The Enemy of Affordable Housing by Sandy Ikeda

Will restricting housing options for the wealthy benefit the poor? Is more regulation the solution to problems created by past regulations? And how can we avoid the interventionist cycle that Ludwig von Mises warned us about?

Critics of Airbnb are not asking these questions. In California, they have proposed stringent regulations to reign in the Internet-based, home-sharing business.

Aligning Interests

One of the marvels of the unhampered market is the way it aligns the interests of buyers and sellers. If the price is too high, a potential buyer is better off keeping her money; if the price is too low, a potential seller is better off keeping his product. When the price is right, trade happens because both expect it to make them better off.

Even when economists note possible exceptions to this harmony of interests — such as market power, asymmetric information, externalities, or behavioral “irrationalities” — most recognize that entrepreneurial competition in a free market will limit or even eliminate their negative effects over time.

In this case, which would be better? Having the government regulate the behavior you disapprove of, or getting rid of the bad rules that prevent people’s own choices from regulating it? When there is public outcry over certain entrepreneurial practices, the political reaction is to compel an outcome that those with political power approve of. In contrast, the scientific approach is to listen to the objections but then try to find the underlying source of the problem.

What Is Seen

From the economic point of view, Airbnb serves to significantly lower the costs of listing, finding, or renting lodging to the general public. Other things equal, it improves the well-being of those involved. In San Francisco, Proposition F would considerably tighten regulations on this popular service.

Among other things, as the ballot initiative reads, Prop F

would restrict all such private rentals to 75 nights per year and impose provisions designed to ensure such private rentals are paying hotel taxes and following city code. It would also require guest and revenue reports from rental hosts and “hosting platforms” every three months.

Prop F’s advocates argue that in San Francisco, wealthy, profit-hungry owners use Airbnb to charge high rents to short-term customers for their vacant residences. They contend that this practice takes much-needed units from an already extremely tight, long-term housing market. That, in turn, shrinks the pool of housing available to lower-income families who are already having trouble renting in one of the most expensive areas of the country. So it appears that the relatively wealthy are profiting at the expense of the relatively poor.

Similar disputes are happening in other cities, such as New York.

Those who support Prop F and call for regulation apparently believe they have the moral and intellectual high ground.

No reasonable and compassionate person likes to see low-income families struggle for housing. Unfortunately, if you question the effectiveness of some cherished public policy, there are too many people who reflexively question your motives, your intelligence, or both.

But a win-at-all-costs attitude in political debate is not conducive to rational and civil discourse.

What Is Unseen

Why don’t entrepreneurs in San Francisco respond to sky-high rents, as economics suggests, by increasing the supply of housing instead of using Airbnb? What’s hard to see in the heated, off-the-cuff political debates are the consequences of rent regulations in San Francisco. According to journalist Meagan McArdle, San Francisco’s rent regulations have meant that “a growing number of landlords don’t want to rent their places at all; it’s too much hassle for too little reward.” Under the circumstances, Airbnb brings at least some of that housing supply into a segment of the rental market.

Also, as Business Insider recently pointed out:

Since San Francisco is located on a peninsula, there’s pretty much only one way for the city to add new housing units: by growing vertically. With taller buildings, San Francisco would be able to fit more housing and thus lower rents. But as Y Combinator partner Garry Tan pointed out in a tweet this weekend, that’s not even an option under current city zoning regulations.

And there’s more.

The surrounding cities and suburbs of San Francisco are also subject to strict building codes. Those who might like to live on the outskirts of San Francisco, and redirect some of the high demand from the city, have fewer options because residents in outlying areas support building codes they think will protect the value of their homes.

Indeed, a housing advocacy group is trying to sue the East Bay town of Lafayette to force it to relax building restrictions on housing density. (See my February 2015 Freeman article, “Shut Out: How Land-Use Regulations Hurt the Poor,” on the regressive effects of building restrictions.)

The Political Economy of Housing Regulations

Passage of Prop F would mean a significant loss of business to Airbnb, which is why the company is reportedly spending millions of dollars to fight it. On the other side, concerned citizens and organizations have reportedly been getting help from the hotel industry, which is anxious to restrain the competition from the sharing economy.

Airbnb, Uber, and other “gap economy” businesses are themselves attempts to address markets that are underserved because of overregulation.

The great Austrian economist Ludwig von Mises described the cycle this way: profit-seeking entrepreneurs respond to the incentives created by bottlenecks and shortages that prior interventions have artificially created. Political activists in turn respond with more regulations. It’s an almost endless cycle that history teaches us usually doesn’t end well.

What’s the best way to improve housing options for low-income families? Taking time to scientifically question the wisdom of Prop F doesn’t make us bad people, and it’s not irrational to refrain from imposing political solutions on problems created by prior political “solutions.” Indeed, looking behind what is obvious and beyond the passions of the moment is the only way of breaking that vicious cycle.

Sandy Ikeda

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.

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