The asymmetric impact of housing prices

Jul 22 JDN 2458323

In several previous posts I’ve talked about the international crisis of high housing prices. Today, I want to talk about some features of housing that make high housing prices particularly terrible, in a way that other high prices would not be.

First, there is the fact that some amount of housing is a basic necessity, and houses are not easily divisible. So even if the houses being built are bigger than you need, you still need some kind of house, and you can’t buy half a house; the best you could really do would be to share it with someone else, and that introduces all sorts of other complications.

Second, t here is a deep asymmetry here. While rising housing prices definitely hurt people who want to buy houses, they benefit hardly anyone.


If you bought a house for $200,000 and then all housing prices doubled so it would now sell for $400,000, are you richer? You might feel richer. You might even have access to home equity loans that would give you more real liquidity. But are you actually richer?

I contend you are not, because the only way for you to access that wealth would be to sell your home, and then you’d need to buy another home, and that other home would also be twice as expensive. The amount of money you can get for your house may have increased, but the amount of house you can get for your house is exactly the same.

Conversely, suppose that housing prices fell by half, and now that house only sells for $100,000. Are you poorer? You still have your house. Even if your mortgage isn’t paid off, it’s still the same mortgage. Your payments haven’t changed. And once again, the amount of house you can get for your house will remain the same. In fact, if you are willing to accept a deed in lieu of foreclosure (it’s bad for your credit, of course), you can walk away from that underwater house and buy a new one that’s just as good with lower payments than what you are currently making. You may actually be richer because the price of your house fell.

Relative housing prices matter, certainly. If you own a $400,000 house and move to a city where housing prices have fallen to $100,000, you are definitely richer. And if you own a $100,000 house and move to a city where housing prices have risen to $400,000, you are definitely poorer. These two effects necessarily cancel out in the aggregate.

But do absolute housing prices matter for homeowners? It really seems to me that they don’t. The people who care about absolute housing prices are not homeowners; they are people trying to enter the market for the first time.
And this means that lower housing prices are almost always better. If you could buy a house for $1,000, we would live in a paradise where it was basically impossible to be homeless. (When social workers encountered someone who was genuinely homeless, they could just buy them a house then and there.) If every home cost $10 million, those who bought homes before the price surge would be little better off than they are, but the rest of us would live on the streets.

Psychologically, people very strongly resist falling housing prices. Even in very weak housing markets, most people will flatly refuse to sell their house for less than they paid for it. As a result, housing prices usually rise with inflation, but don’t usually fall in response to deflation. Rents also display similar rigidity over time. But in reality, lower prices are almost always better for almost everyone.

There is a group of people who are harmed by low housing prices, but it is a very small group of people, most of whom are already disgustingly rich: The real estate industry. Yes, if you build new housing, or flip houses, or buy and sell houses on speculation, you will be harmed by lower housing prices. Of these, literally the only one I care about even slightly is developers; and I only care about developers insofar as they are actually doing their job building housing that people need. If falling prices hurt developers, it would be because the supply of housing was so great that everyone who needs a house could have one.

There is a subtler nuance here, which is that some people may be buying more expensive housing as a speculative saving vehicle, hoping that they can cash out on their house when they retire. To that, I really only have one word of advice: Don’t. Don’t contribute to another speculative housing bubble that could cause another Great Recession. A house is not even a particularly safe investment, because it’s completely undiversified. Buy stocks. Buy all the stocks. Buy a house because you want that house, not because you hope to make money off of it.

And if the price of your house does fall someday? Don’t panic. You may be no worse off, and other people are probably much better off.

The housing shortage is an international phenomenon

Jul 1 JDN 2458301

My posts for the next couple of weeks are going to be shorter, since I am in Europe and will be either on vacation (at the time I write this) or busy with a conference and a workshop (by the time this post goes live).

For today, I’d just like to point out that the crisis of extremely high housing prices is not unique to California or even the United States. In some respects it may even be worse elsewhere.

San Francisco remains especially bad; the median price for a home in San Francisco is a horrifying $1.6 million.

But London (where I am at the time of writing) is also terrible; the median price for a home in London recently fell to 430,000 pounds (about $600,000 at current exchange rates). The most expensive flat—not house, flat—sold a couple years ago for the mind-boggling sum of 150 million pounds (about $200 million). If I had $200 million, I would definitely not use it to buy a flat. At that point it would literally be cheaper to buy a yacht with a helipad, park it in the harbor, and commute by helicopter. Here’s a yacht with a helipad for only $20 million, and a helicopter to go with it for $6 million. That leaves $174 million; keep $20 million in stocks to be independently wealthy for the rest of your life, and then donate the remaining $154 million to charity.

The median price of a house in Vancouver stands at 1.1 million Canadian dollars, about $830,000 US.

A global comparison finds that on a per-square-meter basis, the most expensive real estate in the world is in Monaco, where $1 million US will only buy you 15 square meters. The remaining cities in the top 10 are Hong Kong, London, Singapore, Geneva, New York, Sydney, Paris, Moscow, and Shanghai.

There is astonishing variation in the level of housing prices, even within countries. Some of the most affordable markets in the US (like San Antonio and Oklahoma City) cost as little as $80 per square foot; that means that $1 million would buy you 1,160 square meters. That’s not an error; real estate in Monaco is literally 77 times more expensive than real estate in Oklahoma City. 15 square meters is a studio apartment; 1,160 square meters is a small mansion. Just comparing within the US, the price per square foot in San Francisco is over $1,120, 14 times as high as Oklahoma City. $1 million in San Francisco will buy you about 80 square meters, which is at least a two or three-bedroom house.

This says to me that policy choices matter. It may not be possible to make San Francisco as cheap as Oklahoma City—most people would definitely rather live in San Francisco, so demand is always going to be higher there. But I don’t think it’s very plausible to say that housing is just inherently 14 times as expensive to construct as housing in Oklahoma City. If it’s really that much more expensive to construct (and that may not even be the issue—this could be more a matter of oligopoly than high costs), it must be at least in part because of something the local and state governments are doing differently. Cross-national comparisons underscore that point even further: The geography of Hong Kong and Taiwan is not that different, but housing prices in Taiwan are not nearly as high.

What exactly are different cities (and countries) doing differently that has such large effects on housing prices? That’s something I’ll try to figure out in future posts.

Downsides of rent control

May 13 JDN 2458252

One of the largest ideological divides between economists and the rest of the population concerns rent control.

Tent control is very popular among the general population, especially in California—with support hovering around 60% in Orange County, San Diego County, and across California in general. About 60% of people in the UK and over 50% in Ontario, Canada also support rent control.

Meanwhile, economists overwhelmingly oppose rent control: When evaluating the statement “A ceiling on rents reduces the quantity and quality of housing available.”, over 76% of economists agreed, and 16% agreed with qualifications. For the record, I would be an “agree with qualifications” as well (as they say, there are few one-handed economists).

There is evidence of some benefits of rent control, at least for the small number of people who can actually manage to stay in rent-controlled units. People who live in rent-controlled units are about 15% more likely to stay where they are, even in places as expensive as San Francisco, which could be considered a good thing (though I’m not convinced it always is; mobility is one of the key forces driving the dynamism of the US economy).

But there are winners and losers. Landlords whose properties are rent-controlled decreased their supply of housing by an average of 15%, via a combination of converting them to condos, removing them from the market, or demolishing the buildings outright. As a result, rent control increases average rent in a city by an average of 5%. One of the most effective ways to get out of rent control is to remove a building from the market entirely; this allows you to evict all of your tenants with very little notice, and is responsible for thousands of tenants being evicted every year in Los Angeles.

Rent control disincentivizes both new housing construction and the proper maintenance of existing housing. The quality of rent-controlled homes is systematically lower than the quality of other homes.

The benefits of rent control mainly fall upon the upper-middle class, not the poor. Rent control can make an area more racially diverse—but it benefits middle-class members of racial minorities, not poor members. Most of the benefits of rent control go to older families who have lived in a city for a long time—which makes them a transfer of wealth away from young people.

Cities such as Chicago without rent control systematically have lower rents, not higher; partly this is a cause, rather than an effect, as tenants are less likely to panic and demand rent control when rents are not high. But it’s also an effect, as rent control holds down the price in part of the market but ends up driving it up in the rest. Over 40% of San Francisco’s apartments are rent-controlled, and they have the highest rents in the world.

Rent control also contributes to the tendency toward building high-end luxury apartments; if you know that you will never be able to raise the rent on your existing buildings, and may end up being stuck with whatever rent you charge the first year on your new buildings, you have a strong reason to want to charge as much as possible the first year you build new apartments. Rent control also creates subtler distortions in the size and location of apartment construction. The effects of rent control even spill over into other housing markets, such as owner-occupied homes and mobile homes.
Because it locks people into place and reduces the construction of new homes near city centers, rent control increases commute times and carbon emissions. This is probably something we should especially point out to people in California, as the two things Californians hate most are environmental degradation and traffic congestion. (Then again, the third is high rent.) California is good at avoiding the first one—our GDP/carbon emission ratio is near the best in the US. The other two? Not so much.

Of course, simply removing rent control would not immediately solve the housing shortage; while it would probably have benefits in the long run, during the transition period a lot of people currently protected by rent control would lose their homes. Even in the long run, it would probably not be enough to actually make rent affordable in the largest coastal cities.

But it’s vital not to confuse “lower rent” with “rent control”; there are much, much better ways to reduce rent prices than simply enforcing arbitrary caps on them.

We have learned not to use price controls in other markets, but not housing for some reason. Think about the gasoline market, for example. High gas prices are very politically unpopular (though frankly I never quite understood why; it’s a tiny fraction of consumption expenditure, and if we ever want to make a dent in our carbon emissions we need to make our gas prices much higher), but imagine how ridiculous it would seem for a politician to propose simply making an arbitrary cap that says you aren’t allowed to sell gasoline for more than $2.50 per gallon in a particular city. The obvious outcome would be for most gas stations in that city to immediately close, and everyone to end up buying their gas at the new gas stations that spring up just outside the city limits charging $4.00 per gallon. This is basically what happens in the housing market: Rent-controlled apartments apartments are taken off the market, and the new housing that is built ends up even more expensive.

In a future post, I’ll discuss things we can do instead of rent control that would reliably make housing more affordable. Most of these would involve additional government spending; but there are two things I’d like to say about that. First, we are already spending this money, we just don’t see it, because it comes in the form of inefficiencies and market distortions instead of a direct expenditure. Second, do we really care about making housing affordable, or not? If we really care, we should be willing to spend money on it. If we aren’t willing to spend money on it, then we must not really care.

The Irvine Company needs some serious antitrust enforcement

Dec 17, JDN 2458105

I probably wouldn’t even have known about this issue if I hadn’t ended up living in Irvine.

The wealthiest real estate magnate in the United States is Donald Bren, sole owner of the Irvine Company. His net wealth is estimated at $15 billion, which puts him behind the likes of Jeff Bezos or Bill Gates, but well above Donald Trump even at his most optimistic estimates.

Where did he get all this wealth?

The Irvine Company isn’t even particularly shy about its history, though of course they put a positive spin on it. Right there on their own website they talk about how it used to be a series of ranches farmed by immigrants. Look a bit deeper into their complaints about “squatters” and it becomes apparent that the main reason they were able to get so rich is that the immigrant tenant farmers whose land they owned were disallowed by law from owning real estate. (Not to mention how it was originally taken from Native American tribes, as most of the land in the US was.) Then of course the land has increased in price and been passed down from generation to generation.

This isn’t capitalism. Capitalism requires a competitive market with low barriers of entry and trade in real physical capital—machines, vehicles, factories. The ownership of land by a single family that passes down its title through generations while extracting wealth from tenant farmers who aren’t allowed to own anything has another name. We call it feudalism.

The Irvine Company is privately-held, and thus not required to publish its finances the way a publicly-traded company would be, so I can’t tell you exactly what assets its owns or how much profit it makes. But I can tell you that it owns over 57,000 housing units—and there are only 96,000 housing units in the city of Irvine, so that means they literally own 60% of the city. They don’t just own houses either; they also own most of the commercial districts, parks, and streets.

As a proportion of all the housing in the United States, that isn’t so much. Even compared to Southern California (the most densely populated region in North America), it may not seem all that extravagant. But within the city of Irvine itself, this is getting dangerously close to a monopoly. Housing is expensive all over California, so they can’t be entirely blamed—but is it really that hard to believe that letting one company own 60% of your city is going to increase rents?

This is sort of thing that calls for a bold and unequivocal policy response. The Irvine Company should be forced to subdivide itself into multiple companies—perhaps Irvine Residential, Irvine Commercial, and Irvine Civic—and then those companies should be made publicly-traded, and a majority of their shares immediately distributed to the residents of the city. Unlike most land reform proposals, selecting who gets shares is actually quite straightforward: Anyone who pays rent on an Irvine Company property receives a share.

Land reform has a checkered history to say the least, which is probably why policymakers are reluctant to take this sort of approach. But this is a land reform that could be handled swiftly, by a very simple mechanism, with very clear rules. Moreover, it is entirely within the rule of law, as the Irvine Company is obviously at this point an illegitimate monopoly in violation of the Sherman Antitrust Act, Clayton Antitrust Act, and Federal Trade Commission Act. The Herfindahl-Hirschman Index for real estate in the city of Irvine would be at least 3600, well over the standard threshold of 2500 that FTC guidelines consider prima facie evidence of an antitrust violation in the market. Formally, the land reform could be accomplished by collecting damages in an amount necessary to purchase the shares at the (mandatory) IPO, then the beneficiaries of the damages paid in shares would be the residents of Irvine. The FTC is also empowered to bring criminal charges if necessary.

Oddly, most of the talk about the Irvine Company among residents of Irvine centers around their detailed policy decisions, whether expanding road X was a good idea, how you feel about the fact that they built complex Y. (There’s also a bizarre reverence for the Irvine Master Plan; people speak of it as if it were the US Constitution, when it’s actually more like Amazon.com’s five-year revenue targets. This is a for-profit company. Their plan is about taking your money.) This is rather like debating whether or not you have a good king; even if you do, you’re still a feudal subject. No single individual or corporation should have that kind of power over the population of an entire city. This is not a small city, either; Irvine has about three-quarters of the population of Iceland, or a third the population of Boston. Take half of Donald Bren’s $15 billion, divide it evenly over the 250,000 people of the city, and each one gets $30,000. That’s a conservative estimate of how much monopolistic rent the Irvine Company has extracted from the people of Irvine.

By itself, redistributing the assets of the Irvine Company wouldn’t solve the problem of high rents in Southern California. But I think it would help, and I’m honestly having trouble seeing the downsides. The only people who seem to be harmed are billionaires who inherited wealth that was originally extracted from serfs. Like I said, this is within the law, and wouldn’t require new legislation. We would only need to aggressively enforce laws that have been on the books for a century. It doesn’t even seem like it should be politically unpopular, as you’re basically giving a check for tens of thousands of dollars to each voting resident in the city.

Of course, it won’t happen. As usual, I’m imagining more justice in the world than there actually has ever been.

What exactly is “gentrification”? How should we deal with it?

Nov 26, JDN 2458083

“Gentrification” is a word that is used in a variety of mutually-inconsistent ways. If you compare the way social scientists use it to the way journalists use it, for example, they are almost completely orthogonal.

The word “gentrification” is meant to invoke the concept of a feudal gentry—a hereditary landed class that extracts rents from the rest of the population while contributing little or nothing themselves.

If indeed that is what we are talking about, then obviously this is bad. Moreover, it’s not an entirely unfounded fear; there are some remarkably strong vestiges of feudalism in the developed world, even in the United States where we never formally had a tradition of feudal titles. There really is a significant portion of the world’s wealth held by a handful of billionaire landowner families.

But usually when people say “gentrification” they mean something much broader. Almost any kind of increase in urban real estate prices gets characterized as “gentrification” by at least somebody, and herein lies the problem.

In fact, the kind of change that is most likely to get characterized as “gentrification” isn’t even the rising real estate prices we should be most worried about. People aren’t concerned when the prices of suburban homes double in 20 years. You might think that things that are already too expensive getting more expensive would be the main concern, but on the contrary, people are most likely to cry “gentrification” when housing prices rise in poor areas where housing is cheap.

One of the most common fears about gentrification is that it will displace local residents. In fact, the best quasi-experimental studies show little or no displacement effect. It’s actually mainly middle-class urbanites who get displaced by rising rents. Poor people typically own their homes, and actually benefit from rising housing prices. Young upwardly-mobile middle-class people move to cities to rent apartments near where they work, and tend to assume that’s how everyone lives, but it’s not. Rising rents in a city are far more likely to push out its grad students than they are poor families that have lived there for generations. Part of why displacement does not occur may be because of policies specifically implemented to fight it, such as subsidized housing and rent control. If that’s so, let’s keep on subsidizing housing (though rent control will always be a bad idea).

Nor is gentrification actually a very widespread phenomenon. The majority of poor neighborhoods remain poor indefinitely. In most studies, only about 30% of neighborhoods classified as “gentrifiable” actually end up “gentrifying”. Less than 10% of the neighborhoods that had high poverty rates in 1970 had low poverty rates in 2010.

Most people think gentrification reduces crime, but in the short run the opposite is the case. Robbery and larceny are higher in gentrifying neighborhoods. Criminals are already there, and suddenly they get much more valuable targets to steal from, so they do.

There is also a general perception that gentrification involves White people pushing Black people out, but this is also an overly simplistic view. First of all, a lot of gentrification is led by upwardly-mobile Black and Latino people. Black people who live in gentrified neighborhoods seem to be better off than Black people who live in non-gentrified neighborhoods; though selection bias may contribute to this effect, it can’t be all that strong, or we’d observe a much stronger displacement effect. Moreover, some studies have found that gentrification actually tends to increase the racial diversity of neighborhoods, and may actually help fight urban self-segregation, though it does also tend to increase racial polarization by forcing racial mixing.

What should we conclude from all this? I think the right conclusion is we are asking the wrong question.

Rising housing prices in poor areas aren’t inherently good or inherently bad, and policies designed specifically to increase or decrease housing prices are likely to have harmful side effects. What we need to be focusing on is not houses or neighborhoods but people. Poverty is definitely a problem, for sure. Therefore we should be fighting poverty, not “gentrification”. Directly transfer wealth from the rich to the poor, and then let the housing market fall where it may.

There is still some role for government in urban planning more generally, regarding things like disaster preparedness, infrastructure development, and transit systems. It may even be worthwhile to design regulations or incentives that directly combat racial segregation at the neighborhood level, for, as the Schelling Segregation Model shows, it doesn’t take a large amount of discriminatory preference to have a large impact on socioeconomic outcomes. But don’t waste effort fighting “gentrification”; directly design policies that will incentivize desegregation.

Rising rent as a proportion of housing prices is still bad, and the fundamental distortions in our mortgage system that prevent people from buying houses are a huge problem. But rising housing prices are most likely to be harmful in rich neighborhoods, where housing is already overpriced; in poor neighborhoods where housing is cheap, rising prices might well be a good thing.
In fact, I have a proposal to rapidly raise homeownership across the United States, which is almost guaranteed to work, directly corrects an enormous distortion in financial markets, and would cost about as much as the mortgage interest deduction (which should probably be eliminated, as most economists agree). Give each US adult a one-time grant voucher which gives them $40,000 that can only be spent as a down payment on purchasing a home. Each time someone turns 18, they get a voucher. You only get one over your lifetime, so use it wisely (otherwise the policy could become extremely expensive); but this is an immediate direct transfer of wealth that also reduces your credit constraint. I know I for one would be house-hunting right now if I were offered such a voucher. The mortgage interest deduction means nothing to me, because I can’t afford a down payment. Where the mortgage interest deduction is regressive, benefiting the rich more than the poor, this policy gives everyone the same amount, like a basic income.

In the short run, this policy would probably be expensive, as we’d have to pay out a large number of vouchers at once; but with our current long-run demographic trends, the amortized cost is basically the same as the mortgage interest deduction. And the US government especially should care about the long-run amortized cost, as it is an institution that has lasted over 200 years without ever missing a payment and can currently borrow at negative real interest rates.

This is one of the worst wildfire seasons in American history. But it won’t be for long.

Oct 22, JDN 2458049

At least 38 people have now been killed by the wildfires that are still ongoing in California; in addition, 5700 buildings have been destroyed and 190,000 acres of land burned. The State of California keeps an updated map of all the fires that are ongoing and how well-controlled they are; it’s not a pretty sight.

While the particular details are extreme, this is not an isolated incident. This year alone, wildfires have destroyed over 8 million acres of land in the US. In 2015, that figure was 10 million acres.

Property damage for this year’s wildfires in California is estimated at over $65 billion. That’s more than what Trump recently added to the military budget, and getting close to our total spending on food stamps.

There is a very clear upward trend in the scale and intensity of wildfires just over the last 50 years, and the obvious explanation is climate change. As climate change gets worse, these numbers are projected to increase between 30% and 50% by the 2040s. We still haven’t broken the record of fire damage in 1910, but as the upward trend continues we might soon enough.

It’s important to keep the death tolls in perspective; much as with hurricanes, our evacuation protocols and first-response agencies do their jobs very well, and as a result we’ve been averaging only about 10 wildfire deaths per year over the whole United States for the last century. In a country of over 300 million people, that’s really an impressively small number. That number has also been trending upward, however, so we shouldn’t get complacent.

Climate change isn’t the only reason these fires are especially damaging. It also matters where you build houses. We have been expanding our urban sprawl into fire-prone zones, and that is putting a lot of people in danger. Since 1990, over 60% of new homes were built in “wildland-urban interface areas” that are at higher risk.

Why are we doing this? Because housing prices in urban centers are too expensive for people to live there, but that is where most of the jobs are. So people have little choice but to live in exurbs and suburbs closer to the areas where fires are worst. That’s right: The fires are destroying homes and killing people because the rent is too damn high.

We need to find a solution to this problem of soaring housing prices. And since housing is such a huge proportion of our total expenditure—we spend more on housing than we do on all government spending combined—this would have an enormous impact on our entire economy. If you compare the income of a typical American today to most of the world’s population, or even to a typical American a century ago, we should feel extremely rich, but we don’t—largely because we spend so much of it just on keeping a roof over our heads.

Real estate is also a major driver of economic inequality. Wealth inequality is highest in urban centers where homeownership is rare. The large wealth gaps between White and non-White Americans can be in large part attributed to policies that made homeownership much more difficult for non-White people. Housing value inequality and overall wealth inequality are very strongly correlated. The high inequality in housing prices is making it far more difficult for people to move from poor regions to rich regions, holding back one of the best means we had for achieving more equal incomes.

Moreover, the rise in capital income share since the 1970s is driven almost entirely by real estate, rather than actual physical capital. The top 10% richest housing communities constitute over 52% of the total housing wealth in the US.

There is a lot of debate about what exactly causes these rising housing prices. No doubt, there are many factors contributing, from migration patterns to zoning regulations to income inequality in general. In a later post, I’ll get into why I think many of the people who think they are fighting the problem are actually making it worse, and suggest some ideas for what they should be doing instead.

Why is housing so expensive?

Apr 30, JDN 2457874

It’s not your imagination: Housing is a lot more expensive than it used to be. Inflation adjusted into 2000 dollars, the median price of a house has risen from $30,600 in 1940 to $119,600 today. Adjusted to today’s dollars, that’s an increase from $44,000 to $173,000.

Things are particularly bad here in California, where the median price of a new home is $517,000—and especially in the Bay Area, where the median price is $838,000. Just two years ago, people were already freaking out that the median home price in the Bay Area had hit $661,000—and now it has risen 27% since then.

The rent is too damn high, but lately rent has actually not been rising as fast as housing prices. It may be that they’ve just gotten as high as they can get; in New York City rent is stable, and in San Francisco it’s actually declining—but in both cases it’s over $4,000 per month for a 2-bedroom apartment. The US still has the highest rent-to-price ratio in the world; at 11.2%, you should be able to buy a house on a 15-year mortgage for what we currently pay in rent near city centers.

But this is not a uniquely American problem.

It’s a problem in Canada: Housing in the Toronto area recently skyrocketed in price, with the mean price of a detached home now over $974,000 CAD, about $722,000 USD.

It’s a problem in the UK: The average price of a home in the UK is now over 214,000 pounds, or $274,000 (the pound is pretty weak after Brexit). In London in particular, the average home now costs nine years of the average wage.

It’s even a problem in China: An average 1000-square-foot apartment (that’s not very big!) in Shanghai now sells for 5 million yuan, which is about $725,000.

Worldwide, the US actually has a relatively low housing price to income ratio, because our incomes are so high. Venezuela’s economy is in such a terrible state that it is literally impossible for the average person to buy the average home, but in countries as diverse as France, Taiwan, and Peru, the average home still costs more than 10 years of the average household income.

Why is this happening? Why is housing so expensive, and getting worse all the time?

There are a lot of reasons that have been proposed.

The most obvious and fundamental reason is basic supply and demand. Demand for housing in major cities is rapidly rising, and supply of housing just isn’t keeping up.

Indeed, in California, the rate of new housing construction has fallen in recent years, even as we’ve had rapid population growth and skyrocketing housing prices. This is probably the number one reason why our housing here is so expensive.

But that raises its own questions: why aren’t more houses getting built? The market is supposed to correct for this sort of thing. Higher prices incentivize more construction, so prices get brought back down.

I think with housing in particular, we have a fundamental problem with that mechanism, and it is this: The people who make the policy don’t want the prices to come down.

No, I’m not talking about mayors and city councils, though they do like their property tax revenue. I’m talking about homeowners. People who go to homeowners’ association meetings and complain that someone else’s lopsided deck or un-weeded garden is “lowering property values”. People who join NIMBY political campaigns to stop new development, prevent the construction of taller buildings, or even stop the installation of new electrical substations. People who already got theirs and don’t care about anyone else.

Homeowners have an enormous influence in local politics, and it is by local politics that most of these decisions about zoning and development are made. They make all kinds of excuses about “preserving the community” and “the feel of the city”, but when you get right down to it, these people care more about preserving their own home equity than they do about making other people homeless.

In some cases, people may be so fundamentally confused that they think new development actually somehow causes higher housing prices, and so they try to fight development in a vain effort to stop rising housing prices and only end up making things worse. It’s also very common for people to support rent control policies in an effort to keep housing affordable—and economists of all political stripes are in almost total consensus that rent control only serves to restrict supply, increase inequality, and make housing prices even worse. As one might expect, the stricter the rent control, the worse this effect is. Some mild forms of rent control might be justifiable in particularly monopolistic markets, but in general it’s not a good long-term solution. Rent control forces rationing, and often the rationing is not in favor of who needs it the most but who is the most well-connected. The people who benefit most from rent control are usually of higher income than the average for the city.

On the other hand, removing rent control can cause a spike in prices, and make things worse in the short run, before there is time for new construction to increase the supply of housing. Also, many economists assume in their models that tenants who get forced out by the higher rents would get compensated for it, which is not at all how the real world works. It’s also unclear exactly how large the effect sizes are, because the empirical studies get quite mixed results. Still, rent control is a bad idea. Don’t take it from me, take it from Paul Krugman.

It’s also common to blame foreign investors—because humans are tribal, and blaming foreigners is always popular—even though that makes no economic sense. Investors are buying your houses because the prices keep rising. It’s possible that there could be some sort of speculative bubble, but that’s actually harder to sustain in housing than it is in most other assets, precisely because houses are immobile and expensive. Speculative bubbles in gold happen all the time (indeed, perhaps literally all the time, as the price of gold has never fallen to its real fundamental value in all of human history), but gold is a tradeable, transportable, fungible commodity that can be bought in arbitrarily small quantities. (Because it’s an element, you’re literally only limited to the atomic level!)

Moreover, it isn’t just supply and demand at work here. Fluctuations in economic growth have strong effects on housing prices—and vice-versa. There are monetary policy effects, particularly in a liquidity trap; lower interest rates combined with low inflation create a perfect storm for higher housing prices.

Overall economic inequality is a major contributor to steep housing prices, as well as the segregation of housing across racial and economic lines. And as the rate of return on productive capital continues to decrease while the rate of return on real estate does not, more and more of our wealth concentration is going to be in the form of higher housing prices—making the whole problem self-reinforcing.

People also seem really ambivalent about whether they want housing prices to be low or high. In one breath they’ll bemoan the lack of affordable housing, and in another they’ll talk about “protecting property values”. Even the IMF called the increase in housing prices after the Second Depression a “recovery”. Is it really so hard to understand that higher prices mean higher prices?

But we think of housing as two fundamentally different things. On the one hand, it’s a durable consumption good, like a car or a refrigerator—something you buy because it’s useful, and keep around to use for a long time. On the other hand, it’s a financial asset—a store of value for your savings and a potential source of income. When you’re thinking of it as a consumption good, you want it to be “affordable”; when you’re thinking of it as an asset, you want to “protect its value”. But it’s the same house with the same price. You can’t do both of those things at once, and clearly, as a society—perhaps as a civilization—we have been tilting way too far in the “asset” direction.

I get it: Financial assets that grow over time have the allure of easy money. The stock market, the derivatives market, even the lottery and Las Vegas, all have this tantalizing property that they seem to give you money for nothing. They are like the quest for the Philosopher’s Stone in days of yore.

But they are just as much a chimera as the Philosopher’s Stone itself. (Also, if anyone had found the Philosopher’s Stone, the glut of gold would have triggered massive inflation, not unlike what happened in Spain in the 16th century.) Any money you get from simply owning an asset or placing a bet is money that had to come from somewhere else. In the case of the stock market, that “somewhere else” is the profits of the corporations you bought, and if you did actually contribute to the investment of those corporations there’s nothing wrong with you getting a proportional share of those profits. But most people aren’t thinking in those terms when they buy stocks, and once you get all the way to sophisticated derivatives you’re basically in full gambling territory. Every option that’s in the money is another option that’s out of the money. Every interest rate swap that turns a profit is another one that bears a loss.

And when it comes to housing, if you magically gain equity from rising property values, where is that money coming from? It’s coming from people desperately struggling to afford to live in your city, people giving up 40%, 50%, even 60% of their disposable income just for the chance to leave in a tiny apartment because they want to be in your city that badly. It’s coming from people who started that way, lost their job, and ended up homeless because they couldn’t sustain the payments anymore. All that easy money is coming from hard-working young people trying to hold themselves out of poverty.

It’s different if your home gains value because you actually did something to make it better—renovations, additions, landscaping. Even then I think these things are sort of overrated; but they do constitute a real economic benefit to the people who live there. But if your home rises in value because zoning regulations and protesting homeowners stop the construction of new high-rises, that’s very much still on the backs of struggling young people.

We need to stop thinking houses as assets that are supposed to earn a return, and instead think of them as consumption goods that provide benefits to people. If you want a return, buy stocks and bonds. When you’re buying a house, you should be buying a house—not some dream of making money for nothing as housing prices rise forever. Because they can’t—sooner or later, the bubble will break—and even if they could, it would be terrible for everyone who didn’t get into the market soon enough.