Housing Costs Have Made Boston Nearly Unlivable. It Needn't Be.

Photo Credit: Charles Kirchofer, 2016. CC BY-SA

Listen to this post

It's a constant topic of conversation in and around Boston: Living here is absurdly expensive. Boston housing costs $464 per square foot, putting it behind only notoriously expensive Manhattan, San Francisco, and Honolulu—and ahead of Washington, DC.¹ Even in trendy Brooklyn, housing costs "just" $385 per square foot. Pricey housing damages the rest of the local economy. Businesses have to pay more rent and higher wages so their employees can afford rent, too. This makes everything else, from healthcare to a sandwich for lunch, more expensive than it should be. What's more, people pushed far from Boston's urban core in search of less absurdly expensive housing must commute to work, causing congestion in all forms of transport. The good news? Most of this pain is caused by politics, not economics, and self-inflicted wounds can be self-healed.

America has long promoted homeownership through demand-side subsidies. The intent of the federal mortgage interest tax deduction and the cheap mortgages guaranteed by the housing finance behemoths Fannie Mae and Freddie Mac is to make it cheaper for people to buy homes. That sounds great, but these policies make taking on debt easier and cheaper, which means people are able to buy pricier homes. When the supply of homes is artificially restricted, the result is simply more expensive housing—undoing much or all of the effect of mortgage subsidies. Homeowners in Greater Boston and other restrictive cities find it just as hard to afford housing, even as they are also saddled with more debt. Homeownership rates in greater Boston have fallen from above the national average to below it, at around 60%.² The high cost of housing is almost certainly a significant factor—and the figure would likely be much lower if it weren't for the Boston area's above-average pay. It's unclear how long pay increases can keep the homeownership rate up.

So what are those "artificial restrictions" on housing supply? First and foremost: zoning restrictions. Greater Boston, particularly the cities and towns just outside Boston proper, are awash in density, height, type, and other restrictions that make it difficult for housing supply to keep up with housing demand. The solution? A greater focus on ensuring adequate supply rather than cheap debt. Instead of restricting density, urban areas should be encouraging it. Allowing greater housing density (e.g., by building higher) would stabilize or bring down prices. By allowing people to live closer to where they work, it would also stabilize or reduce congestion.

Policies to increase supply take years or even decades to show significant benefits, hence political emphasis on demand-side promotions like mortgage subsidies, which take effect immediately. Most demand-side policies increase the cost of housing and are thus counterproductive, but there are a couple that could make sense. Housing subsidies for the poor do increase the cost of housing, but cutting them would be heartless and make Greater Boston's crisis even worse. A further benefit of supply-side reforms is that the lower prices they would bring would also reduce the cost of, and the need for, such housing subsidies. 

A second demand-side lever involves second homes. Purchasing a place to live improves the economy because everyone needs housing to be successful (another reason cutting housing subsidies for the poor would be a terrible idea). Purchasing a second place to live provides no such benefit and, in fact, it imposes a cost: It removes housing from circulation that someone else might use as their primary residence. There is thus an argument for taxing residences that are used for less than six months out of the year. London and Vancouver are already doing it and New York is thinking about it. Boston should, too.

A final demand-side tweak would be greater focus on those truly in need. As far as housing costs are concerned, that means future rather than current homeowners—i.e., renters. Massachusetts offers a tax deduction for rent, but it's capped at an absurd $3,000 per year. The cap should be doubled or even quadrupled and then adjust automatically according to rental cost inflation or deflation. Better yet, the deduction could be turned into a credit because deductions benefit the better off more than the poor, while equal credits would benefit the poor most—and cost taxpayers not a cent more.

In the end, the Boston area's housing woes are nearly all self-inflicted. The silver lining is that, perhaps with some coaxing from the state, it has it within its power to overcome those woes—if it has the courage to get started. Boston is beautiful. With the right policies, it could even be livable again.

1. https://www.homeadvisor.com/r/wp-content/uploads/2016/05/PricePerSquareFootComplete_small.jpg
2. For a more up-to-date statistic, albeit for all of Massachusetts, see: https://fred.stlouisfed.org/series/MAHOWN