Is inflation lower in the Twin Cities because fewer people want to live here?
For a few months now, a common theme in the local media is that the inflation rate in the Twin Cities is lower than in comparable metropolitan areas. In October,…
Last week, I wrote about how rent controls are bad public policy. This is because they attempt to treat the symptom of the problem – high prices – and do nothing to solve the underlying problem itself – an excess of demand relative to supply. At worst, they lead to even greater demand and even less supply, exacerbating the very problem they are intended to solve. This is why the Swedish economist Assar Lindbeck said that “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
So, if the problems in the Twin Cities housing market is an excess of demand relative to supply, what is causing that?
Fees and regulations
In 2017, the Pioneer Press surveyed 60 government officials, builders, Realtors, housing and energy lobbyists, and home buyers asking them why housing is so expensive in the Twin Cities. They found that
…regulations, including energy-saving rules and safety codes, are tougher and costlier than in surrounding states;
The cost of metro-area land is elevated by centralized planning, larger mandated lot sizes and a public resistance to development;
An increasing use of city fees, tucked into the price of a new house, can add tens of thousands of dollars.
Early this year, the Star Tribune reported that
…a new report commissioned by a builders group pointed at municipal fees and regulations in the Twin Cities, which it argues are pushing up prices of new homes more sharply here than in other communities, making it nearly impossible to build a single-family house for less than $375,000.
Such fees account for up to one-third the cost of a new house here and are to blame for the area’s affordable housing crisis, according the new report backed by Housing First Minnesota, which represents more than 1,200 builders, remodelers, developers and industry suppliers throughout the state.
The price of a new home “far exceeds what buyers paid years ago, even adjusting for inflation,” David Siegel, the group’s executive director said in a statement. “This disappearance of affordable new homes is not due to a change in buyer or builder preferences, but to homebuilders simply being unable to build at a price that many buyers in the region can afford.”
There are other factors, to be sure, including a labor shortage and the spiraling price of basic materials, including land. But, the Star Tribune continues,
The builders group’s report puts the spotlight on the cost of development fees and regulations levied by municipalities in the seven-county metro area. Those fees are levied before development can start to help pay for roads, streets, curbs, gutters and other infrastructure. They’re paid by builders and developers and passed along to homeowners.
The group worked with four Twin Cities-area builders to determine the cost of building a home in nine suburbs. By studying the cost of local, regional and state fees in those communities, the group determined that by nearly every measure a new home in the Twin Cities costs more than those in every other comparable Midwest market.
For example, it found that an average home in Lake Elmo would cost $47,000 less in Hudson, Wis., and that a new home in the Twin Cities costs as much as $82,000 more than a similar home built by the same builder in the southwestern Chicago suburbs.
Cure the disease, not the symptom
If we are serious about making housing in the Twin Cities more affordable, we need to remedy the things that are making it unaffordable. These are excessive fees and regulations. Simply put, we need to reduce both. Treating the causes of a problem will be more effective than treating the symptoms.
John Phelan is an economist at the Center of the American Experiment.
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