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How the Housing Market Works

Government intervention in the housing market is based on confused economics.

People sometimes argue that we need substantial housing subsidies in some very expensive cities because “the cost of building new housing is greater than what most people can afford.”

It’s certainly true that families earning low or moderate incomes have a hard time buying or renting brand-new housing. But that’s not only the case today; it’s been true throughout the history of civilization, from Uruk to New York.

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The housing market is subject to the same forces of supply and demand as any other market, although of course there are things that distinguish it from, say, the market for fast-food. For instance, unlike a hamburger, a house is durable: it’s not consumed all at once. It also depreciates: the average house in the United States, for example, has a useful life of about forty to sixty years before major renovations become necessary.

Let’s say there are 3 categories of housing – A, luxury housing; B, middle-income housing; and C, low-income housing – and that houses are continuously built, age, and wear down. In the real world there are of course many more than 3 categories but let’s assume for simplicity that there are only these three.

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