In cities like New York, San Francisco, and Boston, housing prices and rents are high and rising.
The usual prescription for bringing down housing prices is to build more housing. On the face of it, this makes perfect sense. An increase in the supply of housing forces sellers to compete for buyers and landlords to compete for tenants. Econ 101 tells us that this will cause prices to fall. And it just might. But there’s a simpler way.
Last fall, I attended a panel discussion in which policy researcher Will Wilkinson of the Niskanen Center laid out his proposed solution to expensive housing. As a twist on the usual prescription, Wilkinson’s plan reveals some insights that get us part of the way to the more elegant solution.
People who’ve got a house back when they were cheaper, are sitting on this quickly appreciating asset, so their wealth is growing — it’s ballooning while poor people can’t accumulate any wealth at all because they have nothing to save after they pay for their housing.
— Will Wilkinson 18:32
According to Wilkinson, what’s standing in the way of greater housing supply is zoning laws that restrict land use. This is a common explanation. Developers don’t build more housing because they’re not allowed to. And they’re not allowed to because people who own property don’t want them to.
People just want their house to appreciate in value because we’ve structured our system in an insane way to push people to treat their house as an investment vehicle, which is a really really bad idea.
— Will Wilkinson 42:22
Wilkinson is right about this problem and he has a clever plan to use Federal money as a carrot to incentivize states and municipalities to make zoning more permissive. The idea is for these incentives to overpower the preferences of property owners to restrict development.
As I said, however, there’s a simpler, more elegant solution. Instead of looking at housing supply we can look at housing demand. A big part of the reason for the concentration of housing demand is that the housing market is tightly intertwined with the labor market. People tend to need to live near where the jobs are.
Wilkinson emphasizes this connection too.
When these housing restrictions — when land-use restrictions — make housing too expensive, it makes it impossible for workers to move to the labor markets where they’re most productive.
— Will Wilkinson 19:37
What Wilkinson fails to recognize is that the economy doesn’t actually need all those people to be living near those jobs. The people need the jobs, but the jobs don’t need the people. What if people had more freedom to live wherever they wanted without having to give so much consideration to the job market?
That freedom is exactly what Universal Basic Income (UBI) gives us. UBI is an unconditional income paid to every individual person. It solves the problem of how to get spending money into people’s hands. And it accomplishes this independently of the labor market. UBI is an income that’s not tied to any particular location.
By providing people more freedom to live in different places, UBI does the equivalent of flooding the market with cheap homes. That’s going to drive down rents in cities where housing is currently tight. It’s going to drive down real estate prices in general.
This is a good thing. Cheaper housing is better for people. Homes shouldn’t be treated as investments in the first place. If you’re invested in real estate and you think a UBI is coming, you might want to get out.
A city’s residents can always exert some control over the supply of housing in their neighborhoods. But there’s nothing they can do to overcome the drop in demand that a UBI will induce. They can restrict new development all they want, but housing will nonetheless become cheaper and more affordable.
When people first hear about UBI, they worry that landlords will respond by raising their rents. But this is backwards. The landlords can’t raise the rents. They can only ever charge as much rent as renters are willing to pay. And the higher the UBI, the less that people are tied down to a particular location, hence the less rent they’re willing to pay. In order to attract tenants, landlords would instead have to lower their rents.
Along with Will Wilkinson’s permissive zoning plan, the panel also featured a discussion of UBI. Sitting right in front of Wilkinson was the solution to expensive housing. He just didn’t recognize it. Universal Basic Income fixes what’s broken in the housing market — by crashing it.