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Wednesday, August 03, 2005

Is Zoning Causing a Housing Affordability Crisis?

Everyday Economist Steve Landsburg wrote one of his better columns in Slate last week, eschewing his usual attempts to push neoclassical economics to the point of absurdity. Instead, he summarizes a recent empirical study Urban Economists Edward Glaeser and Joe Gyourko. Writing in the Cato Institute's Regulation, G&G argue that
If policy advocates are interested in reducing housing costs, they would do well to start with zoning reform. Building small numbers of subsidized housing units is likely to have a trivial impact on average housing prices (given any reasonable demand elasticity), even if well-targeted toward deserving poor households. However, reducing the implied zoning tax on new construction could well have a massive impact on housing prices. [A somewhat more technical paper is available too]
Glaeser & Gyourko's argument is mainly empirical: they claim to be able to split land prices up into two components: the fixed cost of acquiring a parcel of land, and the marginal cost of an additional square foot. Landsburg calls this fixed cost the "mystery component," and summarizes G&G's argument pretty well:
When you buy a house, you're not just paying for the land and construction costs; you're also paying for a building permit and other costs of compliance. You've got to get the permits, pass the zoning and historic preservation boards, ace the environmental impact statement, win over the neighborhood commission, etc. If Glaeser and Gyourko are right, that's the mystery component right there.
I'm fairly sympathetic to this idea. These kind of regulatory costs surely drive up the price of housing in some places, especially in the exurbs, where zoning can restrict minimum lot sizes to 10 acres or more.

Unfortunately, G&G aren't talking about the exurbs or even the suburbs, they're talking specifically about big cities like San Francisco and Dallas. There are certainly restrictions on building in central cities too, but there are also a lot of other possibilities for the "mystery component" of land prices.

The most obvious candidate the "mystery component" of land prices is just the pre-existing housing stock, which is going to impose a lot of constraints on any new construction. One can't simply tack on an extra story to an old building because land prices are high.

If you want to replace a single-family home with three townhouses, you have to tear down the existing house first. Even with a vacant lot, builders have to do a careful survey to avoid cutting underground utility cables and pipes, and to avoid building on land with toxic waste like a leaky underground oil storage tank. And of course, just finding a vacant lot in big built-up cities is costly and time consuming. Not to mention that building one infill house at a time is more expensive than building house as part of a large tract of new homes.

All these drive up the price of housing. And they're also all probably captured in G&G's "mystery component" of land prices, because they're all fixed costs. They're start-up costs that need to be paid before construction can begin, and that don't vary much with the size of a lot. It costs the same to tear down an old house whether or not it has a big yard.

So, there's at least some reason to think that G&G's promise of a "massive" drop in house prices from weaker zoning is exaggerated. But even if they're right, it isn't clear that weakening zoning in big cities is a good idea. Zoning is most needed precisely in big cities where people live close together. Sure zoning has costs but as G&G acknowledge -- at least in the more technical version of their paper, if not the Cato version -- zoning has benefits too.

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