Housing restrictions are causing inequality. Here's how.

A recent theory suggests that housing is at the root of increasing inequality. I agree; housing may be where most wealth inequality comes from today, and I think I can explain why.

In growing cities like Seattle, we know we’re building much less housing than there are people who want to move here. The people moving in tend to be higher income than existing residents. That demand increases the value of property, and causes a property owner to make a choice between three major categories:

The owner can do nothing, accumulating higher value to be sold later. Keep in mind this means anyone living in a house they own; “later” can be at retirement or death.

Purely accumulating wealth is an inequality increase across the market - owners are almost always higher wealth than renters. Its risk is low, primarily in maintenance and slightly higher property taxes. Also note again why I said wealth rather than income - it’s easy to miss the impact of the first choice, because it’s not obviously income, and in fact it can be largely unrelated to income, but it’s the primary way that individuals accumulate wealth. If an owner loses money when they sell a house, some of their wealth was transferred to those who maintained it: painters, roofers, hot water heater installers, and others.

While they may not realize it, owners of houses understand this accumulation in wealth; they show up in droves to planning meetings to argue about scale, noise, shadows, parking, and lots of other reasons they want to restrict growth. They know that allowing more construction nearby lowers their relative value.

The owner can raise rents to take advantage of higher demand. This also includes starting to rent property that was not previously rented (an increase from zero). One of the most common ways for a single family house owner to take advantage of a boom like this is to move to cheaper housing and rent out the house in the higher demand area.

This also accumulates more wealth to the owner (and more immediately), also increasing inequality, but is higher risk, as it requires not only maintenance and property taxes but also management and many more (economic) actors. If an owner of a rental property is losing money, they’ve transferred some of their wealth not just to maintenance, but to their renters, who rented below the actual value of the property.

Owners of rental property almost never show up to oppose changes, and sometimes show up to ask for less restrictive zoning. They don’t benefit from higher zoning unless they’re planning to build, but they can see themselves doing that someday, and they understand the market.

The owner can build something on the site, which can accumulate them the most wealth, at by far the highest financial risk. If the owner overbuilds for market conditions and has to rent below their cost, not only do they transfer away wealth, but their investors do as well! Wealth is transferred to maintenance and renters a little, as before, but now you’re transferring a lot more wealth to the construction workers and building material suppliers.

In each case, the successful outcome for the owner increases inequality, and a failure decreases inequality.

In all three cases, there’s a blanket risk of supply being greater than demand. If there are lots of houses or condos to choose from, an owner can’t command a high price. If there are lots of apartments, owners can’t charge as much rent.

Those first two choices are largely unregulated. You can sell a house to someone for as much as you want, and you can ask someone for as much money as you want for them to rent your property. This means we allow wealth inequality to increase, lots.

However, we strongly regulate the one big thing that actually generates that risk of redistributing wealth downward: We prohibit owners from building more than a set amount on a given site. By saying “you can only build x stories”, we prevent risk takers making that third choice from taking much risk. Almost all new housing in Seattle is built right up to those limits, which should be a giant klaxon telling us we’re driving up wealth inequality for all owners. And it is - a lot of people are starting to understand this.

Each of these buckets has a very different number of people in it, decreasing each level by orders of magnitude. So considering just owners, limiting growth wins handily. However, only considering the interests of owners excludes most of the total number of people impacted by these decisions.

Unfortunately, someone’s level of political involvement scales with both the amount of time they’ve spent in a place and with their wealth - so the vast majority of the people who get involved in these decisions are these single family homeowners. As a result, our policies serve their interests, increasing wealth inequality.

Can we fix this?

I think we can. We know that our current political system mostly serves the wealthy, even at a local level. This is inherent to a system in which those running for office are funded voluntarily by constituents - those serving the interests of the wealthy will have more resources to win. We should definitely fight for public campaign financing.

As we learn the affordability outcomes of supply and demand choices, we could also change the laws allowing zoning. It may be that zoning inherently worsens inequality, and that we should not have the right to limit how much someone can build. Many countries don’t allow local zoning, and they have more equitable outcomes.

Thanks for reading this far. If you have feedback, feel free to contact me!