Editor: David Reiss
Brooklyn Law School

January 15, 2013

Land Use Controls Caused The Financial Crisis?

By David Reiss

Respected Housng Economist Edwin Mills and co-author B.N. Jansen write in their article, “Distortions Resulting from Residential Land Use Controls in Metropolitan Areas”,

The strong conclusion of this paper is that stringent residential land use controls were a primary cause of the massive house price inflation from about 1992 to 2006 and possibly of the deflation that started in 2007.

Indeed, it is difficult to imagine another plausible cause of the 2008-2009 financial crisis.  Popular accounts simply refer to a speculative housing price bubble.  But productivity growth in housing construction is faster than in the economy as a whole [citation omitted] and the US has an aggressive and competitive housing construction sector.  In the absence of excessive controls, housing construction would quickly deflate a speculative housing price bubble.

A final comment is that there appears to be no interest at any level of government, or among the articulate population, in reducing the stringency of land use controls.  Indeed, recent trends are in the opposite direction. (200)

Jansen and Mills rely heavily on a dataset constructed by Joseph Gyourko and others to analyze local land use control stringency.  I am not in a position to evaluate the dataset or the model that they use, but their findings are consistent with those of Gyourko and Edward Glaeser in Rethinking Federal Homeownership Policy.

It seems to me that Jansen and Mills overstate their case quite a bit — stringent land use controls may have been a necessary condition for the bubble, but I can’t see how their argument demonstrates that it was sufficient unto itself.  That being said, I would agree wholeheartedly that this hypothesis is worthy of serious study.  The relationship between land use and housing policy is way more important than most members of the “articulate population” understand.

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