Politics Foreign Affairs Culture Fellows Program

What Inflation Teaches Us About Housing

Perhaps policy makers will finally learn that spending more money isn’t the answer to a housing crisis.

(4 PM production/Shutterstock)

Inflation is a nightmare for working families. It erodes the value of their wages and raises the price of basics like energy and gas. If there is a silver lining to the American economy’s latest encounter with inflation, it may be that it allows us to reevaluate our housing policy, which has long resisted the idea that to lower housing prices, we must create more housing, not spend more money. 

With inflation soaring, Americans are getting a crash course in basic economics: When money is poured on a problem, the resulting demand can outpace supply, driving up prices. It's the classic case of “too much money chasing too few goods.” 


Why has the housing discussion been so impervious to basic supply and demand analysis? On the left in particular, there is an abiding assumption about price that has its roots in socialism, namely, that a given price is not the result of changes in the relationship between supply and demand but instead a measure of exploitation. Marx has been described as just a minor Ricardian economist in that he restated economist David Ricardo’s labor theory of value. But Marx’s lasting take on value is that the owner of property harvests the labor, sells the product and extracts his profit, leaving the worker with nothing but a wage. 

This theory of price informs the view that rents are fundamentally arbitrary and exploitative. That is, price doesn’t correspond to supply and demand, but to the whims of producers and housing providers. Rents, in this view, are set based solely on landlords’ desired profit margins, not what the market will bear. This popular belief was on full display in the reactions to my editorial for the Columbus Dispatch supporting changing the term “landlord” to “housing provider.” 

One person wrote a letter to the editor in response suggesting that private property owners that rent their property are “a parasite class, that contribute nothing of value to our society. Do they truly provide housing? No, builders do that. Do they supply electricity or water? No, utility companies do that. Do they provide maintenance and repairs? No, they usually keep a maintenance person on staff for small things, and then hire a plumber, carpenter, electrician, etc., for serious issues. The list goes on and on.”

The letter writer concludes that, “essentially, what landlords do is demand too much of our money, pocket as much of it as possible and then use the rest to pay those who actually do make a contribution of one kind or another. Seems to me, it would be a lot more affordable for the rest of us without them.” 

There were hundreds of similar comments on Twitter. And the view isn’t limited to angry people in their pajamas posting on Twitter. A state legislator told me that she understood my argument about supply and demand, and even agreed that reducing regulation of housing would likely create more housing, but was skeptical of the policy shift in that direction. “We lower regulation, the developer’s cost goes down, they still charge the same, and they laugh all the way to the bank.” I tried to explain the concept of competition, that consumers would benefit and have more bargaining power if housing wasn’t scarce. She wasn’t persuaded. 


This view of price has led to a movement explicitly calling for the “decommodification” of housing, treating it instead as a “right.” This view can be found in a book called In Defense of Housing, which, while honest and well-argued, is ignorant of reality. If we accepted the book's premise and ended the housing market as we know it, how exactly would housing be distributed? Rather than price signals motivating private actors to produce housing when demand rose, government would have to ration housing. Can’t find an apartment? Sure, it’s a human right, but you’ll have to get in line to wait for your unit to be distributed by the government. 

Our encounter with inflation might well set the stage for broader public recognition of the fact that prices really do go up when there is scarcity and steady or rising demand. With housing, it really doesn’t matter whether access to it is deemed a “right” or not; if there isn’t enough housing, rents and prices will be high, and wait times for rationed units will rise, too.

The second big problem that has kept supply and demand from shaping housing policy in the United States is the stubborn notion that the problems in the housing market are “more complicated than that.” A perfect example of a podcast discussing one of my posts on rent control. The discussion was titled, “How Do You Solve a Problem Like Housing Prices?” Their conclusion? “There is no easy solution for the housing crisis,” that we need to avoid “the temptation to apply blanket policies to complex systems,” and that “we can’t just build our way out of the crisis.” 

Why can’t we? Even when the research demonstrates that we can, it seems, there is a kind of disbelief and denial among pundits and housing-policy activists. A study by the Kellogg School of Management at Northwest University of the effect of regulation on housing prices compared two cities—one with fewer rules, Indianapolis, and one with many, Boston. That study found that, “if Boston adopted the regulatory posture of Indianapolis, where it’s easier to build housing, our model shows that would only lower rents by 12 percent.” Why the word “only?” Because, 12 percent is “a lot less than rent has gone up in Boston over the last 30 years.” 


A recent look at rents in Boston found that “Boston rents rose sharply over the past month, according to the report, up 15.4 percent from the same time last year, compared to the national rent growth of 16.3 percent.” I’ve pointed out that these rises are deceptive; rents dropped dramatically in 2020, likely because of the pandemic, so the increases are simply a reflection of prices catching up to where they were before. 

But the Kellogg study writers simply dismissing a 12-percent reduction would come as a shock to real people in Boston who are paying $250 more a month than they were two years ago. That $250 per month increase amounts to about 15 percent, depending on the analysis you use. In any event, a 12 percent reduction would mean that increase over time would have been more like $50 a month, about $3,000 less per year than the current increase. Would anyone shrug and say, “Sure, reduce regulation, but you’re only going to save $3,000 per year”? Of course not. 

The Biden administration is taking a well-deserved beating for what has been called it’s “shockingly naïve price theory,” more or less a denial of the laws of economic gravity that are pulling most Americans back to earth where they’re seeing the real effects of government policy over the last two years. 

What isn’t falling to earth are prices, and perhaps at the end of this difficult period of inflation, when I say we don’t need more affordable housing (i.e., money), we need more housing, it will make sense. Then, perhaps, we will see policies move away from subsidies and regulations and toward the reduction of barriers to allow abundant housing production. 

The New Urbanism series is supported by the Richard H. Driehaus Foundation. Follow New Urbs on Twitter for a feed dedicated to TAC’s coverage of cities, urbanism, and place.


Become a Member today for a growing stake in the conservative movement.
Join here!
Join here