The first in a two-part series on the global housing crisis.

Next to inflation, Americans ranked housing as their top financial worry in a Gallup survey last May. It’s only gotten worse. January home sales were down 5% from last year’s dismal numbers. Record numbers of first-time buyers are stuck on the sidelines as housing affordability stands at the lowest level ever recorded, while one in three Americans now spend over 30% of their income on mortgage or rent. 

The housing crisis is not just an American problem, but a global phenomenon that hits the middle and working classes the hardest. Studies of the Canadian, British, European, and East Asian markets have also found that housing prices have risen far faster than household incomes and inflation. A report from the Organisation for Economic Co-operation and Development concluded that “housing has been the main driver of rising middle-class expenditure.” In prosperous and communitarian Switzerland, Zurich studios sell for well over $1 million, and small houses even more, making downpayments unaffordable to affluent people despite the overwhelming financial advantages to homeowners. 

Underlying the plight of home buyers worldwide is a sometimes overlooked but profound influence – the spread of restrictive land-use regulations. It’s reshaping political and economic alignments in ways that may further destabilize the social order. Home ownership is strongly correlated with positive social indicators, and as renting grows twice as quickly as buying, this trend poses a threat to Western democracy by deepening economic inequality, depressing demographic vitality, and undermining the upward mobility that has driven Western progress for the past century.

Cost of Over-Regulation

A 3D-printed house in the Netherlands displays the latest technology in affordable, accessible housing.

The price increase may seem surprising because there has not been a huge spike in fundamental demand. In California, and most of the United States, as well as Europe and East Asia, population growth is tepid, if not declining. Today’s higher interest rates are below those that prevailed from 1970 to 1995, when housing costs were considerably lower relative to incomes. Nor is this predominantly a technical problem; the rise of remote work, which is connected to migration to smaller metros, as well as new technologies for building, including using 3D printers, actually offers the chance to build more cheaply.

And yet, the principal cause for housing shortages and rising prices stems from the failure to build enough new housing units, particularly the single-family homes consumers most desire. Homebuilders built 1 million fewer homes (including rental units) in 2024 than in 1972, when there were 130 million fewer Americans. One estimate puts the U.S. housing market shortage at an estimated 4.5 million homes, according to Commerce Department data. 

The rapid inflation of housing costs stems primarily from ever more constricting land-use regulations. Inflated prices are particularly rife in countries and states with strict regulations like California, where high-income households now utterly dominate the housing market, and more than a third of all real estate transactions in recent years topped $1 million.

At the crux of the problem is a series of housing policies referred to as “urban containment.” First implemented in Britain at the end of the Second World War, urban containment policies typically seek to manage growth by imposing boundaries or greenbelts around urban areas, outside of which new development is either prohibited or severely limited. 

Decades ago, there was ample land within these boundaries, but this has changed as population growth has stimulated more demand. The simple fact is that once the urban limits are reached, land prices along the boundaries – the suburbs and exurbs – and in the areas still open to development inevitably rise. This mimics the effects of the 1970s gasoline embargoes that drove prices through the roof – and is nothing more than basic economics. Rationing tends to increase prices.

To this flawed approach, many jurisdictions have imposed other costs such as high-impact fees, lengthy environmental reviews, minimum parking mandates, and historical preservation designations. But generally, nothing quite compares with urban containment, as it drives up land costs by restricting development on the periphery, where land prices are the lowest. 

Strict zoning ordinances and fees have helped inflate California's housing prices, giving rise to tent cities.

In almost all cases, the highest housing prices occur in markets that are characterized by this planning strategy. This includes all markets in Australia and New Zealand and many in Canada, the United Kingdom, the U.S., Western Europe, and China. In the U.S., the worst housing inflation has been in California, Oregon, Washington, Hawaii, and Colorado, all states that apply the tightest large regulatory noose around new developments, particularly on and beyond the urban fringe.

The connection between policy and prices is clearly evident. As late as 1970, only a few markets were shaped by urban containment. As its influence grew, so did prices. As late as about 1990, national price-to-income ratios were “affordable,” at three or less in Australia, Canada, Ireland, New Zealand, the U.K., and the U.S. Today, the median multiple in these countries tends to be over five. But the worst results, as seen in most recent Demographia International Housing Affordability Study – Hong Kong, Sydney, San Jose, Vancouver, Los Angeles, Adelaide, Honolulu, San Francisco, Melbourne, Brisbane, as well as Greater London, are at a remarkable nine or above. 

Perhaps counterintuitively, higher density development – often seen as the alternative to “sprawl” – does not lower prices, as is sometimes suggested. In fact, U.S. data suggests a positive correlation between greater density and housing costs. Among 53 major metros, those with more single-family housing and larger lot sizes (key indicators of lower density) have substantially better housing affordability. The effects of density-focused policies on people and regions are profound. One study found the median family in San Jose or San Francisco would need 125 years (150 in Los Angeles) to save enough money to afford a down payment on a median-priced home; in Atlanta or Houston, the figure is 12 years. 

Highly restrictive planning policies also impact renters. A recent RAND study of California found that policy-driven delays, strict architectural standards, green mandates, and the requirement to pay union-level wages have increased the cost of construction of subsidized apartments twice as much as in Texas, while taking almost two years longer to get approved. Portland, Ore., a pioneer in urban containment, embraces high-density housing, but high prices have driven multifamily construction to the lowest level in a decade.