Thursday, July 20, 2017

How Deregulating Land Use Restrictions Would Proliferate the Housing Market

We, the people, have a right to life, liberty, and the pursuit of happiness in the United States, at least according to the Declaration of Independence. The right to property.....that one is trickier. The Fifth Amendment of the Constitution covers the protection of private property under the Takings Clause. Within this Clause, it states that "private property [shall not] be taken for public use, without just compensation." The Constitution is not the only legal basis for limiting right to property. The majority of local municipalities use what are referred to as land-use regulations.

In general terms, land-use restrictions are government-enforced restrictions on the development and use of private property that are in accordance with public policy goals. As this report on land-use regulations from the libertarian Mercatus Center points out, land-use restrictions really did not kick in until the early twentieth century when concerns regarding tall buildings resulted in height restrictions and setback requirements. Land-use is not confined to urban areas. The suburban sprawl came as a result of land-use in the hopes that it would promote civil and moral virtue. Land-use restrictions became more restrictive in the 1960s when the environmentalist movement went into full swing and was restricting property owners and their right to build. As it has evolved, land-use restrictions can take many forms, including the more traditional regulation of zoning or the idea of "smart growth," the urban planning theory that suggests that [amongst other things] mixes land use in order to minimize urban sprawl.

If we use zoning laws as an example, zoning laws act as a de facto production quota since they limit the amount of housing that can be produced in a given area. Basic microeconomic theory tells us what is to happen when these laws are enacted: supply of housing is limited, economic growth is limited, and the cost of housing skyrockets.

Some would argue that the main driver of housing prices is a lack of land. MIT Professor Albert Saiz found that geographical detriments play a considerable role. He also found that greater housing regulation was more likely to result in less housing and higher prices (Saiz, 2010, p. 1261). What's more is that Professor Saiz is not the only one who finds issues with housing regulations:
  • A paper at the National Bureau for Economic Research found that housing constraints lowered aggregate growth by 50 percent between 1964 and 2009 (Hsieh and Moretti, 2017). Removing these regulations in New York, San Francisco, and San Jose would have meant the US GDP in 2009 would have been 8.9 percent higher, which would have meant an average $8,775 per worker (ibid., p. 24). 
  • In its report on government failures, the Right-leaning Heritage Foundation found that removing land-use regulations would save American households a whopping $209 billion a year (Furth, 2015).
  • A paper from the London School of Economics found that land-use regulations drove up land prices, as well as confirmed that landowners of already-developed land are the ones that are in favor and benefit since these landowners benefit from the artificially high prices (Hilbert and Robert-Nicoud, 2013).
  • Manhattan apartments sold for nearly double (134 percent more expensive) the engineering costs because of land-use regulation (Glaeser et al., 2003). Minimum lot sizes and other land-use regulations made housing expensive in Boston (Glaeser and Ward, 2009). Land-use regulations accounted for Florida real estate to be 7 percent more expensive (Ihlandfeldt, 2007).
  • Land-use regulations cause stronger boom-and-bust housing cycles, which is unsurprising when supply is incapable of responding to demand (Huang and Tang, 2010).
  • A 2003 report from the Federal Reserve Bank analyzed the effect of building restrictions. Amongst its findings was that Cleveland had as much available land as San Diego, but San Diego was considerably more expensive due to land-use regulations. 
  • Using environmentally motivated land-use regulations to make land artificially expensive ends up turning more farmland into residential space than would have happened in a free market (Glaeser, 2009).

Life is more complicated than the simplified supply-demand graphs used in Econ 101, but the general results from those graphs play out in real life. Land-use regulations do a bang-up job by restricting housing supply and driving up housing prices, which makes it especially difficult for those who are not wealthy to afford a house.

As the centrist Brookings Institution points out in its recent essay arguing for land-use reform, land-use regulations are very much at the local level. The Department of Housing and Urban Development (HUD) doesn't have jurisdiction, which means that it is the state-level government that can best put pressure on cities to lay off with the land-use regulations. One can also switch from taxing structures to taxing land could reduce incentives to build less housing. However a solution potentially plays out, what I do know is that there is more than ample evidence that land-use restrictions cause much harm and making it more difficult for lower-income households to afford homes while preventing negligible risk, and making it more difficult to live the American dream should be unacceptable to every American citizen.

8-9-2018 Addendum: The Reserve Bank of Australia just released a report (Kendall and Tulip, 2018) on zoning and housing prices in Australia. The report found a considerable increase in housing prices that are well above the marginal costs of supply. The reason for such high prices? It's not land scarcity, but rather zoning regulations.

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