Zoning: a hidden tax on housing?
Isaac Laquedem
The February 12 issue of The Economist reports that three economists have looked at the extent to which government regulation pushes up housing prices. As summarized in the article, Professors Edward Glaeser and Raven Saks of Harvard University and Professor Joseph Gyourko of the University of Pennsylvania studied how housing markets behaved in more than 300 American cities since 1950. They concluded that from 1950 to about 1970, housing prices went up in tandem with increases in "hard" building costs -- the cost of bricks, mortar, wood, labor, and so on. From 1970 to 2000, they found that hard building costs didn't change much in inflation-adjusted dollars, but inflation-adjusted house prices continued to climb. They hypothesized that the value of a house includes not just the materials, labor, and land, but also the permission to build the house, and they tried to estimate that cost.
And what an estimate it turned out to be. In 2000, in 27 cities that they studied, the value of permission to build was more than 40% of the price of property. (The article doesn't make clear whether this is 40% of the value of a building site, or 40% of the value of the finished house. I suspect the reporter means 40% of the value of the building site, though the article does say that in Manhattan, regulations account for more than 50% of the price of an apartment.)
The authors make the point that it's in the interest of people who already own houses to thwart others from building near them, not just as an expression of the NIMBY syndrome but to keep down housing supply and protect the value of their investments. As a result, says Professor Glaeser in the article, the cost of zoning falls disproportionately on poorer people.
I'm looking forward to reading the professors' study, particularly to see if it mentions Portland. Curiously, in our fair city the matchbox-sized apartments being squeezed into the gritty industrial areas and onto the Superfund sites are being marketed not to the poor but to the rich, even as the poor move to the suburbs. Did the professors fit Portland into their theory, or hold us out as an anomaly? I'm very curious.
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12:29 a.m.
Feb 14, '05
Isaac... You mention that, "...inflation-adjusted house prices continued to climb. They hypothesized that the value of a house includes not just the materials, labor, and land, but also the permission to build the house, and they tried to estimate that cost."
It seems to me that another large non-inflationary cost that will drive the values of homes (esp. over the decades-long term) is increasing population.
As my granddad used to always say, 'they keep making more people, but they ain't making any more land.'
By definition, then, the cost of homes will go up as population increases.
(Yes, even if they keep building... After all, most people want to live in the places they find attractive. By definition, that means that some X percentage will always want to live in pre-existing neighborhoods; whose quantity of housing is basically fixed.)
If the authors of the study left out population factors, well, then it's not a very useful study, right?
Feb 14, '05
Kari, that's a good question. I haven't read the study itself but I would have to think that the authors adjusted for population growth. Otherwise it's not meaningful to compare house price trends in Portland, where the metro area has grown tremendously, to those in Detroit, where the central city has lost 500,000 people in 50 years.
Whether the real-dollar cost of homes will increase with population depends on how you look at the question. If it's desirable to live in Portland's central city, then the cost of housing there should increase as the metropolitan area grows, for exactly the reason you give: the land supply is limited and housing competes with more valuable commercial and office uses for the central land. The number of people who want to live downtown increases, and they compete for the limited supply.
But whether the average house price metro-wide increases depends also on how much new land is opened up for housing: if 300,000 people come to the metro area with no increase in housing land, then house prices and rents will skyrocket. But if land is made available for 300,000 new housing units (which would accommodate 800,000 or so people), the average house price might not change much even though houses in the most desirable (expensive) areas would jump. One thing the authors noted was that 40 years ago the top 10% of houses were 50% more expensive than the bottom 10%, but by 1990 the top 10% were twice as costly as the bottom 10%, suggesting to me that people bid up the expensive houses but not the cheaper ones.
Feb 14, '05
One cost never attributed to housing, but should, is infrastructure, especially roads. When opening up huge tracks of land, does the 10 million dollar highway interchange built to support those new developments on greenfields get directed to those new developments who provided the pressure for the interchange or the entire state? Usually the burden falls on the entire state. There is more to unlimited land and housing prices then most studies are willing to look at.
8:20 a.m.
Feb 14, '05
Don't fall for this "economists" argument -- "paid for research" financed by the housing industry. It is based on the fallacy of causality. Prices are not being forced up by zoning, they are being forced up by density -- or lack of it.
Consider: Nearly 75 percent of all the people who live West of Denver live in a strip about 100 miles wide centered along Interstate - 5. To wedge so many people into this small strip -- zoned or not -- is an expensive proposition -- the water comes from the Colorado River or the Cascades. Electric power comes from mine-mouth coal fired plants in the Rocky Mountains or from hydro-electric dams in the Columbia Basin.
Housing prices are forced up by the ggrowing number of people trying to tie into these limited resources in a limited space. Large lot zoning and other practices that limit density have a role in pushing up housing prices, but if you eliminated those practices entirely, housing prices would still go up -- too many people trying to live in too small a space -- the Pacific Slope.
9:15 a.m.
Feb 14, '05
You can find a copy of the actual paper here.
Feb 14, '05
Kari's grandfather was right, but he didn't know what we know now.
I am a real estate appraiser (the only private one) in Crook and Wheeler Counties over here at the geographic center of Oregon. To me, the economics of supply and demand are obvious on the ground. Comparing Fossil, Prineville, and Redmond; similar homes will cost $60,000, $100,000, and $140,000 respectively. The difference is the relationship between supply and demand. No demand to speak of in Wheeler Co./Fossil where they average one residential sale per month in the County. Much more demand in Redmond, and Prineville is in the middle.
So, the basic economic theory does explain things. But zoning is an overlay. In Oregon, with our land use laws, about 97% of the State has been placed in an Exclusive Farm (or forest) use zone with minimum lot sizes of 20 acres or more. You can fit 174 city sized lots (50 feet by 100 feet) into 20 acres. So, we have restricted growth to our urban areas, increasing density. If you can find a 50 x 100 lot in Portland for under $80,000, it becomes good economic sense to buy it, destroy the single family dwelling, and build the duplex. The enforced density forces prices up more than the normal supply/demand relationship by artifically limiting supply.
Now, you might think from that statement that I don't support zoning. Actually I do. When I was on the Crook County Planning Commission, I saw our zoning as a way to protect property rights.
What we need to keep housing prices reasonable is a timely responsiveness on the part of government to the need to expand urban zones. We need more flexibility with non-resource lands. (We have a lot of rocky sage brush lands where cattle would starve that could have residential housing over here on the dry side of the Cascades.)
But, yes the thesis is correct. Zoning increases land values. But in Oregon there is more -
In Oregon, we have yet one more layer adding cost. After the passage of Measure 5 in 1990, it became very popular for local governments to use system development fees (parks, schools, transportation, water/sewer, etc.). I know for example, that in Bend Oregon, the system development fees for a 24 hour a day restaurant are in the neighborhood of $100,000 beyond the price of land, the cost of building, etc. The system development cost for residential housing in Bend is in the neighborhood of $10,000. So, in the "used" real estate market, this underlying cost is a force that also moves up the cost of housing.
There is an old theory they teach you in real estate school - government intervention drives up housing costs. Whether rent controls, land use/zoning, system development fees, etc. - government drives up costs.
Good/bad? Depends where you sit.
Feb 14, '05
Cause and effect are not always clear. Zoning may increase the value of my home, but the reason I have acted to enforce zoning in my neighborhood is to maintain the character of the area, the reason I moved here.
It is true that zoning and other landuse regs can increase housing cost with proportionally more negative effect on low income folks. That is a good reason for increasingly progressive taxation, in my opinion.
I know, it's government interference leading to more government interference. Get used to it. Civilization is complicated, but it beats cave dwelling for softies like me.
12:15 p.m.
Feb 14, '05
I'll try to read that report sometime, too. Seems mighty interesting. I'm persuaded by the logic of Kari's argument, but I wonder if it holds water in fact. It seems observable that cities with higher density see their rates rise faster than those with lower density, adjusted for growth. But there are other variables we may not see, like types of growth (rich or poor migration).
I'm also reluctant to throw the baby out with the bathwater on this one, as Russell does: the Economist is definitely a pro-business mag, but the data Isaac references controls for bias (or appears to): taking comparable data, the economists found a difference betweeen an earlier period and a later one. Bias may not account for that difference.
Feb 14, '05
I would have to assume that Portland is an anomaly since Oregon, up until M37, has had the nation's most unique land use laws that have forced planners to think differently. We've grown up more more than out. People want to live where the focus is, which is on urban enhancement and development.
4:52 p.m.
Feb 14, '05
A tangential observation... Sometimes we've been talking about zoning as "adding value" to property and other times, as "raising the cost" of property.
Same thing. What it means depends on where you sit. (Own the property, "adds value". Trying to buy some, "raises cost".)
To broaden the point - seems that Isaac's tack of calling zoning a "hidden tax" creates a negative impression; it's also true, as Tom points out, that zoning "adds value", a positive thing.
In the end, it's true that government intervention almost always creates winners and losers. By definition, almost - otherwise, the intervention would have had no effect.
Once you've got winners and losers, the question is not "does someone lose?" but rather "who loses? do we care? and what can we do to ameliorate their pain?"
Of course zoning costs something. It also adds tremendous value - perhaps so much as to make the costs worthwhile. (Every case is different.)
Now can we talk about affordable housing programs?
Feb 16, '05