Groundwork Collaborative report reveals how lowering the cost of capital for housing construction is key to achieving affordability for tenants and families
Today, Groundwork Collaborative released a new report that challenges the assertion that regulation is the primary barrier to housing affordability. The report, Fixing Housing Means Fixing Finance: Why We Can’t Deregulate Our Way to Affordability, authored by real estate economist Mike Fellman and Groundwork Collaborative Senior Fellow J.W. Mason argues that conventional housing finance models create an affordability paradox: because developers must deliver high returns to attract private capital, building managers must impose high rent increases on tenants and families in order to satisfy investors. That dynamic makes it functionally impossible to “build to affordability,” the authors argue, because if a construction boom ever leads to declining rents, private investment in new housing construction slows, thereby putting upward pressure on rent growth once again.
The report challenges the “abundance” approach advanced by many housing advocates, who argue that restrictive zoning and cumbersome regulations are primarily to blame for America’s housing shortage. While loosening zoning restrictions may enable more people to live where they choose, doing so will not, on its own, make and keep rents affordable.
Instead, the report proposes federal and state policy solutions to lower the cost of building new housing, boosting construction in a way that also prevents high rent increases on tenants. These include expanding the role of Fannie Mae and Freddie Mac to purchase and securitize construction loans and establishing state-level revolving loan funds to replace expensive private equity with lower-cost public financing.
In the paper, the authors write:
“Returns on housing investment depend on steadily rising rents. A policy that simply encourages the construction of more private housing — for instance, by relaxing land-use restrictions — may initially spur substantial new housing investment. But this is unlikely to be enough to lower housing costs in the long run. Once rents begin to fall, or even rise more slowly, the expected return to new investment drops sharply, choking off investment.
Delivering the steady rise in housing supply consistent with sustained slower growth in housing costs demands developers be willing to go forward at lower returns than today’s private markets require.”
Key Takeaways:
Polling from Groundwork Collaborative reveals voters view corporate landlords overwhelmingly unfavorably and support strong public intervention in the housing market: