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This public-sourced case uses the California housing crisis to analyze economic policy in an environment featuring a rising cost of living and shrinking affordable housing options. The case discusses policy options as well as the role and incentives of the private sector in helping develop more affordability. In the case, economist Renee Bowen examines the tradeoffs involved in government intervention in housing markets. This includes understanding the causes of the state’s rising costs of living, evaluating whether California needed more affordable housing, and assessing policy options to address high housing costs. Three big-picture questions are considered: Should the state government intervene to address housing affordability? What interventions might be most effective? And what would caution against government invention?
- Understand determinants of local housing prices + Demand: Amenities and income + Supply: Geography, building regulations - Examine the effects of urban growth on low-income residents + Local economic growth can lower low-income residents’ real wages if urban growth is driven by firms that employ predominantly high-wage workers and/or migration of rich households to high-natural-amenity areas - Understand the perspective that California needs more affordable housing + Costs of living rising, burdening low-income households - Evaluate proposals to reduce housing costs + Rent controls and housing subsidies to the poor can mitigate housing cost burdens, but they have limitations * Rent controls can limit the supply of housing, as landlords cut back on quality improvements or developers abstain from building new apartments = Supply restrictions can increase rental costs for those not in rent-controlled units. * Housing subsidies can increase home prices, especially if the supply of housing is inelastic, reducing the affordability impact of the policy. + Policies to increase supply of housing have the most potential to increase affordability. Most effective is to increase the supply of affordable housing units. * New high-end developments can still displace low-income residents from their neighborhood and might attract even more rich households. * ADUs can increase density, and in particular can directly increase the supply of low-income housing.