Affordable housing always costs money
Although sustainable affordable housing is good for communities, it always costs government money to close the cost-value gap, because of the affordability paradox:
The affordability paradox
In equilibrium environments,
both land and existing property are priced based on market values
… and that is not ‘affordable’ to people below median income
Markets are always in balance …
The reasons are straightforward.
- Urban land has no intrinsic value (it generates no revenue unless developed); it is worth what someone will pay for it, so land value is determined by property market value after development, minus costs to develop.
- Existing property works the same way. While it has an intrinsic value (essentially, its current Net Operating Income capitalized at market rates), the owner is never compelled to sell. And once an older property needing recapitalization is put ‘into play’ (offered for sale), it will sell for fair market value — its highest price, and that means market value after repositioning, minus costs to acquire and reposition.
See what’s happening? In both cases, as-is value derives from post-improvement value, and that derives from market prices.
Policy makers and government officials always lament their current financing environment:
- “If only interest rates were lower, then we could solve our affordability problem.” No, lower interest rates mean higher property prices.
- “If only the economy picked up, then people could afford more.” No, rents and prices would rise.
But the rainbow always retreats: El Dorado is a myth.
“With lower interest rates, this will be affordable”
What does this mean? Long-term affordability must be purchased, using the four kinds of money (plus subsidy).
Sustainable affordable housing always costs money.
Period.
Anyone who tells you otherwise is deluded or fibbing.
So what does a policy maker do? Accept it like gravity, and move on ….
