Land-use Regulation Makes Housing less Affordable, Harvard Study Finds
A March 2002 study published by the Harvard Institute of Economic Research at Harvard University demonstrates the effects of zoning and other regulation on housing affordability. “The Impact of Zoning on Housing Affordability,” by Edward Glaeser and Joseph Gyourko, uses census data to compare the effects of zoning on housing prices in 26 U.S. cities.
on a Quarter-Acre Lot
|New York City||334,432|
|Calculated by Randal O'Toole fro Glaeser and Gyourko, Table Four, by taking the difference between the "imputed land cost from means data" and the "hedonic price of land log-log specification." The prices in Table Four are in dollars per square foot; for this table, O'Toole multiplied them by 10,890 square feet (a quarter-acre).|
Glaeser and Gyourko, who are with the Wharton Business School of the University of Pennsylvania, used data from the Census Bureau’s American Housing Survey to estimate the value of a quarter-acre of land in two different ways. First, they compared the sales prices of homes on quarter-acre lots with the prices of similar homes on half-acre lots. This represented the value of the extra quarter-acre.
Second, they subtracted the cost of constructing a home from the sales prices of homes on quarter-acre lots. This represented the value of a buildable quarter-acre.
Put another way, the first value is the amount people are willing to pay for an extra quarter-acre of land in their yard. The second value is the amount it costs to own a quarter-acre of land on which you can build a house.
Without zoning and land-use regulation, the two values would be nearly identical. If someone had a house on a half-acre, and the value of developing the extra quarter-acre grew to be more than it was worth to the owner as a part of their yard, they would subdivide and develop it.
However, zoning and regulation can increase the cost of such subdivisions, or prevent them from taking place at all. In this case, the second valuation will be more than the first, and the difference represents an “implicit tax on new construction.”
In some cities, the difference between these two values is small. In Kansas City, the first value is about $18,000, while the second is about $21,000. This suggests it costs only about $3,000 to get a permit to subdivide your half-acre and build in Kansas City. The difference was also less than $30,000 in Baltimore, Cincinnati, Houston, Milwaukee, Philadelphia, Pittsburgh, and St. Louis.
In many other cities, however, the difference is large. In San Francisco, having an additional quarter-acre in your yard is worth $85,000, but a buildable quarter-acre lot is worth nearly $700,000. The value of buildability on a quarter-acre lot is more than $200,000 in Anaheim, Los Angeles, New York City, San Diego, and Seattle. In these areas, only a small percentage of the value of the lot comes from an intrinsically high land price; the rest is due to restrictions on construction.
Unfortunately, Portland (the nation’s model for smart growth) and Las Vegas (the nation’s fastest-growing yet still affordable urban area) were not among the cities studied by the researchers.
Glaeser and Gyourko checked to see if other factors, such as densities, incomes, and climate, could account for these differences in values. But density and income had little effect on the analysis, while warm winters did not raise the value of land by very much.
In the October issue of Environment & Climate News, I suggested someone should develop an index of land-use regulation. (See “Land Use Regulation Makes Housing Less Affordable.”) Glaeser and Gyourko relied on a 1989 “Wharton Land-Use Control Survey” to develop such an index for 45 urban areas.
The index was the length of time required to get a permit to rezone an area of land for a subdivision of less than 50 homes. An index of 1 equaled less than three months, 2 = 4-6 months, 3 = 7-12 months, 4 = 13-24 months, and 5 = more than 24 months.
Even after controlling for regional growth and median incomes, they found a strong correlation between this index and the share of homes in an area selling for more than 140 percent of the construction cost of those homes. Increasing the index by 1—going from 1 to 2, 2 to 3, etc.—increased the share of high-cost homes by 15 percent.
The researchers admit zoning may have some benefits. But if affordable housing is the goal, they say, zoning reform is the place to start. “Building small numbers of subsidized housing units is likely to have a trivial impact on average housing prices,” they say. “However, reducing the implied zoning tax on new construction could well have a massive impact on housing prices.”
For more information
“The Impact of Zoning on Housing Affordability,” by Edward Glaeser and Joseph Gyourko, is available in Adobe Acrobat’s PDF format at http://post.economics.harvard.edu/hier/2002papers/HIER1948.pdf.
Housing affordability, congestion, and open space are just three of the issues raised in the Thoreau Institute’s slide show, “The Costs of Smart Growth.” For more information, see http://www.ti.org/vacd.html.