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This week we’re going to the graph below.
Why have housing prices gone up 3x in New Zealand, the UK, Canada, and Australia?
While going up 2x in France and the US?
But have stayed level or even decreased in Switzerland, Germany, and Japan?
How can we create stable housing prices in the US (and other countries)?
To dive into this, I’m excited to share my podcast with Alan Durning:
He authored an excellent series titled Winning Abundant Housing. He’s been working on housing for a few decades and I learned a lot from him. Here are some highlights from our conversation:
The Contradiction At The Heart Of Housing
Alan: Here is the contradiction at the heart of housing policy. You cannot have both: a) affordable housing for everyone and b) rising home values.
This shows up at three levels:
1. There’s the local zoning problem. In coastal cities, we've gone into what we call residential lockdown. We're building nowhere near as many housing units as there are people who want to live in that community. [Rhys: Since 2000, the Bay has added 800,000 jobs, but only 200,000 housing units.]
2. There’s the tax policy problem. This is a national issue, not a local one. The US Department of Housing and Urban Development spends $50B a year subsidizing housing for low-income families. Meanwhile, we're spending $200B through the tax code on subsidies to homeownership—mortgage tax deductions, property tax, and imputed rent. We spend four times more on subsidizing home ownership than we do on low-income housing.
3. There’s a real estate financialization problem. We guarantee a bailout for the mortgage sector of banking. All this money flows in knowing that there's a federal guarantee and the institutions are too big to fail. Then we look the other way and only lightly regulate the securitization of mortgage loans.
All three encourage us to treat housing as a place to invest as opposed to as a place to live.
The Explicit Goal of Policy Should Be Stable House Values
Rhys: Yep, love it. I like this reframe away from affordable housing and towards abundant housing. We want to expand supply, not subsidize demand.
But how do we get there? What should we do about it?
Alan: Let's focus on the macroeconomic stuff first.
My prescription is that tax policy should be neutral between owning and renting.
There are places where the tax system is essentially neutral. You don't get any tax break for renting, you don't get any tax break for owning. Those places still have plenty of homeownership. Germany has 40% homeownership. The United States has 67%.
In Germany, you don't get rich by owning a home. Your home value is stable and the explicit goal of policy in Germany is for home values to be stable.
Recently, there was a revolutionary proposal from the government in New Zealand. The explicit goal of policy should be stable house values. It shouldn't be revolutionary, but it is.
Rhys: I'm just agreeing and laughing so hard over here. This feels so right for me. But so wrong for so many people. You're supposed to make money from housing!
Alan: That’s right. It’s tough to change minds here.
But yes, the prescription is for policy to deflate all real estate bubbles immediately and aim for stable real estate values.
It's easy to say that.
It's really hard to do that when the entire economy and all of the political economy that has resulted from it is now built around the expectation of rising real estate values.
Still, it’s important to understand the goal. Then you can begin to identify what kind of policies you would need, even if they are hard from a political economy perspective.
Rhys: Have we made any progress on the tax policy problem?
Alan: We have had we've had remarkable progress on this. In the 2017 Trump tax cut, somewhat shockingly, there was a huge reduction in the mortgage interest deduction. There was a scale-back of the capital gains exemption for homes and there was a reduction in the property tax deduction as well.
Altogether, this was a 50% reduction in the amount of money flowing annually into tax credits for home investment.
Housing Should Be Like A Grocery Store
Alan: Moving forward, abundance is the core concept.
People should have the experience in the housing sector that they have when they go into modern American grocery store. The experience when you go into a grocery store is, oh my gosh, I can have anything I want. People aren't competing to get the only loaf of bread.
They're not bidding up the price of that box of spaghetti. There's just a lot of everything. You have to make then choices about the right tradeoffs for you. People buy different things. Housing should feel like that.
We need the federal tax and financial policy to get there.
The New American Dream: NIMBY Issues At The Local Level
Rhys: Let’s move from federal policy to local policy. How do you think about changing things on the local level to get better zoning?
Alan: We need a new American Dream. The old dream was to have a big yard and trees. And just one family per lot.
This has meant that, in most cities in the United States, 75% of the land is reserved for single-detached homes. This means that homes only get built in two places, the remaining 25%: As apartments in the dense areas of cities, or on the exurban fringe.
We are just dramatically under-building.
But we’ve been making progress. SB9 allowed duplexes on every lot in California. Portland just legalized four-plexes. Slowly but surely, we’ll decrease that 75%.
The Problem Is Incentives And Psychology, Not Morality
Rhys: How do we get more of these wins?
Alan: Sightline has a staff of about six working on winning abundant housing. We have all kinds of detailed arguments to help win specific issues. Classic political economy.
I'm trying to move up a level and think about the structure of the fight.
Rhys: The meta political economy.
Alan: Yes. Here’s how I think of it:
Homeowners are the overwhelming share of voters. The home is their most valuable asset. It’s the way that they're going to be able to retire, the way help send their kids to college. There are intense pressures on them to defend their property values and be risk-averse about changes in local rules.
People want to defend their property values. That is the root explanation here.
This is why most places have gone into residential lockdown. There are 22,000 cities and counties making zoning decisions. Almost everywhere the zoning is ended up being really restrictive. It’s because of incentives and human psychology.
So we have to first acknowledge that. We shouldn’t make this a morality play of good people against bad people.
Rhys: This is why I don’t like the YIMBY vs. NIMBY meme. It’s a classic binary meme that spreads. But actually, I wouldn't want call myself a YIMBY. I wouldn't want to call someone else a bad NIMBY. What they’re doing makes sense given their incentives!
Political Leverage Points
Alan: Yes, so we have to figure out policies and strategies with two key criteria:
First, ones where not many people suffer a big loss in their assets.
Second, ones where we mobilize the constituencies who stand to gain from abundant housing and give them political voice.
For example, we know that it helps to get renters to participate in politics.
Political Option #1: Move To The State Level
Alan: We need to move from the city level to the state level.
This changes the game. It changes who shows up. When you move to the state level then big employers, trade unions, and the AARP will show up.
But they're not going to show up in a city-by-city fight over the local zoning rule. The only one who shows up for the local zoning rules are a few NIMBY homeowners and the person who's trying to build a new project.
Moving to the state level is confirmed by my analysis of change in other countries that do housing well. Japan, for example, is a very centralized country in terms of decision-making. They were able to pass a very permissive zoning code.
This is how California, by moving to the state level, was able to legalize duplexes statewide. In Oregon, we have been able to win duplexes statewide. In fact, by state law, all large cities in Oregon now have fourplex allowed on almost every urban lot.
Political Option #2: Incentivize Locally
Alan: What no one in North America is yet doing well is what Germany and Switzerland do. They create incentives for localities to welcome more homes.
In Germany, for example, local governments get about a quarter of their funds from a formula that rewards them for having more population. In Germany, localities are competing to attract more people.
We’ve begun introducing bills in the Washington legislature that gives cities a financial reward for adding more homes.
So those are the two big strategies: 1) Move up to a higher level of government and 2) Create incentives for cities.
Inequity Under Democrats' Single Party Rule
Rhys: This makes me think about a recent New York Times video that showed how some of the most inequitable places in the US are under single-party Democratic rule.
Many Democrats are optimized for progressive signaling without actual policy impact.
How do you think about inequitable housing policy under democratic rule?
Under-regulated Nationally, Over-regulated Locally
Alan: Yes, it's a really good question. Because the places that are the worst offenders on housing abundance are under one-party rule by Democrats.
What we have is two parties with polarized perpsectives on government. The right has become anti-government. While the left has become pro-government with more regulation of the market.
If you have a problem in a left-ruled place, where the actual problem is overregulation, the left doesn't really have the neural pathways well developed to recognize that.
My view is that the U.S. economy is under-regulated at the macro level around certain huge problems like climate change or the financial systemic risk. But we’re quite over-regulated at the local level on issues like building.
For example, Airbnb is such a huge controversy because we have a housing shortage. Tighter regulations on Airbnb might feel good and fit into our left paradigm that says pro-market players are suspect and we should regulate them.
But the right answer to AirBnB is probably to tax those activities like a hotel tax. And primarily to recognize that there's an enormous shortage of housing and we should build a lot more housing.
There's recent research that shows that places that have not regulated Airbnb are building more housing than places that have tightly regulated Airbnb.
Use UBI, Don't Subsidize Demand
Alan: The big city Democrat impulse says let's stick it to the landlords. Let's subsidize more. Let's allow construction of a few buildings, but put tight rules that say a quarter of the units have to be rent-regulated.
We do need more equity in the system. But my personal belief is that the best way to do that is to provide housing vouchers as an entitlement or better, a universal basic income or a child allowance.
Giving people money is a better solution than trying to get each individual building to have tight rules about how many of their units are going to go to people at specific income levels.
Let builders build buildings. Give poor people money so they can afford to move there.
This is what France does very well. France is a social democracy. The way that they provide most housing to lower-middle-class families is though very generous housing vouchers. They trust people to then use the vouchers on housing if that's what they want to spend it on. But in fact, no one's checking. If they decide that they wanted to go to the grocery store to buy more bread, they can do that too.
40 Years To Get Into This Mess, 20 Years To Get Out
Rhys: Final question. What should you say to someone to about this abundant housing future?
Alan: First, it's a long timeline. It's important that we set expectations realistically.
Second, we are making progress.
It took us 40 years to get into this mess. I hope it can take us only 20 years to get out.
Hope you have a good week! Warmth, Rhys
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