A wave of protests in Spain is asking for a solution to the “habitational crisis.” What are they talking about? Basically, dwellings—both for sale and rent—are too expensive, their prices climbing continuously, pricing more and more people out of the market.
Most solutions offered consist of more government interventions, which basically means more things not allowed on the housing market or more bureaucratic processes for everything. Leftists love this approach. Those on the right see the problems with it and rightly recognize that part of the problem is the lack of supply, although they misdiagnose the problem as being only a supply issue.
And here comes public housing, which offers something for everyone, it seems. Government building and distribution of houses stops people “making housing a business” for leftists, and increases supply for right-wing advocates. They are both wrong. Public housing is a disaster and only makes things worse. Here is how.
Housing
As with any other good, housing is something that needs to be produced. In Western economies, dwellings were very basic at the close of the 18th century. Most people that moved to cities could not afford to buy as houses were extremely expensive. They rented, but also at high prices.
But, during the 19th century, this changed, as with most other goods and services. House prices declined steadily until the start of the 20th century. With the excuse of the First World War, governments started to swap to fiat currency gradually and started taxing people through inflation—the artificial creation of money—to fund government expenditures. The consequent devaluation of the currency and the increase in “easy money” caused by the new money entering the economy through commercial banks caused an increase of demand for “safe” investments, housing being one of the main ones, at least in Europe.
House prices in the UK dropped from roughly 12 times the average salary in 1845 to just twice the average salary by 1914. Today, they are climbing and are close to 9 times the average salary again. Demand has increased also by population growth and changing in habits, but these changes have been small.
It is true that supply has also been affected. Increasing planning application processes, regulations, and zoning laws. In Spain, now even rental price controls are restricting supply. Artificially-increased demand, with a restricted supply, added to a devalued currency has created the housing market we have at the moment.
Why Public Housing Makes Things Worse
Value is a concept that has been debated for centuries. Value is in the eye of the beholder. We can see that this is true when we understand that we all have different tastes, preferences, and values. I greatly value a coffee first thing in the morning, but not late at night. If they had the same value—the same utility—I would want both coffees as the same. My wife prefers tea, but I would not take a tea with milk even if I was paid to have one. There are a myriad other examples you could think of how people value things differently. So if we can value something differently, it must mean value is within us, not in the thing.
We also do not value abstractly. We cannot say a coffee would give me X amounts of satisfaction units. I need to compare it with something and be willing to exchange it for that something. In economics, preferences are demonstrated by actions. Only during a voluntary exchange between individuals can two things be valued against each other.
Public housing means governments building or buying houses for social rent. As a collective approach, by definition, it will not involve individual choice. Resources will be taken by force through taxes, debt, or inflation; decisions will be made “by the collective,” not by individuals. What to build, of what quality, where, and how much of it will be collectively decided, and outputs will be assigned by “the collective,” not through voluntary exchange.
This process will be entirely valueless because collectives and governments have no way to assign value. They have no profit and loss or ability to perform economic calculation.
Without individual decisions, things cannot be valued. Without value, you cannot see if what you are doing makes sense. A process only makes sense if you get out more than you put in, if the resources you have used as input have less value than what you get as output. If not, you are wasting resources.
You cannot calculate demand for something as the valuation is assigned by political will. You cannot perfect processes because, without market valuation, you cannot compare different processes. And you cannot calculate if you are making a profit or loss for the same reason.
Public housing thus means building the wrong type of house, in the wrong place, in the wrong quantities through a wasteful process that you cannot improve, because the decisions will not be made by the individuals who can value these houses but by “the collective” who cannot meaningfully assign value. In fact, it represents the values of the political elites, not the consumers or taxpayers.
This means houses will only be built for political gain. Houses have been used as savings for many decades now. Who really wants to see their house reduce its price to a quarter of what it is now? What is the political cost of such a policy? Whereas a crisis always allows for more government intervention and power.
Opportunity Cost
It gets worse. There is an opportunity cost. All resources taken by government are taken from the private sector—building supplies, brick layers, even lorries. All these are scarce and cannot be used in two buildings at the same time. Land is also scarce.
Government does not magically create resources. Scarcity does not disappear by public intervention. These resources taken from the private sector mean the private sector will have less to build with. This increase in costs will ultimately reduce private building even more. This is without taking into account that public buildings will always achieve less output than private counterparts.
Private Solutions
Consider mobile phones. You may be reading this through one. But you would have had to be very affluent to have the first one made in 1984, which cost a quarter of an average annual salary. Today, a burner phone costs less than 0.1 percent of an average salary.
How do you make things cheaper? You need to increase production and exchange under a regime of private property and freedom. You also need a strong incentive to improve and an arena in which the best processes can be selected. You need free markets and free competition. Finally, you need a way to fund improvements. Capitalism is the idea that by saving and reinvesting, you accumulate capital that can be used to improve productivity.
Conclusion
Private property, free markets, and capitalism are not just the best way to make housing cheaper, it is the only way. We must recognize that the elite have strong incentives to perpetuate the housing crisis: To amass more power and increase interventions on markets further. And there are strong incentives against any policies that will reduce the price of houses.
It will be up to individuals to fight back. Only by starting to acknowledge the true causes of the crisis and start asking for less government, not more, will we start to reclaim a market that should not be in the hands of elites. We can make housing something we don’t have to worry about. But will we?
