Can Governments Ever Provide Affordable Housing?
Human beings are social creatures. All over the world, human beings want to live in their own houses. This is the reason why all the governments in the world also try to woo their voters by promising them affordable housing.
Governments all over the world from the United States to India are trying to enact policies that would create affordable housing. However, the reality is that the best way the government can make houses affordable is by not creating and policies and letting the markets function. It is a known fact that when politicians meddle into economic affairs, the results are less than impressive.
In this article, we will have a look at exactly how the governments policies make housing less affordable.
How The Government Makes Property Expensive?
Governments all over the world enact legislation at different levels which end up making the property more expensive. These policies are as follows:
- Inflation at Central Level: It is important to realize that property prices tend to rise only when there is inflation in the entire economy. In the absence of inflation, property prices would automatically remain affordable.
In fact, one of the biggest reasons for buying property is that it acts as a hedge against inflation. The problem here is that it is the central banks which decide the amount of money supply in any nation. This money supply is then regulated by changing interest rates.
Historically, governments and central banks have followed inflationary policies. This means that they create more money, a large part of which comes into the housing market raising prices. The solution to the problem would be to stop creating more money! However, governments seldom acknowledge that they are the root cause of the problem. No measures are taken to quell inflation, while at the same time governments continue making empty promises that they will reduce inflation.
- Rent Control Laws: Rental housing is an important component of affordable housing. However, for the rental market to flourish, homeowners must be allowed to charge fair rent to the customers. Most provinces around the world prevent this.
Many governments in progressive nations like America have implemented rent control acts. These acts are applicable to some housing units whereas they are not applicable to the others.
The owners of rent-controlled units prefer not to rent out their homes. In effect, this exacerbates the supply of affordable rental housing by artificially restricting supply. Once again, the market would be better off without government interference than it would be with it.
- Zoning Laws: Housing prices are a function of supply and demand. The demand in the cities is increasing because of increasing population. However, the supply of housing units in the city is not increasing at the same rate. This is because of archaic zoning laws in many cities. These laws prevent the use of large tracts of land. The end result is that builders are asked to go through an expensive and time-consuming process in order to receive the building approvals.
Sometimes, these approvals are granted whereas at other times they are not granted. Even if these approvals are granted, the entire process is laced with corruption and bureaucracy. This is the reason that the government ends up increasing the prices because of two reasons.
Firstly, the supply of large tracts of land is restricted.
Secondly, even to construct on land where construction is permitted, bribes and other costs need to be factored in.
Once again, the government is not really the solution to the problem. In fact, the government is the problem.
- Transactional Costs: Local governments all over the world charge transaction costs whenever a property changes hands. In many cases, these transaction costs can be as high as 6% to 7% of the property prices.
These costs obviously add up to the purchase price making it more expensive. If the government really wants to make housing affordable, then one of the ways in which they should do it is by reducing the transaction costs.
Most governments never reduce the transaction costs because they are major sources of revenue. In most cases, the government is only pretending to be in favor of affordable housing.
In the United States, the government enacted a policy to create more affordable housing. As per this policy, they started giving loans to everybody regardless of whether they had the credit required to back the loan. The government had even created agencies whose jobs was to buy these loans and infuse cash to the banks who could then make fresh loans once again.
It is strange that the government thought that infusing excessive cash in a market would help lower prices. The result was completely predictable. During the period from 2000 to 2008, housing prices in the United States went through the roof.
The record of history is very clear. The only way any government can help reduce housing prices is by staying out of the housing market! Yet, each and every government tries to meddle in the housing markets in the hope of political gains. It is time that the voters realized that it is efficient markets and not political promises which provide cheap housing.
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The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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