Housing Supply Matters

What the Finns can teach us about affordable housing

I know all of you have read the most recent report about the effects of new luxury housing in Helsinki as it relates to helping low-income people find affordable housing. Right, you've all read that report too?? For those who aren’t in the loop you can find it here.

I’m just being silly, but the report is good and backs up a phenomenon that is believed about housing supply but hasn't been confirmed. I want to use this as a jumping off point for some thoughts on housing supply. While someday I want to do a full complete explainer of housing supply with cool graphics and stats, today is more the rough draft, the first attempt.

Affordable Housing

We generally believe that it is a basic human right to have shelter, to have housing. Indeed it seems like part of the reason why humans are as advanced as we are is because we were able to create shelters to shield us from the elements. Housing is vital for human flourishing, there is no doubt about that. 

Since it is a human right, we believe that everyone should be able to access housing. With the United States being a capitalist country we generally view this through the lens of housing being “affordable” or not. The implication being that someone should be able to find adequate housing that meets the amount of money they are able to pay for it. Generally when we look at housing it should be about 33% or lower of a household’s income to be counted as affordable.

All sorts of people make all different amounts of money. If we truly wanted affordable housing available to everyone there would be housing options that would cost only $1 a month alongside the luxury condos and mansions. But we know there are no housing options that you can find on the market that will only cost $1 a month. There’s just no way to get something like that. But we also see that people living in impoverished countries still have housing even though they are in extreme poverty, so how are they housed?

Choices we make about our housing

So the hypothetical $1 a month housing would be something along the lines of some cobbled together scraps to create a tiny shack. You can also use natural materials but in the modern world that is less of an option. Regardless, this type of housing sports no luxuries; no running water, no temperature control, no security, no cooking area, and no lighting. Now I know nobody reading this thinks that this is a good housing unit, but there are millions of people who live in housing similar to what I’ve described. This type of housing is better than no housing, but it’s far from the best.

As a society we have decided that shacks and huts are not adequate housing, so we have outlawed them. Or to put it another way, we have decided that they are worse than someone not having shelter. That may be an oversimplification, but it’s a natural conclusion of the rules as currently expressed.

Not only that, we’ve essentially outlawed many other forms of housing that used to be available to poorer people. I will say that many were outlawed because of poor conditions. Like the shacks mentioned above there were also tenement buildings of the past, places that were in horrid conditions but nonetheless housed people at rock bottom prices. It used to also be that when you rented an apartment it came “as is” so you were responsible for maintaining it, but we changed the responsibility to the landlord in the 70s. We’ve also outlawed many shared living spaces such as boarding houses, where people would rent a room in a house and have shared bathrooms and living areas. Those are still legal in Galesburg but only in the B3 district downtown, and I don’t believe there are any currently operating.

But if we go further we see that we have rules about the minimum amount of land you need to own in order to build housing. There are rules about parking requirements. We have rules about how wide the lot is, and have a maximum number of housing units that can be built on it. We’ve banned homeowners from building little cottages in their backyards for tenants or renting out their basements. We have mandated that we have sprinkler systems in buildings above a certain size. 

And what am I getting at? We have made so many forms of housing illegal in our society, and sometimes for good reasons. I’m not suggesting that anyone should live in a large apartment building with no sprinkler system. But each and every one of these rules reduces the number of spaces that can be used to house people. And when the supply goes down, basic economic market analysis says that the price of housing will go up. More people going after fewer units makes prices go up as people outbid each other.

The Supply

Since we have cut off the lowest rungs of the housing market, we are constantly worrying about affordable housing for the poor, but not just the poor. People all through the middle class struggle to find affordable housing, especially in big cities. We do have a number of government programs that we use to alleviate the problem, like public housing and Section 8 vouchers. These help by either supplying artificially cheap housing like in public housing, or subsidizing people in order to be able to afford higher payments with Section 8 vouchers. But we know both of these options are not enough because there are poor people all over who are still housing insecure.

What’s even worse, is that if you start limiting the amount of new housing becoming available, there becomes a ripple effect through the supply. The rich start out-bidding on housing that middle class people had been able to afford. Then those middle class people have to start out-bidding poor people on the housing they used to be able to afford. And then in the end there is no lower rung of housing options for the poorest people that fit their budgets. Either they have to pay a larger share of their income, seek government assistance, or become homeless. This is an extremely tough problem that our society has to deal with all the time, partially because of our choices to limit the supply of housing that poor people can afford.

The Study in Helsinki

So now we finally get to the study that I mentioned in the beginning. It looks at what happened when a brand new luxury apartment building was opened in the city center, and the moving that happened as a result of it. 

And you may say to yourself, “how on earth do luxury apartments make housing more affordable for poor people?” But I’ll tell you, the study confirms that it did help poor people.

In the scenario where there isn’t a lot of extra housing, people are bidding down the line on housing they otherwise may not prefer. So when suddenly there is a new supply of luxury housing, the rich no longer need to out-bid the middle class for housing, they can just move into the new building. Then after that happens the middle class people can stop out-bidding the poor. And then finally the poor are better able to afford housing because people with more income aren’t needing them. The study showed that there was a chain of people at all income levels being able to move into new housing after the opening of the luxury tower. Even some of the poorest people were able to find better housing because people just above them in economic status were able to move to better housing.

The lesson of this story is that new housing, whether it’s specifically for low income people or not, helps make housing more affordable for everyone. We should allow luxury housing to be built, because if not then those rich people will just outbid everyone else for the housing that already exists.