New Study Calculates Impact of Regulations on Housing

Sandy Ikeda and Emily Washington of George Mason University’s Mercatus Center published a new paper yesterday looking at how zoning regulations, like minimum lot sizes, minimum parking requirements, inclusionary zoning and urban growth boundaries restrict the supply of housing, driving up its cost.

In the introduction, they write:

Despite the economic opportunities afforded by places such as New York and San Francisco, many such cities are not experiencing the population growth one would expect to see because regulations make it difficult to expand building in coastal cities. Rather than moving to where the best opportunities are, people are moving to where new housing is abundant, such as the rapidly growing Sun Belt cities of Houston and Atlanta. As Ryan Avent explains in The Gated City, “America has made its most productive locations ever less accessible. The best opportunities are found in one place, and for some reason most Americans are opting to live in another.”

As Matt Yglesias noted at the Cato Institute’s Zoning Rules Event, this is a serious problem. It limits worker productivity and opportunity, and in Sunbelt cities it means automobile dependency, suburban sprawl, pollution and very often more money spent on cars and gas than they would in the coastal cities. Moreover, for those of us living in Boston, New York or San Francisco, our housing costs begin to approach 50 percent or more of our income, homeownership is restricted to the superrich and systematic disinvestment in public transit forces us into car dependency.

“Some zoning regulations are designed to price certain demographics out of particular neighborhoods,” Ikeda and Washington wrote. “If land use regulations — including zoning, parking requirements and aesthetic rules — increase overall housing costs, the burden of these rules falls disproportionally on low-income households that typically dedicate a higher proportion of their income to housing relative to higher income people.”

Overall, the paper’s results are not out of line with what others have noticed: inclusionary zoning, minimum lot sizes, mandatory parking minimums and other regulations all contrive to drive up housing prices by restricting supply. They also show that the converse is true: in Sunbelt cities with less restriction on new construction, home prices are cheaper as supply has kept up with demand.

Ikeda and Washington found that minimum lot sizes and parking requirements have the biggest impact on costs. They reported that Donald Shoup found thart parking requirements in Oakland, CA raised construction costs and decreased land values. They say that a 2002 study by Edward Glaeser and Joseph Gyourko found that land in Boston that was built on was worth 20 times the vacant portion.

“It’s true that some land-use scholars interpret the effects of zoning differently . . . for example, in a 1988 paper Nancy Wallace finds that Euclidean Zoning rules mimic what the market would provide . . . she argues that a free market would seperate residential and commercial uses . . .” they wrote.

This neglects one important effect of zoning, which is that it limits housing to certain types. Most zoning only allows one type of use per zone. It will restrict an area to single families or certain types of retail. It has also reduced the types of uses available, like the elimination of boarding houses and single room occupancy. While the market has historically produced detached single family housing similar to the suburban model, it has also historically produced other kinds of housing. Moreover, market conditions change over time — in the United States’ earliest cities, like Baltimore, New York, Philadelphia and Boston, the earliest houses were detached and use-seperated. It was only later, as they became more settled and the value of property and demand for housing and other types of space increased that rowhouses, boarding houses, lodging houses, apartment houses and mixed-use buildings began to be built.

Glaeser, Gyourko and Raven Saks also found that there was an effect they called a “zoning tax”:

In their 2003 paper, they estimate that the cost of construction in Manhattan is roughly $200 per square foot. The authors argue that construction should be a very competitive industry because of its low barriers to entry and the existence of thousands of construction firms in the country and hundreds in New York alone. Given this competitive environment, we would expect that, in a free market, real estate prices would be very close to construction costs. In reality, however, they find that the mean price of Manhattan condos is $468 per square foot. The authors attribute the 134 percent price difference to the “regulatory tax” of zoning and other land-use regulations that increase the cost of obtaining building permits and also restrict housing supply.

Ikeda and Washington also looked at the various ideas that have been proposed to correct the problems caused by the regulatory burden. They say that William Fischel proposes a home equity insurance policy so that homeowners would be protected if their house value dropped. Glaeser has recommended limiting the number of buildings that can be earmarked for historic preservation and David Schleicher and Roderick Hills have suggested a “zoning budget” that would require the municipality to consider the costs and benefits of its regulatory decisions. Schleicher has also advocated a Tax Increment Local Transfer system that would transfer some of the increase in property taxes.

One thing that the papers authors should do in the future is see if they can distinguish between local and aggregate effects. It has been my experience in Boston, for example, that developers don’t complain about inclusionary zoning requirements, at least, not at public meetings. They also say that they need subsidies to build cheaper housing — something that Michael Kane, the executive director of the Massachusetts Alliance of HUD Tenants, also believes to be the case.

They should also look at the effect of property taxes and property tax caps. In Massachusetts, municipalities cannot raise property taxes by more than 2.5 percent a year and in California, property tax is locked in from the point of purchase and can only rise two percent a year afterwards. One person who bought their home in Palo Alto in 1964 has seen the market value rise 9953 percent, but it can only be taxed at 3.7 percent of its value. If property taxes had not been capped, it is likely that more development would have been allowed in order to keep the tax burden light.

All in all a very important paper.

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