New Orleans City Council Just Showed How 'Affordable Housing' Can Destroy a Housing Market
If you want to know why housing is so unaffordable in the United States, just look at what governments at all levels have done to suppress the supply of housing while the nation’s population has expanded rapidly because of unbridled immigration.
A vast thicket of laws and regulations at all levels of government makes it incredibly expensive to build houses, creating a shortfall of 1.5 million to 7.3 million units, according to a new study by the Mortgage Bankers Association.
The median house price has been rising rapidly since the 1970s, as state and local regulations have made it increasingly difficult and unprofitable to build houses and apartment buildings.
Politicians’ reaction to the damage they cause is to pile on more laws and regulations, and to garnish them with subsidies and fines that distort the market even further.
A recent example from Louisiana illustrates the problem very well.
The New Orleans City Council is rolling back an affordable housing mandate that “failed to produce a single apartment complex since being passed in 2020,” The Center Square reported.
“Housing affordability in the city has only gotten worse” since the government imposed the mandate, the story said.
The idea of the mandate was to lower housing costs for consumers by increasing the supply of affordable apartments.
The City Council’s brilliant idea for how to do this was to make it too expensive to construct an apartment complex without charging below-market prices for a specific percentage of the units.
Developers would have to provide a specific number of “affordable” units, or pay a sizable fine for… building housing.
The ordinance set the percentage of “affordable” apartments at a suspiciously round number, indicating that it was not based on any kind of serious economic analysis or any inquiry of any kind: “Under the mandate, a 100-unit apartment complex in the city’s Core mandatory inclusionary zone would generally have to reserve 10 units as affordable housing,” The Center Square reported.
The fines were enormous: “If the developer chose not to, the alternative fee could total about $3,000,000.”
The program failed to achieve the stated intent, as anyone with basic arithmetic skills could have predicted.
Instead of repealing the mandate, however, the city government is now decreasing the fine to a round number that the lawmakers have apparently decided builders will find tolerable, cutting the per-unit “fee” from $304,810 to $10,000.
That radically lowers the cost for developers to avoid the set-aside requirement.
It also highlights the absurdity of the policy. Artificially raising the cost of a 100-unit apartment complex will cause the owners to increase rents accordingly to make up for that loss, thus resulting in zero additional “affordable” apartments while creating higher rents for those who move into the new building.
How that makes anything more affordable is a great mystery.
“Housing development is fundamentally a math equation,” New Orleans Home Builders Association CEO Dan Mills told The Center Square.
“If developers are required to sell or rent a portion of units below market rates, the lost revenue must be absorbed somewhere else in the project,” Mills added.
The same is true of the fines. The residents will pay for them.
While building zero new apartment complexes under the threat of the fines, developers responded positively to being paid to provide apartments: “Other affordable housing projects have seen more success, especially those subsidized with federal dollars,” The Center Square noted. “Those projects have produced 260 individual units since 2021.”
That is to be expected. Of course, the money came from taxpayers across the country, who certainly received no benefits from the spending.
Politicians are the main reason for high housing prices, as I documented in this Heartland Institute policy study titled “Housing Affordability: America’s Short-Term Crisis and Long-Term Problem,” released earlier this year.
Government regulations and currency manipulation suppress the housing supply and drive up prices, locking people out of the American dream of homeownership and self-reliance.
Land-use regulation is minimal in Houston, and the price of a new home is near its construction costs. In highly regulated places such as Manhattan, Boston, and San Francisco, the same house meanwhile costs two to five times as much, because of restrictions and mandates, not higher costs of labor or materials, the Affordable Housing Initiative reported.
New Orleans should follow Houston’s lead and let people build.
Instead, the City Council is retaining the reduced apartment fine with the intention of jacking it back up later, when different economic conditions will presumably cause the policy to generate an effect diametrically opposite to what it has produced thus far.
The politicians will reinstate the fees “when the City’s real estate market is stronger and more able to bear them,” council member Lesli Harris said in a statement.
“Strong” markets, however, do not “bear” stupidly expensive and ill-conceived fines and mandates. They just become distorted markets.
It is not “market failure,” but destruction by government.
Harris’s explanation for retaining the program underscores the incoherence of the mandates-and-fines approach: The requirements do absolutely nothing but punish people for building apartments in New Orleans.
The sole possible effect of the requirements is to keep people from building apartments if the mandate is “robust” enough to affect developers’ decision-making.
The only thing such a mandate can do is suppress building.
Cutting taxes and unnecessary regulation is the only reliable way for a government to spur economic production, including the housing supply. That is the only way to solve an affordability problem.
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