Apr 12, 2018

Why Land Use Regulations Matter

Many American cities that offer good job opportunities are not experiencing the population growth one would expect. Their lackluster growth is largely the result of regulations that make it difficult to build in coastal cities. The regulations that limit construction include zoning laws, parking requirements, and historic preservation.

Rather than moving to where the best opportunities are, people are moving to where new housing is abundant, such as the rapidly growing Sun Belt cities of Houston and Atlanta. As Ryan Avent explains in The Gated City, “America has made its most productive locations ever less accessible. The best opportunities are found in one place, and for some reason most Americans are opting to live in another.”

The Regressive Effects of Land Use Regulations

Rising home prices in cities with growing populations are not a law of nature. Until the 1970s, regions generally accommodated new residents by allowing new housing construction and maintaining a housing stock affordable to households with a range of incomes. And cities that allow housing construction see this same pattern today. For example, in Houston, housing supply elasticity was 0.42 percent for the period of 1996 to 2016, well above the national average of 0.17 percent. During this period, the city’s population increased by half a million people, but today the median Houston home price is $235,000. Households across a broad range of incomes can find housing in Houston that’s affordable to them.

Policies whose costs fall disproportionately on low-income people are considered regressive. For example, a sales tax on staple goods has regressive effects because people with low incomes spend a greater proportion of their incomes on such goods. If land-use regulations—including zoning, parking requirements, and aesthetic rules—increase overall housing costs, the burden of these rules falls disproportionately on low-income households that typically dedicate a higher proportion of their income to housing relative to higher-income people.

Better Neighborhoods

In addition to increasing housing prices, land-use regulations limit our freedom to live in the types of neighborhoods that meet our preferences. Land use regulations limit development density by setting minimum lot size and parking requirements and by separating residential and commercial land uses. These regulations cause less dense, walkable development relative to what we might see in a freer market.

Land use regulations create a mismatch between the amount of housing available in walkable neighborhoods and the number of people who would like to live in these neighborhoods. Homes in walkable neighborhoods cost up to 14 percent more than homes in non-walkable neighborhoods. Land use regulations that limit walkable development make consumers worse off by artificially limiting the supply of walkable development and increasing home prices in walkable neighborhoods.

Preemption as a Way Forward

At the local level, the incentives are strong to maintain existing regulations. Regulations privilege cities’ existing homeowners at the expense of people who would like to move in, but can’t due to supply constraints. Incumbent policymakers face incentives to keep the voters who elected them happy rather than creating opportunities for new people to enter their jurisdictions.

State-level preemption of local land-use rules has potential to reduce the burden of land use regulations. State policymakers have a broader geographical constituency than their local counterparts, and they are further removed from opposition to development at the local level. State rules that limit the extent to which local governments restrict development could increase housing supply and affordability in the country’s most productive cities.

California is currently exploring preemption as a way to solve their affordable housing crisis. As my colleague Salim Furth and I recently discussed on a podcast with the Pacific Research Institute (and in a forthcoming episode of the Mercatus Policy Download), California’s efforts could be a model for other states who hope to positively reform their own local land-use regulations.

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