NCPA - National Center for Policy Analysis


October 26, 2005

Even if the much talked-about housing "bubble" bursts, prices will still remain relatively high, especially in coastal areas, says Hal R. Varian. The reason? Demand has increased, but supply has not kept pace.

Low interest rates and subsidies for new homebuyers and taxes affect the demand for housing, yet land use restrictions limit supply, says Varian.

  • A 10 percent subsidy to a broad segment of the market pushes housing prices up 10 percent.
  • Likewise, a 10 percent increase in property taxes pushes housing prices down by 10 percent, although the total cost of housing would be unchanged.
  • In California, Proposition 13 limits property tax increases to 2 percent a year, but then assesses taxes on the sale price once the home is sold; hence, the tax discourages people homeowners from putting their homes on the market.
  • Additionally, California's tax structure provides incentives for the elderly to remain in their homes, even if they don't need all the space.

Lastly, zoning laws often prevent affordable housing from being built. Indeed, since land supply cannot increase, land zoned for housing must be used more intensively, or homes must be built further away from jobs, says Varian.

Source: Hal R. Varian, "Is Affordable Housing Becoming an Oxymoron?" New York Times, October 20, 2005.

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