February 19, 2008

Just Another Example of Supply and Demand

Regarding the subprime mortgage crisis that I wrote about yesterday, Ilya Somin at The Volokh Conspiracy comments on new research showing that restrictive zoning and other government land-use restrictions have played a major role in causing the subprime mortgage crisis. "Zoning helped cause the crisis in two ways: by artificially inflating the price of real estate, and by increasing the likelihood of a 'boom-bust' cycle in real estate prices," Somin writes. ...

Portland, Oregon, is a prime example of how restrictive land use policies drive up housing prices.

Several years ago, the "smart growth" anti-sprawl movement captured the minds of Portland's political elites and they limited the growth of suburban development via a "smart growth" urban boundary, outside which land could not be subdivided into plots smaller than 5 acres.

The result was housing prices in the city shot sky high and created an acute shortage of affordable housing.

This didn't hurt the well-off, as they could merely go outside the "urban growth" boundary and buy 5 acres and build a house. The poor and lower-income working class, however, were greatly impacted as a larger and larger share of their limited resources was consumed by housing costs, or they had to move into crappier homes because that's all they could afford.

Portland's answer wasn't to cancel the "smart growth" plan that was forcing up housing prices by placing an artificial limit on the available supply of developable land, but to use taxes to subsidize affordable housing. Taxes, I should add, that increased the cost of buying a house in Portland.