Why are Housing Prices so High? Land-Use Regulations in Metropolitan Areas

Housing Prices - Being Libertarian

Ask anyone living in the cities of New York, San Francisco, or London what their biggest expense is, and most people would answer that it is their rent or mortgage.

Partly, this is the free market at work; as professionals flock to high-paying jobs in such developed cities, housing prices will rise to meet this new demand.

But the problem is also partly artificial, brought on by excessive and harmful land-use policies by state and local governments.

In many populous cities, building regulations mandate the maximum height a structure can be, how dense a city block can get, and what areas can and cannot be developed. All these government regulations have led to sky-high housing prices in cities, forcing residents to move further from their jobs, stifling local and regional economies, and putting even more pressure on the middle class.

There is no better example of excessive land-use regulations than the Green Belt in the UK.

Originally developed so that the country could preserve natural spaces for the health of the environment, Green Belt development policies have grown out of control and have led to the fact that London is now one of the most expensive cities in the world to live in.

Due to land set aside for the Green Belt, London lacks the space to build new homes to accommodate growing demand, demand that requires an additional two million homes. Prices in the city are 50% higher than their pre-crash peak. Sadiq Khan, the mayor of London, opposes any development of the Green Belt, although just 3.7% of this land could provide London residents with one million new homes.

A study by London School of Economics estimates that regulations on land-use in the West End of London have pushed up the price of office space by 800%.

The problem is similar in the United States, specifically on the east coast and the Bay Area.

Although the U.S. lacks such a direct policy as the UK’s Green Belt one, coastal cities suffer from building height restrictions and density limits that drive up housing prices.

Silicon Valley’s housing prices exploded once it became the technology mecca of the world. They have a hard time constructing anything over three stories as this draws protests and government intervention.

The California Environmental Quality Act makes housing more expensive as it attempts to limit the housing density in urban areas, although most environmental groups agree that urban density is less harmful to the environment than developing previously unused land.

Increased housing prices hurt the economy as well as residents; employment in the Bay Area could be five times larger than it currently is if land restrictions were lifted.

The east coast is suffering from this government intervention as well.

A 2005 study from the Federal Reserve found that the share of property costs, due to land-use regulations, were 20% in Washington D.C. and 50% in New York City in the late 1990’s.

The problem in DC is bad partly due to the policy that no building can be more than 20 feet taller than the width of the street it faces.

New York City has even bigger issues; due to strict zoning regulations, one-story buildings and surface parking lots are very common, restricting land use even further even as the city becomes more populated.

The city of Boston is suffering as well; minimum lot sizes of one acre in many suburbs, and as high as two to four acres in some suburbs are devastating the city’s housing supply. If land-use restrictions were removed or even somewhat relaxed, the median home price in Boston would be $450,000 and in New York, San Francisco, and Washington DC, $300,000, compared to current prices of $900,000, $450,000, $800,000, and $600,000, respectively.

Government policies are driving up housing prices in some of the most in-demand cities in the world, which already face housing shortages due to the high-paying jobs they provide.

London, New York, and San Francisco are becoming more and more unaffordable for middle-class residents due to restrictions on how land can be used, from limiting building heights and designs, to density limits, to Green Belt policies that are particularly destructive in the UK.

If such restrictions were not in place, many major metropolitan areas would become much more affordable places to live.

State and local governments should get out of the land-use business altogether and allow residential supply and demand to determine the shape and cost of housing. Left in the hands of the free market, housing prices would fall and middle class workers would find it easier to move to big cities for better jobs, without being stifled by the cost of housing.

Government could still put safety standards forth, but building designs and green space decisions should be left up to the ultimate residents of cities. Employment would rise, local economies would grow, and the American dream of owning a house would be within the grasp of more people.

* Jenny Grimberg is a graduate student in applied economics at Georgetown University.

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