Editor: David Reiss
Brooklyn Law School

June 14, 2017

High Rents and Land Use Regulation

By David Reiss

photo by cincy Project

The Federal Reserve’s Devin Bunten has posted Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation. It is a technical paper about an important subject. It has implications for those who are concerned about the lack of affordable housing in high-growth areas. The abstract reads,

Highly productive U.S. cities are characterized by high housing prices, low housing stock growth, and restrictive land-use regulations (e.g., San Francisco). While new residents would benefit from housing stock growth in cities with highly productive firms, existing residents justify strict local land-use regulations on the grounds of congestion and other costs of further development. This paper assesses the welfare implications of these local regulations for income, congestion, and urban sprawl within a general-equilibrium model with endogenous regulation. In the model, households choose from locations that vary exogenously by productivity and endogenously according to local externalities of congestion and sharing. Existing residents address these externalities by voting for regulations that limit local housing density. In equilibrium, these regulations bind and house prices compensate for differences across locations. Relative to the planner’s optimum, the decentralized model generates spatial misallocation whereby high-productivity locations are settled at too-low densities. The model admits a straightforward calibration based on observed population density, expenditure shares on consumption and local services, and local incomes. Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner’s allocation. Abolishing zoning regulations entirely would increase GDP by 6%, but lower welfare by 5.9% because of greater congestion.

The important sentence from the abstract is that “Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner’s allocation.” Those are significant effects when we are talking about  real people and real places. The introduction provides a bit more context for the study:

Neighborhoods in productive, high-rent regions have very strict controls on housing development and very limited new housing construction. Home to Silicon Valley, the San Francisco Bay Area is the most productive and most expensive metropolitan region in the country, and yet new housing construction has been very slow, especially in contrast to less-productive large cities like Houston, Texas. The evidence suggests that this slow-growth environment results from locally determined regulatory constraints. Existing residents justify these constraints by appealing to the costs of new development, including increased vehicle traffic and other types of congestion, and claim that they see few, if any, of the benefits from new development. However, the effects of local regulation extend beyond the local regulating authorities: regions with highly regulated municipalities experience less-elastic housing supply. (2, footnotes omitted)

The bottom line, as far as I am concerned, is that localities that are attempting to deal with their affordable housing problems have to directly address how they go about their zoning. If the zoning does not support housing construction, then no amount of affordable housing incentives will address the demand for housing in high growth places like NYC and San Francisco.

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