Understanding Rising Housing Prices: Winners, Wealth, and the Subsidy Game

Many planners face rapidly-rising housing prices and rents in their communities. Why? It seems pretty simple: population growth (births, and jobs, and migration) exceeds housing production (land, density, and approvals). I want to argue for three more explanations: Winners, wealth, and subsidies. Planners help pick winners (and by default, losers) as they make and/or recommend development decisions or carry out past decisions embedded in plans and codes. Wealth drives growth, especially accumulated homeowner equity. The foggiest question is the role of government programs and subsidies, mostly via taxes. I suggest all three play a role in driving up housing prices and in keeping them high.

Population Exceeds Housing

Whether the increase comes from within the community (i.e. births exceeding deaths) or net immigration (domestic or international) the net effect is more people in the same geographic area who want housing, jobs, and services and produce economic growth (most of the time), waste, and congestion. The United States and California were built on population growth which continues to be the basis of our economic and political stability. There is no end in population growth forecasts for California, not in 20 or 40 or 100 years.

With population and housing growth land owners, businesses, and developers are winners. Homeowners also gain unless excess housing supply softens values. Self-perceived losers will move on to the next valley, or stay and are sometimes successful at diverting or delaying growth. After all, if you restrict new housing then existing housing values increase triggering another set of changes. So, whether or not new housing is built to accommodate population growth, communities are changed and there are winners and losers. The current winners want to continue winning–and that’s understandable. Local planners play a major role in picking the winners and losers by implementing a community’s decisions about growth, and these decisions are largely a function of who votes in local elections.

Wealth

Increasing wealth will trigger growth as renters become owners and owners buy more housing. Second and vacation home development increases. Couple increasing income and wealth with increasing population and you have a powerful growth force, especially in desirable areas like the Central coast of California. Most Americans see their home as their single largest wealth creator and secure investment. I stress ‘secure’ given the recent collapse of stocks. The Baby Boom is soon to start retiring in large numbers and they collectively control enormous home-equity wealth, which may come swooping into retirement-friendly communities and spur growth. Conversely, their selling and leaving could lower local prices and/or free up older-suburb housing for younger larger households.

Government Subsidies

Many people see government housing subsidies as a way of helping low and moderate income households make ends meet. But I want to argue that housing subsidies are also a growth force, especially the mortgage interest and real estate tax income tax deduction for homeowners. A 2001 Brookings Institution report found that over 75% of net homeowner tax benefits nationwide accrue to homeowners in just three metropolitan areas: New York, San Francisco, and Los Angeles: $5,400, $7,000 and $6,100 annually, respectively, based on 1990 Census data (Gyourko and Sinai, “The Spatial Distribution of Housing-Related Tax Benefits in the United States, July 2001, Discussion Paper, Table 4). With that much subsidy poring in year after year, there has to be an upward push on prices.

How do tax subsidies affect home values? If I give you 30 cents for every dollar you spend on mortgage interest and local taxes, create low interest rates, insure your five percent down mortgage, and then let you keep up to $250,000 gain in capital gains tax free when you sell, you can afford a higher price. As each house sells for more, tax subsidies automatically kick in and you play another round, most likely upgrading to a larger house on more land (hence sprawl). There are lots of winners (including me) with a stake at keeping the game going. But those who cannot play the homeowner subsidy game are losing more and more ground–so much that it undermines all of us.

I have to wonder, is this game a house of cards?

Dr. Chris Williamson, AICP is a staff senior research associate at Solimar Research Group in Ventura, California.