Has capitalism failed the housing market?
We need to examine the decisive points that lead us through some philosophy to consider capitalism’s impact on housing affordability and supply.
Ultimately, our goal should be to achieve an adequate supply of homes, resulting in a median home price of two times the median household income for that area.
Capitalism and Housing
Scottish Economist and Philosopher Adam Smith speaking on capitalism in 1776:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Capitalism is an economic system characterized by private ownership of production and operations for profit. Central tenets of capitalism include wealth accumulation, competitive markets, private property, and the recognition of property rights. Private citizens control property and act in their self-interest to gain economic prosperity. Production, distribution, income, and prices are determined mainly through markets rather than governments.
Capitalism drives significant economic growth and innovation and increases standards of living. However, it can also lead to exploitation and economic inequality. Capitalism proponents assert that the most efficient use of resources occurs when individuals make decisions based on market signals without government influence.
The American housing market thrives on capitalism, but the system is a double-edged sword.
Capitalism undeniably demonstrates the ability to drive progress and meet consumer demand. It benefits America’s housing market through innovation, efficiency, and investment opportunities. The drive for profit encourages innovation and efficiency. Capitalism supports a robust real estate market. Markets allow individuals to invest in property, contributing to personal wealth and economic growth.
However, capitalism also leads to systemic challenges in the housing market. It creates affordability challenges and widens income inequality. In many urban and desirable areas, housing prices have escalated beyond the reach of middle- and lower-income families.
Moving from Adam Smith's capitalist ideals, which highlight market-driven self-interest, to John Locke's philosophical stance, we encounter a compelling case for governance that honors and protects natural rights, including the essential need for housing.
The Role of Government in Capitalism
John Locke, the foundational philosopher of the US Constitution, championed a government that actively preserved property rights. He viewed these rights as more than just material possessions. They extended beyond physical holdings to include individual liberty and the fruits of one’s labor. His vision extended beyond debates about regulation.
Regarding property, Locke, in his Two Treatises of Government, 1690, said:
The great and chief end…of men’s…putting themselves under government, is the preservation of their property.
In essence, Locke believed individuals consent to government to preserve their property—not just physical possessions but life, liberty, and personal estate. Protecting these elements justifies government within society. Some might argue his focus on property rights disregards the needs of those who may not have property or the means to acquire it. However, Locke’s premise was that everyone owns property, even if that property is owning yourself.
Locke’s view of property rights relates to today’s affordable housing challenges through his understanding of the government’s responsibility. We have a duty not only to protect these rights but also to create conditions under which citizens can secure their own properties, which in a modern sense includes affordable housing.
Securing basic needs allows individuals to pursue prosperity and stability. These can’t be achieved without heat in the house and food on the table, and you can’t put food on the table without a home to put it in.
Therefore, the people who lead government must address the broader economic conditions that enable individuals to acquire and enjoy property. These conditions include access to affordable housing, fair market practices, and the protection of investments.
The Current State of the Housing Market
The housing market has become untenable. The challenges aren’t an inherent failure of capitalism. They’re a symptom of market-driven systems operating with added government influence but without sufficient intervention to address societal needs.
Government officials at many levels, including cities, counties, states, and the federal level, levy additional housing rules on builders. Many of these requirements are strongly beneficial, such as plumbing, electrical, and personal safety standards. Other requirements, such as zoning, increase housing costs. All combined, the requirements represent government interference that increases the cost of building housing.
The impact of increased building costs is a reduced supply of affordable housing, which has been decreasing since 1960. Builders build bigger homes to recoup their costs. Figure 4-6 below shows a long-term trend in housing production per capita, with a notable decrease in the construction of single-family homes. This downturn in housing is especially pronounced during economic recessions, as evidenced by the gray bars. The data suggests that in our regulatory environment, market-driven production alone doesn’t meet the population's housing needs.
The supply of first-time homebuyer houses is especially low. Figure 4-7 below presents a stark visual representation of the declining trend in the construction of smaller single-family homes since the 1970s. As these homes are often more affordable for first-time homebuyers and lower-income families, the sharp decrease from nearly 40% of homes to just over 5% signifies a shift away from affordable housing. This shift isn’t just a reflection of consumer preference. It indicates market and policy failures.
Adam Smith, the capitalist philosopher, identified we can’t ask builders to build more inexpensive, smaller homes for first-time homebuyers out of the goodness of their hearts. We have to appeal to their self-interest. Building smaller homes has to be profitable.
The government's role, in the Lockean sense, needs to evolve to address the challenges presented by the housing market. The decline in affordable housing isn’t a market outcome. It’s a central concern for policy intervention.
Counterarguments
Critics argue that government regulations like zoning laws and building codes inherently disrupt market efficiencies. However, we need more than unchecked capitalism to ensure equitable access to housing. Targeted government intervention, informed by Locke's principle of protecting property rights and individual liberty, can help correct market failures without undermining overall market efficiency.
Another common critique is that merely increasing the housing supply does not address the deeper issues of market greed and speculation, which can continue to drive prices up, outpacing increases in supply. This argument overlooks the role of targeted policy measures in shaping the type of supply that comes to market. By incentivizing the construction of affordable housing through tax credits, grants, and revised zoning regulations, government action can ensure that increased supply directly addresses the needs of low- and middle-income families.
A more philosophical critique posits that capitalism is inherently unjust, leading to inequality and prioritizing profit over human needs. While capitalism does have its flaws, it is also the driving force behind innovation and economic growth. The issue is not capitalism itself but how it is regulated and directed. By aligning capitalist incentives with societal needs, such as creating affordable housing, we can retain capitalism’s strengths while mitigating its weaknesses.
Proposal
We have examined capitalism's double-edged sword and recognized the duty of government officials to safeguard an individual's rights, including the fundamental right to secure necessary resources. With this common understanding of the philosophy, we can answer our question: Has capitalism failed the housing market?
No, capitalism has not failed the housing market.
Capitalism can’t fail the housing market because it’s an economic system. It’s not accountable to anyone, and no one directs capitalism. It doesn’t aim to achieve housing for low- and middle-income individuals; the goal of a capitalist system is to enable individuals to act in their interest. The success of capitalism—economic growth, innovation, and increased living standards—orients us to keep capitalism for the housing market.
We need to work through the market and increase the supply of homes for low- and middle-income families. In simple economic terms, as the supply of an item rises relative to the demand for that item, the price in the market will decrease. In a capitalist market, the approach to reducing the cost of houses for first-time homebuyers is to increase the supply.
As an example, imagine there are only a few slices of pizza left, and everyone wants one. The price will be high because everyone wants a slice, and they are willing to pay more to get one. But if the kitchen suddenly makes more pizzas, there will be enough for everyone. The price will come down because there's no longer competition for the limited slices. This is similar to what happens in housing. When there are fewer houses available than people who want them (or low supply, high demand), prices go up.
As the latest Congressional Research Service US housing supply report implies, the supply of first-time homebuyer houses is too low. Home prices are unaffordable for low- to middle-income families. The report mentions some ideas, like grants, to reduce the challenges of building new houses. These challenges could be things like permits, zoning laws, or other regulations that make it more expensive or time-consuming to build.
The CRS report identifies other possibilities, such as tax credits for first-time homebuyers and setting goals to increase the supply of building materials. But the reality is those items aren’t direct indicators of affordability for first-time homebuyers.
The direct indicator of housing affordability is the ratio of median household incomes and home prices. The median household income in 1960 was $5,600, and the median cost of a home was $11,900. We need to measure our progress to achieve that 2:1 standard.
In addition to current efforts to increase the supply of affordable housing, we need to set a goal. We need to achieve an adequate supply of homes, resulting in a median home price of two times the median household income for that area.
Has Capitalism failed the housing market?
Capitalism is an economic system. The system drives economic growth and innovation and increases our standard of living.
No, capitalism has not failed the housing market. The goal of a capitalist system isn’t to make housing affordable. The goal is to enable individuals to act in their self-interest.
But while capitalism hasn’t failed per se, it has created a scenario where intervention is necessary to safeguard individual rights. This includes the fundamental right to secure housing.
To enable Americans the ability to secure their own needs, we need to set and measure progress toward a goal. That goal is a median home price of two times the median household income for that area.
May God bless the United States of America.
Postscript.
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