modular design strategies led to phenomenal economies of scale, allowing entire mini-cities to go up in months or a couple of years, a breakneck pace unheard of in much of the Western world, where the obsession with luxury aesthetics and customized designs often overrides practical issues around functionality and affordability.

Figure 1: Panelak housing in Prague, Czech Republic. Millions of Czech people live in these apartment units constructed during the communist era, and the market for them is still robust. Panelak developments were constructed from modularized panels, which facilitated rapid rates of construction.

Housing Supply and the Complex Dimensions of American Political Economy

Things work very differently in the United States, where private capital dominates housing politics. This domination leads to ideologically rigid and inflexible proposals that are completely inadequate. For example, supply-side liberalism is now in intellectual vogue with Abundance, the new book from Ezra Klein and Derek Thompson. Before I turn to criticism, I want to say some positive things. Their vision does represent a somewhat meaningful improvement over the current technocratic managerialism that pervades the Democratic Party, so they should be commended for that. They offer many useful insights for unshackling certain parts of the bureaucratic state. On the other hand, their proposed solutions on housing are too narrow and would do virtually nothing to address America's fundamental issues around affordability.

In their book, Klein and Thompson complain that too many local, state, and federal regulations are hampering our ability to build things quickly, including housing. For just one example, they go hard after the California Environmental Quality Act, legislation passed in 1970 that mandates environmental reviews for many construction and development projects in California. But beyond bromides about how regulation is restricting new construction, they have no comprehensive theory about the role of political economy in providing industrial-scale supply, for housing, energy, or anything else.

Let's examine how these different dimensions of political economy affect housing supply and demand in the United States. A good place to begin is with money and financing, the most critical barriers to home ownership or affordable housing for most people. The housing bubble in the Great Recession, which produced millions of foreclosures, is a landmark example of what happens when housing supply and demand are driven by ruthless financial speculation. Of course, the housing bubble couldn't have been possible without a wave of new home construction, fueled by an environment of low interest rates and lax regulations (see Figure 2). But the situation was aggravated and turbocharged by corrupt and predatory lending to borrowers from various subprime lenders and Wall Street firms looking to make a quick buck by skirting every rule in the book. The wave of financial speculation in housing nearly brought down the entire economy, and only direct government bailouts and interventions prevented an otherwise inevitable collapse.

Figure 2: There was a boom in new single-family housing (blue line) leading up to the Great Recession, even though nothing really changed about local zoning regulations. The chart underscores the futility of hyper-obsessing over zoning laws, as developers will find plenty of reasons to build under the right financial conditions. Source: Lance Lambert at ResiClub Analytics.

For a concrete example, consider Ameriquest, the largest subprime lender in the country before the Great Recession. Ameriquest became notorious for fabricating loan applications and doctoring information in order to make potential borrowers qualify for subprime loans. In 2006, it accepted a $325 million settlement with states nationwide for its predatory behavior. At least 240,000 of Ameriquest’s roughly 750,000 customers from 1999 to 2005 were entitled to compensation from the company under the deal. Ameriquest was a viper’s den of criminality. Former employees later reported that people in various company branches would joke about “taking the loan to the art department,” meaning they would take it to the copy room so that W2 statements and bank statements could be altered and falsified. The copy rooms were decked out with scissors, tapes, and special markers for blanking out written text, among other things someone might need to commit mortgage fraud. Other methods of fraud included having borrowers sign a document that guaranteed them a fixed-rate loan, then literally ignoring or tossing that document away after the closing. Ameriquest was not alone in its brazen illegal behavior. In a very real sense, the housing bubble was a story of fraud and crime more than anything else.

Private builders won't build much if interest rates are high, which is exactly what happened in 2022 and 2023 as interest rates soared. Real estate developers usually pay for large projects by taking out loans from private banks, meaning that higher interest rates will raise production costs, especially for large developments. Unsurprisingly, developers often counter this threat to the bottom line by jacking up rental prices and housing costs.

Developers also won't build much if labor and material costs are too high. They won't build much if they're facing spiking land prices from hyperlocalized upzoning. If you jack up their production costs, they will hesitate to build in large quantities. Capitalists don't want to lose money. In many cases where upzoning is spatially restricted and ultralocalized, developers just bring in more expensive luxury units to cover for the extra costs from land speculation, thus sabotaging the fundamental goal of affordability, as I explain in greater detail in the next section.  In addition, there's growing concentration in the home building industry, with a few dominant builders controlling the supply in many major metro areas. Under these circumstances, there are fewer and fewer incentives to compete, and it's well-known that, in every single quarter, many large builders actively avoid selling and building thousands of homes that they're easily capable of churning out otherwise.

We haven't even scratched the surface of the problems. Another major issue is the delegation of power and authority over zoning and the broader contours of real estate development to local governments. Why do local authorities in America have so much power over zoning and housing in the first place? Americans even pay their real estate taxes to local and county governments. To cut a long story short, it's because of federalism and the history of American political development, which collectively have enshrined a strong private property rights regime. These kinds of local barriers to massive social change have existed for many societies throughout history, even if they weren't federal republics. It wasn't until the French Revolution that the French finally overcame eminent domain issues for the construction of massive canals and irrigation projects in Provence, which until then had been successfully resisted by local towns and landowners. It's easy to say that we should have large-scale upzoning, but we're not going to get it until there's more centralized control over the economy from the state.

A big problem with the position of many supply-siders, who think of upzoning as some kind of eternal panacea, is that land prices tend to rise rapidly after the expansion of high-density housing. That’s because capitalists and investors are expecting big returns from the forthcoming high-density construction, so they’ll do just about anything to grab the necessary land and whatever else is on it. That mad rush to seize valuable land then contributes to higher rental prices and housing costs, as capitalists try to pass on higher acquisition costs to consumers.

Here's another big issue. How can regular people compete in many real estate markets where something like 25% of the sales are going to investors, from small groups to big Wall Street firms? If you put a substantial chunk of a country's housing supply up for speculation, you shouldn't be shocked to know that people will have a hard time affording homes. Real estate investors, from big Wall Street firms to smaller investment groups, play a major role in the rental and housing markets, squeezing out competitors and driving up prices and rents to boost profits. A 2021 report by the Pew Research Center described the ownership composition of the rental market as follows:

The Census Bureau counted nearly 20 million rental properties, with 48.2 million individual units, in its 2018 Rental Housing Finance Survey, the most recent one conducted. Individual investors owned nearly 14.3 million of those properties (71.6%), comprising almost 19.9 million units (41.2%). For-profit businesses of various sorts owned 3.7 million properties, or 18.8%, but their holdings totaled 21.7 million units, or 45% of the total. Entities such as housing cooperative organizations and nonprofits owned smaller shares of the total. Businesses own larger shares of units because individuals, while far more numerous, tend to own one or two properties at most, while businesses’ holdings are larger. In fact, 72.5% of single-unit rental properties are owned by individuals, while 69.5% of properties with 25 or more units are owned by for-profit businesses. Most rental properties are owned by individuals, but only a small share of individuals own rental property, according to IRS income-tax data. In 2018, 6.7% of individual tax filers (about 10.3 million) reported owning rental properties. Those filers reported owning 1.72 properties on average.

When so much housing supply is controlled by profit-hungry corporations, it's not surprising to see strong upward pressure on rental costs. For example, rent prices tend to soar when private equity firms take over existing apartment units and buildings.

Many economists and analysts discount the importance of large institutional investors in the housing market because those investors own a small share of all single-family homes. They’ll point out that Wall Street real estate firms purchase “only” about 2% of single-family homes in the United States. This statistic is routinely regurgitated as a way of excusing Wall Street’s predatory behavior. But obsessing over this number is a complete distraction from the more fundamental and structural problem: that most of the damage in the housing sector is being done by upper class investors, not Wall Street tycoons. According to a comprehensive Harvard report, investors made up a stunning 28% of all single-family home sales in the first quarter of 2022, up from 19% in the first quarter of 2021 and way above the 16% share they had from 2017 to 2019. The authors of the report stated that investors had a huge impact in certain markets:

Investors focused on markets with rapid home price appreciation, accounting for especially high shares of sales in Atlanta (41 percent), San Jose (38 percent), Phoenix (36 percent), and Los Angeles (34 percent) at the end of 2021.

These are staggering numbers, and they’re a fundamental reason why so many middle-class families in America cannot afford to purchase a home. Although it’s inaccurate to blame large Wall Street firms exclusively for America’s housing affordability crisis, it’s absolutely fair to point out that real estate investors in general are indeed pricing out regular families in numerous real estate markets across the United States. And although some of these investors operate small companies with limited financial resources, most real estate investors find themselves easily in the upper tiers of the American economic ladder, if not much higher.

Nevertheless, we shouldn’t be too lenient on the big Wall Street players. That’s because these apex investors really do their damage among affordable, inexpensive single-family homes that require lots of repairs. They don’t typically bid on more expensive properties, leaving those to the professional classes, like doctors, scientists, and programmers. Because big-time investors scoop up these otherwise affordable homes with all-cash offers and other sweeteners, they’re pricing out individuals in the middle class who may be trying to enter the housing market for the first time. In 2021, the real estate company Invitation Homes, which heavily invests in single-family housing, spent roughly $2 billion purchasing 4,802 homes. Large corporations like Invitation can often buy properties before they’re listed for public viewing, can use algorithms to determine which homes they should target, and can present all-cash offers that are hard to turn down. It’s absolutely not an even playing field; most American families cannot compete under these conditions. 

Yet another critical issue for housing affordability is the distribution of wealth and income. Over the past few decades, we've had a corrupt neoliberal economic regime that has funneled wealth and income to the ultra-rich while leaving everyone else in the dirt. A typical teacher in San Francisco makes around $80,000 a year, so how can she be expected to afford a $1 million home? But imagine a world where a typical teacher in America made $250,000 a year. Suddenly price tags of $1 million or more look reasonable for a middle class couple, where middle class here is being redefined so that the couple in total makes around $400,000 or $500,000 a year. Wealth and income redistribution therefore must be essential components in resolving the affordability crisis, but they rarely come up in the discourse of the corporate media on the housing issue, which is dominated by upzoning propaganda to the near-exclusion of any other considerations.

And there are so many other dimensions to this problem, not all of which I'm going to cover in this post. Consider rent control, one of the tools used by various municipal governments around the world to try and control housing costs. Rent control can come in many different variations, some being more ambitious than others. It’s definitely not the best instrument for achieving the goal of housing affordability, and almost always doesn't work just by itself. But it’s nowhere near as bad as often portrayed by conservative economists, and it can be more effective when implemented in conjunction with other comprehensive strategies.

For example, Vienna is the most prominent major city in the world where strong public housing programs coupled with effective rent control regulations have produced relatively affordable rental prices for most middle-class families. In 2015, Vienna had roughly 890,000 apartments used as a primary residence, with 160,000 being occupied by owners and about 693,000, or 78% of the total, occupied by tenants (data from Statistics Austria, Microcensus 2015). Among rental apartments, about 401,000 are social housing units and 292,000 are privately owned. That means 58% of the city’s entire rental stock is social housing. Crucially, only 66,000 housing units were exempt from rent control laws, about 7.4% of the total housing stock. This figure implies that the vast majority of Vienna’s housing, over 90%, is either covered by rent control regulations or falls under social housing.

The notion that higher supply by itself will fix America's housing crisis is sheer fantasy. Even if we could suspend the laws of physics and make an infinity of new homes, it would guarantee nothing about affordability if the market is poisoned and destabilized by ruthless financial speculation. Contrary to the proposed policies of many housing advocates, bringing more supply to the market is not a panacea for sky-high rental and housing costs. China is the posterchild for why that argument doesn’t work: China suffers from huge levels of housing oversupply and yet still experienced outrageous increases in housing costs from 2000 to 2020, in violation of what the simplistic story about supply and demand would suggest. A 2016 paper from a team of economists explored the housing dynamics of the Chinese real estate market in the early 21st century. The researchers wrote the following:

Consistent with casual observations made by many commentators, our price indices confirm enormous housing price appreciation across China in 2003–2013. In first-tier cities, which include the four most populated and most economically important metropolitan areas in China (Beijing, Shanghai, Guangzhou, and Shenzhen) housing prices had an average annual real growth rate of 13.1% during this decade. Our sample also covers 31 second-tier cities, which are autonomous municipalities, provincial capitals, or vital industrial/commercial centers, and 85 other third-tier cities, which are important cities in their respective regions. Housing prices in second-tier cities had an average annual real growth rate of 10.5%; third-tier cities had an average annual real growth rate of 7.9%. These growth rates easily surpass the housing price appreciation during the US housing bubble in the first decade of the twenty-first century and are comparable to that during the Japanese housing bubble in the 1980s.

A major reason why this happened, though certainly not the only one, is that real estate in China turned into a massive asset bubble, a speculative wave in which people rushed to buy multiple homes as investment properties even though they were already homeowners. The Chinese government has tried to restrain this speculative boom, but not always successfully, and the real estate market in China remains an uncertain mess to this very day. Bringing more supply is critical to creating housing affordability, but only in the context of a different political economy that weeds out speculation from the real estate sector and provides greater financial stability for workers and families.

Recent Evidence on the Effects of Upzoning

There have been many recent studies that have analyzed the impact of upzoning policies on housing supply and housing costs, and in this next section I'll focus on a few of the prominent ones. In general, the research shows that upzoning does have a causal impact on boosting housing supply, but its impact on housing costs is usually so muted that it has no practical effect on the central issue of affordability.

In 2023, researchers at the Urban Institute published a major study that analyzed the effects of upzoning on housing supply and affordability in the United States. Upzoning is the process of changing local zoning regulations to allow for the construction of more high-density housing, like multi-family units. The Urban team built an enormous panel dataset for 1,136 cities across the United States covering the period from 2000 to 2019. The research group concluded that upzoning does expand housing supply, but largely for luxury and high-end rental units, not for lower-end units. They wrote the following:

We find that reforms that loosen restrictions are associated with a statistically significant 0.8% increase in housing supply within three to nine years of reform passage, accounting for new and existing stock. This increase occurs predominantly for units at the higher end of the rent price distribution; we find no statistically significant evidence that additional lower-cost units became available or moderated in cost in the years following reforms.

The researchers basically found that upzoning favors the construction of high-end rental units that are only affordable for people with much higher incomes than the median level. They also found that upzoning policies produced slightly lower median monthly rents compared to other jurisdictions that implemented downsizing policies. In other words, upzoning had a small effect, but overall it wasn't much, and certainly nothing comparable to the necessary scale for resolving our housing challenges.

Another big study from 2020 looked at upzoning policies in Chicago and concluded that, contrary to common wisdom, they actually had a negative impact on housing affordability. In 2013 and 2015, Chicago upzoned several large parcels of land. The economist Yonah Freemark examined the consequences of these policy changes and detected "significant, robust increases in values for transactions on parcels that received a boost in allowed building size." Freemark also concluded that "the short-term, local-level impacts of upzoning are higher property prices but no additional new housing construction." Here is yet another example of where localized upzoning policies, in the absence of other major constraints, actually backfired and producing higher housing costs.

A paper from 2023 studied upzoning policies in the Australian city of Brisbane over a 20-year period and concluded that "higher rates of new housing supply are robustly related to higher prices." The study looked at almost 26,000 sites across 19 major activity centers and observed that "activity centers with the highest new housing supply saw faster price growth, not lower growth." This central result still held even after controlling for zoned capacity and other factors. The researchers summarized their argument in the following passages:

It may be the case that planning controls are not a binding constraint on housing supply in Brisbane over our study period. But such an explanation still challenges the supply side argument in general. Brisbane dwelling prices increased by more than Sydney prices from 2001-2016, and over the whole period increased by more than prices in San Francisco (250% versus 235%); both cities that are routinely argued to be supply-constrained...These results suggest that changing planning systems to facilitate...density by increasing zoned capacity is unlikely to result in noticeable housing price effects...The regression results coupled with the overall descriptive data supports the idea that zoned capacity alone is not a major determinant of the rate of new dwelling supply, nor dwelling price. Only 22% of the sites with zoned capacity in 1996 had any redevelopment in the subsequent twenty year period. Despite all the development that did occur, zoned capacity in every activity center continued to grow over the 20-year study period, and in total zoned capacity was twice as high at the end of the study period than the start. Meanwhile, the increase in dwellings in these activity centres was in line with the city average, with many below it.

Many studies do find that upzoning helps to boost housing supply, but it’s prices that really matter, and there’s no solid evidence at all that upzoning brings down housing costs in any appreciable sense. In 2016, the city of Auckland in New Zealand enacted sweeping changes to its zoning regulations, upzoning roughly 75% of its residential lands. A major 2023 study later revealed that the upzoning program substantially boosted housing supply, but this particular study did not evaluate the effects of the policy on rental prices and housing costs in general. In the following year, the same research group did publish a study analyzing costs, and claimed that Auckland’s upzoning had produced rents that were roughly 28% lower than the counterfactual of no zoning reform. These results are relatively robust and have been validated by other research teams.

Although this study out of New Zealand did show that large-scale upzoning can help slow down the rise in rental costs, it’s also clear that this policy shift didn’t solve Auckland’s fundamental affordability problem at all, because housing costs continued to rise in Auckland long after 2016, just at a slower rate than they otherwise would have. It’s worth emphasizing that the authors end the paper by writing that "our findings...suggest that Auckland’s reform is not a panacea, and that additional policy tools and further reforms may be necessary to bring housing costs down to affordable levels."

There are several important caveats to mention about this Auckland study. First, their dataset stopped in 2022, which means they were unable to capture the enormous 7.8% surge in average weekly rent in Auckland that started in the following year, going from $579 in 2023 to $624 in 2024. This percent increase was higher than the annual percent rise in New Zealand as a whole (6.9%) for the first time since the upzoning was enacted in 2016. And second, Auckland’s annual average increase in weekly rent from 2017 to 2020, about 3.4%, was much higher than the rate of general inflation in New Zealand over the same period, which was under 2%. These facts collectively underscore the point that although Auckland’s reforms may have produced some positive impacts, and there's no question that they helped improve the situation slightly, they are woefully inadequate by themselves at addressing the broader affordability crisis plaguing the city. 

A Bold and Simple Vision for the Future

What we really need to fix our crisis of affordability in the United States is an entirely new political and economic regime around housing. Here are a few ideas that, if implemented collectively, would do exactly that:

1. We need an expansive and ambitious program of public housing financed by the federal government, coupled with local economic development so that new neighborhoods are surrounded by parks, shopping centers, entertainment, museums, and other cultural and economic amenities.

2. We need a new regime of public financing that provides cheap borrowing options for developers, so that they're not discouraged from building because of high interest rates.

3. We need to nationalize, or collectivize through local cooperatives, some of the major developers so that the government and the people have a more direct impact on the pace of housing construction.

4. We need to heavily restructure the nature of real estate investment, either by imposing regional-specific annual caps on investment properties that can be purchased or through other regulations that make more of the existing housing supply available for regular people.

5. We need less wealth concentration at the top so that more regular people can afford to buy homes in competitive markets. That means we should promote unionization, higher taxes for the rich, and other policies designed to boost income levels for the working and middle classes.

6. We need to give the federal government broader powers to regulate zoning regulations at local levels, so that short-sighted local homeowners don't sabotage development because they're worried about their property values.

7. Finally, but perhaps most importantly, we need a total revolution in the meaning of housing, with the adoption of modularized design and manufacturing strategies that can produce rapid economies of scale and deliver major results in a short period of time. That means prioritizing things like functionality, affordability, and walkability over aesthetics and luxurious amenities.

If we're actually serious about solving this terrible social problem, then that's what it will take. To think otherwise is to live in a fantasy land. The current economic regime is broken and needs to be thoroughly revamped. We can have affordable housing, but it will take a different kind of society to get us there.