Why is housing pricy? Ask your government
Trust The Economist (subscription required), just after I have posted on linkage, to report academic study statistically demonstrating what those of us who
work in
affordable housing have long known in our bones: namely, that in the context of urban land, what’s valuable is not land by itself but permission to develop:
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.
If the study unit is an urban market, it takes a long time to generate enough data to meet standards of academia, but the authors have done it:
A new paper (“Why Have Housing Prices Gone Up?” forthcoming in the American Economic Review) 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.
Not only is building permission money, time is money, and …
… the amount is rather breathtaking:
By 2000, the value of permission to build was more than 40% of the price of property in 27 cities.
As you might expect, that hidden tax on development is highest in places with the most interventionist government:
The authors estimate that the regulatory “tax” of
Zoning and supply restrictions are thus a tax on the right to develop that is paid by property consumers and benefits owners of developed property. Moreover,
Billions are spent every year on “affordable housing” schemes, either through grants [or tax relief incentives, or indirect costs] 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.
Meanwhile, the reverse is also true — in places where land is plentiful and zoning absent (say,
spontaneous communities in fusion countries) housing is seldom worth more than its construction cost. Add to that ambiguity about title and difficulty in finding resale buyers, and housing may be economically entropic — costing more to build than it is worth after completion. Solving that paradox is critical to urban development and urban regeneration.
