Plans to subsidize renters and homebuyers will likely just fuel housing cost inflation

Rising rents and home prices are becoming unbearable–or at least politically unpalatable–in cities around North America.  Over the past year, two Pacific Northwest cities, Portland and Vancouver, have seen some of the biggest rent and home price increases anywhere. Portland’s reported double digit rent increases in early 2016 were among the highest in the nation. By one reckoning, Vancouver’s home prices were up 24 percent over the previous year, although, as we’ve noted, there’s been a good deal of noise in home price estimates there. The political pressure that rising prices and rents have produced is generating some novel policy suggestions.

Vancouver (Flickr: Gord McKenna)

In Vancouver, the British Columbia provincial government has announced that it will match the down-payment that first-time homebuyers make to purchase a new residence. The program, announced by Premier Christy Clark–whose ruling Liberal government faces the voters in the new year–would give first time home buyers up to $37,500 to match their down payments.  Up to 40,000 households might qualify for the credit.

Portland just adopted a poorly designed inclusionary housing requirement, and now state legislators are looking at repealing the state’s ban on city-imposed rent control programs. In response, a local landlords group has proposed that the state instead enact a rental subsidy, roughly modeled on the federal Section 8 voucher program. The proposal is that the state would allocate something on the order of about $20 million per year to provide rent subsidies of around $100 per month to as many as 20,000 low and moderate income households.

Both of these proposals intervene on the demand side of the marketplace, giving some homebuyers (Vancouver) or renters (Portland) more buying power to help them better afford new homes or apartments. While its hard to argue that such subsidies won’t be of some benefit to their direct recipients (households that get subsidies will be able to more easily afford housing than otherwise), the economics of these proposals are clear and ugly.  By giving more households more money to bid for housing, these measures amp up demand, but do nothing–at least not directly or in the short term–to raise supply. Greater demand in the face of fixed supply means one thing: even higher prices and rents.

The underlying economic problem in both Vancouver and Portland is that the growth in demand for housing–for urban living, especially in this part of the world–has dramatically outstripped the supply of housing. Adding even more demand in the form of subsidies is like pouring gasoline on the fire.  More prospective renters and buyers, with more money in their pockets will bid up the price of housing still further.  UBC economist Joshua Gottlieb called the BC proposal “shockingly illogical”:

“It’s a pretty bad idea. It is counter-productive and if you give people more purchasing power, they will be able to bid up the prices of the homes that they’re looking at, and that price increase will eat up any benefit from the subsidy. The same people who were going to compete for a home at $500,000 are still going to be competing for that same unit, but at a higher price. They’re just going to compete away the benefit. The only people who gain are existing homeowners or developers who benefit from these higher prices. . . . it’s not going to increase supply and it’s supposed to increase demand, so how is it not going to increase prices?  . . .  There’s no way there was any serious economic analysis.

The same problem holds for the Oregon rental voucher program.  Giving thousands of renters more buying power in the face of an already tight market and a constrained supply of rental units is likely to accelerate rent increases. In both Oregon and British Columbia, the necessary solution is on the supply side: building more housing.  And the money that would be spent on homebuyer or renter subsidies would be better spent on measures to add to the housing stock, especially for low income households.

As we’ve said, the housing affordability crisis ought to be a teachable moment for economists. At its root, the problem cities are experiencing are about supply and demand.  The only way to craft effective solutions is to apply some fundamental economic analysis to the problem. Rent and home purchase subsidies may help out a few individuals, but only at the cost of making the affordability problem worse for everyone else.