The answer is simple, even if is one many do not want to hear, for on the one side it relates to the way the housing system supports those who use the system for residence, shelter from the elements, protection from intrusions, or ability to live in a healthy physical, social, and economic environment; but on the other side those who use the housing system simply as a source of profit, for the production of financial gain.
The housing system is thus inherently full of deep conflicts of interest. Solutions equally satisfactory to those who benefit from it and to those who suffer from it are not likely to be easily found.
In housing policy debates, it is really an old and well-known conflict, as inter-relational as they come.
It is the price—not the cost—of providing housing that ultimately is the major problem.
Housing prices are high not because the costs of providing housing to its residential users are necessarily so high, but because we allow the system to act as a source of substantial profit to multiple powerful material interests, who are able to block equity-based changes to the system.
To summarize how the housing system works:
The price of housing and its components is set in a system in which housing is bought and sold for private profit, at prices determined by a minimally government-restrained market. This market is allowed by government to charge monopoly prices that maximize the possibilities for profit and political power.
It is left to the owners and the government, generally allied with others in political power, to supply the legal and physical infrastructure on which the market depends every day. The system lets the owners take advantage of the severe shortage of existing housing prevalent in most areas of the United States, where limitations on the supply of land in desirable locations create a monopoly for its suppliers and let them set their own prices for what they supply.
Resident users’ prices include on the one side, the true costs of production of the housing all along the production chain (that is, the costs of labor and materials needed to produce buildings and make them habitable), but on the other side also permit the price to include factors that are not only above the true costs of physical and infrastructure production but socially determined: determined by government and those in political power, over issues such as zoning, building codes, permitted use regulations, traffic laws, environmental policies, and racial policies (how to deal with racial segregation and discrimination, etc). Policies setting prices are under pressure for private profit all along the production chain.
Those socially-determined prices are put into effect as a result of public policies and governmental standards, and include monopoly premiums for scarce land.
So, prices are driven up to exceed the real costs of production—the labor and materials required for the development of housing. These socially-determined charges of course include the profit to the developer and owner, largely unrestrained by public policy.
The rent is thus only partially explained by the true costs of production. Prices are set with only very limited constraint by government or public interests, and only in part determined by the housing’s true costs.
The public actions influencing housing prices are legion. They run from building and construction codes to zoning provisions, use restrictions, public residency, tax policies, income taxes, capital gains taxes, and real estate taxes. They even occur at multiple levels of government, from local to national.
Housing’s high cost in Santa Barbara is not attributable mainly to its cost of production, but rather largely to speculation on its future market price. In particular, this is the future market price of land, generally its largest component.
Nor is the high price of housing the result of public actions for the protection of the health, welfare, and safety of the residents. The actual problem with government in the housing system is not that it is too solicitous of the good of its proposed residents, but rather that it is not solicitous enough to bring its real powers of regulation to bear on it. This renders a major section of the current stock unaffordable for a large segment of the population. Government perhaps should be blamed not for what it does to add costs to housing, but rather for what it does not do to regulate the price of it (for example, rent control).
Land’s price is largely fixed by speculation, perhaps often with only benign results for its carefully selected beneficiaries.
If one deducted the land price component from the housing price, this would change its resulting market price to the greater of the cost of housing production and its value to the resident.
If, for instance, the land was publicly owned, and valued by its use to its users, you would get a very different picture of housing prices.
The high price of land set by the market plays a major role in producing the high cost of housing in Santa Barbara.
Land can have such high prices because it is essentially a monopoly good–they don’t make more of it any more, as the saying goes. The feasibility of further desirable locations is limited—and those who control those locations are likely to make maximum profitable use of it.[i]
All this is probably not an argument likely to make affordable housing more available in the real world today, because of the power of those benefiting from the present arrangements. But the alternatives should at least be confronted by advocates and policy makers concerned with the equity implications of their actions.
We turn below to what the feasible alternatives might be.
Alternative Policies to reduce the prices of housing.
Alternatives to unrestricted market pricing for land and housing are actually very substantial Some are suggested below.
Increased demand for housing from population growth indeed drives up the market price of housing. However, that is not because of increased cost of production. Increasing taxes on land will drive down the price of housing if those taxes are seen as only needed to cover the true cost of labor and materials, physical production, and is certainly desirable if reducing the true cost of occupancy is indeed a goal.
Real-property taxes are levied to raise the funds for what is provided by society generally, from police protection to education to health care. It should not be focused on the need to cover just the cost of housing production.
Alternatives to an unrestricted market pricing system are substantial. Some of the them are suggested below.
PROS AND CONS OF CAPITAL GAINS TAXES
A high capital gains tax would discourage flipping of homes by real estate operators and profit-seekers from the practice;
Discourage threats to community building and solidity because of temptations for more profitable sales. By multiple sages and moves in and out by temporary residents.
Produce ability of residence.
Entourage more self-help home improvement by mobile residents. As making use of reductions on such taxes.
Encourage resident investment in residential improvements
Thus strengthen social peace
Not encourage investment and economic growth unless profits from speculative-motivated sales are invested in labor and building. or other development activity, for which there is little evidence.
Discourage indolence by avoiding fear of taxes to which self-improvements in value are not subject,
Taxes, Inflation and potential dangers of an article of Paul Krugman’s analysis
Paul Krugman’s recent Opinion column in the New York Times (in August 2021) may give the unwary the impression that increases in city housing prices are simply the result of economy-wide inflation. But that argument is fraught.
Such an argument, which Krugman himself should not be accused of espousing, can however be read as arguing that that taxes on real estate price gains should not be treated differently from taxes on gains generally. Housing price increases, by this is argument, may be considered simply to be following a national trend, and one that has its healthy as well as painful sides. If Krugman were to extend his argument to argue that price increases in housing have no special relation to housing markets or urban development, that would be an important mistake, with harmful real-world consequences.
The increase in prices in housing and real estate is largely the result of simple speculation in the market price of housing in a prime location, not any investment in the production or movement of housing. Given an absolute shortage of housing in most areas, price increases are the result of speculation grounded in rational expectations of increasing demand and monopolistic supply of land, the largest component of most housing payments. The consequences of speculation are that those prices will continue to increase. The increases are not from investment in the construction or improvement of housing but rather from the particular monopolistic character of land and its monopolistic locations. Such investment is not a net contribution to the economy, and should not be welcomed by unwary, self-interested, or socially-motivated readers because it seems to replace the theoretical inflation-created availability of more funds for affordable housing for those actually in need of housing within their means.
Where the increased price of a housing unit is the result of increased production or necessary maintenance, that is one thing. Where it is simply the result of watching a growing demand trigger profits to be made from an initial investment, that is another thing. The increased prices for housing are not the result of the healthy inflation which Krugman optimistically writes about.
As a side note, it is likely a false hope that increased profits from speculation will in turn produce funds to improve needed and affordable housing. Profits from such investments might more likely be used cynically by speculators to enjoy of fancy dinners and vintage wines in the neighborhood.
High-level capital gains taxes applied to all monetary gains from transactions in real estate, should exempt gains resulting from seller’s own labor and contribution of materials and actions such as physical improvements, but should capture all gains resulting from mere speculation in changing market values and prices. The result of high taxes should thus be to minimize speculation but reward improvements.
A wealth tax or luxury housing tax, or strategic use of capital gains and land taxes, should be used to reduce inequities of income. This will also help to finance the necessary real costs of maintenance and quality and amount of needed housing throughout the system. There should be basic recognition of the fact that the guarantee of decent housing for all is not going to take place without substantial ongoing subsidies from different levels of government, but at a level only the national economy can provide. Current national debates about subsidies in the trillions suggest that, however formulated, our economy can sustain such a burden.
Community land trusts can combine local democracy and community life with legal controls and resident democracy. For example, the University of California, Santa Barbara has set price controls on the housing it provides for sale to its faculty.[ii]
A ban on evictions except for cause (e.g. waste, damage, or harm to others) would ensure a resident the security of continued residence, and help provide protection to those who are most likely to need it, avoiding homelessness.
Public housing owned and managed by a public authority builds on long existing experience: see “Convert the City Golf Course Into Public Housing”.
The Santa Barbara Tenant’s Union supports the City of Santa Barbara converting local municipal golf courses into high quality public housing.
Public ownership of land, with a knowledgeable public authority, carefully and transparently makes decisions as to use, distribution, new construction, and privacy rights.
However, it may be argued that placing land in a public trust for affordable housing takes land off the tax rolls, but tax revenues are needed for the normal operation of government. Nevertheless, that’s exactly the point: reducing the use of housing as an income-producing economic asset, whether for public or private use, should make it available free or at affordable prices to all who need it, not only for shelter, but also for personal development, security, or enjoyment.
 The New York Times, August …..
 See the book EVICTED by Mathew Desmond and colleagues.
 The Costa-Hawkins Law now says:
Notwithstanding any other provision of law, an owner of residential real property may establish the initial and all subsequent rental rates for a dwelling or a unit (with a few minor exceptions.)
“Notwithstanding any other provision of law” effectively means notwithstanding what community residents want or need.
 See discussion at 10.D. and E. bellow.
[i] Of course, given modern technologies, more land surfaces can be brought into use for housing than in earlier times, but the costs are correspondingly high.
[ii] The relevant A passage in a housing complex’s Declaration of Covenants, Conditions and Restrictions reads:
2. Purchase Price and Terms. The purchase price of any Residence offered or sold pursuant to this Article XII shall be the lesser of:
(a) The fair market value of the Residence as mutually determined by the Owner and Declarant; or
(b) The sum of: (A) the purchase price of the Residence paid by the Owner, plus (B) the product of the purchase price of the Residence paid by Owner and the fractional change in the Consumer Price Index (as defined below), if greater than zero, as published for the month immediately preceding the date on which the Owner purchased the Residence and said Index as published for the month preceding the date of the offer made pursuant to Section 1 of this Article, plus (C) the cost of all capital improvements to the Residence made by the Owner, but only to the extent that each such capital improvement exceeded $1,000 in cost and was certified by the Association and Declarant at the time such improvement was completed following submission by the Owner of cost documentation in such form as Declarant or Association may prescribe, which documentation shall be subject to audit and proof loss (D) the reasonable cost (calculated as of the date of the sale) to cure any destruction of or failure to maintain the Residence in excess of normal wear and tear. As used in this Section, “Consumer Price Index” means the National Consumer Price Index (all items) as published by the United States Department of Labor, Bureau of Labor Statistics, or, if such index ceases to be published, then any comparable successor index which measures changes in the prices of consumer items.
[iii] I wrote this first during the debate on Proposition 10 in California, and expanded it since.