Arnold Kling  

Regulation and House Prices

"Do the Opposite": Efficiency ... The Summers Flap, Continued...

Edward L. Glaeser, Joseph Gyourko, and Raven E. Saks write,

the evidence points toward a man-made scarcity of housing in the sense that the housing supply has been constrained by government regulation as opposed to fundamental geographic limitations. The growing dispersion of housing prices relative to construction costs suggests that these regulations have spread into a larger number of local markets over time. Moreover, they appear to have become particularly severe in the past 2-3 decades.

The authors use a sort of Tobin's q for housing, the ratio of house prices to construction costs, as a measure of impediments to construction. The question that their research poses is whether restrictions on construction are too high relative to the true negative externalities of development.

In restricting growth of new housing, owners of existing homes apparently are adding value to their properties. From their point of view, growth restrictions may not be as irrational as Bryan Caplan argued.

In a related paper, the authors write,

In places where limited regulation and low density facilitate the construction of new homes, urban success is more likely to take the form of higher population levels. In contrast, in places with high density and high levels of regulation, urban success is more likely to leave population levels relatively unchanged while leading to higher levels of housing prices and income.

One gets a picture of blue states with strong regulations leading to an under-supply of housing, reducing population and higher nominal wages, while red states gain population with lower nominal wages (but not necessarily lower real wages when the cost of housing is taken into account).

For Discussion. Are there other factors that could account for the Tobin's q measure of house prices in some areas?

Comments and Sharing

COMMENTS (4 to date)
Building a House writes:

As someone who has been waiting 8 months for a permit to build a house on a plot of land in an existing development in the relatively distant DC exurb of Fredericksburg, I would prefer that externalities such as road and mass transit be dealt with via a building tax rather than the probably corrupt rationing of building permits...

Duane Gran writes:

The motivation, as I understand it, of slow growth is to prevent urban sprawl and to retain the rural character of many counties. I lived in Washington DC and observed the effect of sprawl on the countryside. I know live in a community out of the reach of a major urban area, but we have structured permits in a way to create a urban ring where 95% of the county remains rural. This seems to me good planning.

Will it increase the cost of housing? Yes. Will it decrease the sprawl? Yes. That, to me, is simply the cost of doing the right thing.

Lawrance George Lux writes:

Use of Housing for investment purposes. Homeowners are acting as Investors, not Tenants, and utilize ability not to sell until they get a profitable Turnover Profit. lgl

M. D. Johnson writes:

This argument is a conspiracy from the "positive-sloped" wing of supply & demand economics to retain relevance in the hot housing market.

The demand side truly drives the change in housing Tobin's Q and this research seems to be an attempt to change the parameters of the argument to give more weight to regulations and more generally to the supply side.

If I hold demand/growth flat and I apply housing regulations in my mother-in-law's small town in Iowa, housing prices will not appreciate due to the regulatory environment imposed. I would grant that there could be a step change level of regulations (i.e. physically reduce supply of houses or make housing prohibitively expensive) that impact housing values, but only to the extent that the regulations impact demand.

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