... why i hate governemnt regulation



Economics focus

Sheltered market

Feb 10th 2005
From The Economist print edition


Restrictions on building can help explain why house prices are so dear


AS HOUSE prices have soared in many rich countries in recent years, most observers of the property market have pointed to rising demand as the source of the boom. However, cheap money and rising incomes are not the whole story. Government limits on the supply of new homes have often been overlooked. But they have also helped push up house prices—especially when inflation over a long period is considered.

In markets for, say, carrots or cars, rising demand raises prices in the short run. That encourages producers to make more, which brings prices back down eventually. But houses are no ordinary good: when demand for them rises, increasing the supply can be difficult. Not only do they take time to build: building them at all can be hard, owing to planning laws (known as “zoning” laws in America) governing the use of land, the density of housing and the heights of buildings. In Europe, such restrictions have long been accepted. In America, thanks perhaps to a lower population density and greater popular support for home ownership, the right to build has historically been much less fettered.


Edward Glaeser and Joseph Gyourko wrote “The Impact of Zoning Laws on Housing Affordability” in 2002. The New York City planning department has information about the city’s zoning laws.

But that has changed drastically in recent decades in the most populated parts of the country, such as the north-east coast and California, according to a new paper* by Edward Glaeser and Raven Saks, of Harvard University, and Joseph Gyourko, of the University of Pennsylvania. They studied the housing markets of more than 300 American cities since 1950 and have pieced together evidence of regulation-induced inflation in many places. Having measured this burden, they attempt to explain its origin.

The authors report that in the two decades after 1950, American house-price rises were almost entirely caused by increases in construction costs. Between 1970 and 2000, however, building costs were virtually stagnant in real terms, thanks to greater efficiencies. Yet real house prices kept on rising. Moreover, the variance in prices widened. In 1960, properties in the highest-priced decile were 50% more expensive than those in the lowest-priced decile; by 1990, the margin was 200%.

Reasoning that the price of a house reflects not just the costs of construction and land, but also the value of permission to build, the authors set out to estimate this value. By 1980, only a few cities, such as Los Angeles and San Francisco, saw house prices rise faster than physical building costs. By 2000, the value of permission to build was more than 40% of the price of property in 27 cities. In Los Angeles, the housing stock grew by less than 10% during the 1990s, down from 60% in the 1950s. In many cities, prices rose while supply growth slowed sharply.

Perhaps as cities grew the amount of available, suitable land dwindled? The authors say this explains only a little of the slowdown in supply. Housing growth abated in many places where existing dwellings were sparse, especially in California. In a related paper†, the authors look at Manhattan, where free land is so scarce that the cost of a new unit of housing is simply that of adding an extra floor to a building. Comparing this cost with the market price of housing, the authors estimate that the regulatory “tax” of Manhattan's planning laws has risen to more than 50% of the average price of an apartment.

Still, New York's zoning rules might be economically justified if they reflect the costs imposed by additional residents on those already living in Manhattan. The authors first estimated the value of views and sunlight lost when new flats are built. Then they examined the costs of extra congestion and of new public services, such as schools, sewers and so forth. By their calculation, all these costs taken together could not come close to explaining such a high regulatory burden. In other words, the zoning “tax” was much higher than the cost to existing residents of having new people in the neighbourhood.

To try and explain the constraints on supply, the authors delve into political economy. Perhaps, they wonder, judges and regulators have become more protective of the environment. However, direct evidence for that is lacking. Or maybe property developers have become less adept at making political contributions, or paying straight bribes, to the right politicians. Then again, American politics scarcely seems short of money. Nevertheless, the authors' favourite theory is that existing home-owners have become better at organising themselves politically to thwart new building.



Not in my backyard, or anywhere near
Since housing is by far the biggest expense for most people, any source of house-price inflation matters. Although zoning restrictions are often welcomed on the grounds of preserving the benefits of rural charm or urban character, their cost tends to fall disproportionately on poorer people, says Mr Glaeser. By raising property values, planning laws act as a windfall for existing owners and a burden on those who rent or seek to buy. Since renters typically have lower incomes and wealth, zoning is often a highly regressive form of taxation, he says.

One lesson for rich-country governments, says Mr Glaeser, lies in the way that they help people who cannot afford adequate shelter. Billions are spent every year on “affordable housing” schemes, either through grants or by requiring a certain portion of newly built units to be sold or rented at below-market prices. This latter requirement is, in effect, yet another a tax on new building. A more effective and cheaper way to make housing more affordable, he reckons, is to loosen restrictions on new construction. It is inconsistent, surely, for a government to offer help with one hand, while holding back the supply of housing with the other.



* “Why Have Housing Prices Gone Up?” Forthcoming in the American Economic Review

† “Why is Manhattan So Expensive? Regulation and the Rise in House Prices”. Forthcoming in the Journal of Law and Economics