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Slums are how the free market houses the poor
Comparing depression era housing policy to today
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In October 1937 the Victoria Premier’s Department released the First report of the housing investigation and slum abolition board.
I’ve uploaded that 153-page report below.
Much of the economic analysis in that report could have been written today. But where it differs from todays housing debates is that in the 1930s the housing problems facing the working classes were seen as a result of the free market in housing, not of government intervention.
This makes sense. Prior to this time there was little to no government involvement in regulating building standards or property uses. The government was focused only on enforcing the exclusionary rights of owners in the property titles system it created.
The market was free insofar as property rights were strictly enforced. Squatting was illegal. But also free insofar as there were no non-market ways to access housing for those that didn’t already own property and no regulations on building types or standards that applied to property owners.
The operation of the property market provided satisfactory housing outcomes for those in the upper classes but did not generate desirable outcomes across the income distribution.
Living in 2,833 slum and sub-standard houses inspected by the board are 4,597 children who represent 46 per cent of the total occupiers of these houses.
Sanitary conditions were a huge concern. I suspect because disease outbreaks do not respect class boundaries, this was a big political motive for doing something about these poor housing conditions.
The report quotes an earlier 1913 government report documenting the same problems
That the housing of the people in portions of the metropolis is most disgraceful and that the conditions under which the unfortunate residents of some of the slum areas exist are a menace not only to themselves but to the health of the community at large.
These are the conditions that led to the first planning and building regulations in the 1920s. The report notes that the continued mix of residential housing with nearby factories and stables was problematic because of noise, sunlight, air quality, issues and bug and rat infestations that could not be eradicated by any particular household.
While the sanitary conditions in cities today are vastly improved, in part thanks to planning regulations and major public infrastructure investments, the economic processes and incentives underlying property markets have not changed at all. There are hence lessons from looking to the past at how the undesirable outcomes of these economic forces were addressed by public policy.
Housing problems are income problems
One of the ways the report matches the economic debates about housing in 2023 is how it equates the housing problem to an income problem—they are two sides of the same coin unequal income distribution coin (see pages 44 and 60).
Today we talk of additional income payments to renters as one way to reduce housing poverty by compressing the income distribution. Back then, such government payment systems did not exist.
Need for zoning and planning
The solution to the problems of disease and slums was zoning and planning, and even in 1937 there was recognition that planning for land uses goes hand-in-hand with planning for transportation.
Rent regulation needed, but what about supply?
Back in 1937 regulating rents seemed necessary. But there was already caution about whether fixed rent limits across the market would reduce the incentive for property owners to build new housing or carry out repairs.
Since the 1930s lessons have been learnt about rent regulation so that modern rent controls explicitly allow for rental increases in situations where major renovations are made. This creates the opposite incentive, whereby investing in the home is the best way to increase rental income (see this previous post on rent control for more detail).
Private enterprise won’t provide cheap homes
I’ve argued many times that private property owners aren’t in the business of competing down the value of rent.
This was implicitly acknowledged in the report. The authors note how property owners only provide homes when it is profitable “and then only to the extent that those who need them can afford to pay the full economic rent”
They conclude that private enterprise will not make homes cheaper except by reducing quality and that “…it is futile to attempt to deal with the problem as a cold commercial proposition.”
Financing public housing scheme
After concluding that only a government program can solve the problem of the slums, they turn to funding options for such programs. Initially, they comment on the benefits of public housing programs, being the quality of housing for the poor, the reduction in other welfare payments, and the macroeconomic effects of a large construction program on employment and income which will result in further taxation to the state.
These same benefits would be seen today from large scale public housing programs.
The honesty in the sources of finances section is refreshing. It is either taxes or loans, since “slum reclamation must be regarded as a branch of the social services and will not be self-supporting”.
Actually spending some of the collective wealth on building better housing for the poor rather than requiring a self-financing system is the opposite of the current economic fashion. For example, the main housing proposal of the Australian government is to create an investment fund to attempt to self-finance public housing with an abomination call the Housing Australia Future Fund (HAFF).
In fact, one of the major housing policy themes in 2023 is to attract superannuation funds to invest, or to lend money to community housing providers with government guarantees (e.g. the affordable housing bond aggregator).
But this approach always bumps up with the reality that cheaper housing means less financial gain to the property owner. The idea of funding slum reclamation and rebuilding from bank lending was dismissed because of the necessity to lose money in the process, not make money, and the program would be unable to repay the loan with interest.
One thing I would dispute is that the “…manner in which the State raises the moneys required for slum reclamation will have an important bearing on the success or failure of any scheme.” This may have been true in 1937 when the state has a tiny budget. Today, any housing program would be a tiny fraction of the government budget. A rounding error. It is the political will that is lacking.
Demand side subsidies
More interesting is how they seek to administer the subsidies necessary. They go against the now popular demand-side subsidies and instead argue that direct grants to the slum reclamation and building to local authorities or the central housing authority are the best direct way to achieve the result.
Subsidies to tenants for rents they worry will simply be captured by the landlords. Though they assume 100% will be passed through as higher rents, which I doubt would be the case. But even if it is half or less, this is still a very cost-inefficient way to make housing cheaper for tenants.
Construction sector capacity
Since the report recommends a major construction program, it deals with the issue of capacity constraints in the construction and materials sectors of the economy.
They refer to a 1924 English program of home building that began with a treaty on prices from private sector materials suppliers and builders so that the sudden increase in demand for construction was accommodated by a gradual increase in capacity rather than a sudden increase in price.
This makes a lot of sense. As we have seen from the COVID-era housing boom, sudden increases in demand in construction really do result in rapid price changes (though border closures and lockdowns made things a whole lot worse).
This is certainly a lesson for any future large-scale Australian public home-building program. Indeed, these capacity constraints are why I suggest that over the long term, public homebuilding is a great counter-cyclical stabilisation policy. When private housing markets fall, keep the construction sector going by fast-tracking public homebuilding. Of course, this requires keeping a buffer stock of properties ready to go. We saw in 2009 with Kevin Rudd’s $6 billion public housing stimulus how effective countercyclical public homebuilding can be.
That’s all from me for now.
The report is excellent. Please take a look at it for yourself and share your thoughts in the comments.
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