November 5, 2015

Four Regulations That Increase Housing Costs

Emily Hamilton

Research Fellow
Summary

Housing is becoming increasingly expensive in major American cities, and this is partly due to land-use regulations that don't receive enough attention from policymakers or voters. In a new research paper, Sandy Ikeda and I review the economics literature on the relationship between land-use regulations and housing costs. We find that a significant majority of studies show that stricter zoning rules increase the cost of housing. These higher prices hurt low-income people, reduce income mobility, and even limit national economic growth.

Housing is becoming increasingly expensive in major American cities, and this is partly due to land-use regulations that don't receive enough attention from policymakers or voters. In a new research paper, Sandy Ikeda and I review the economics literature on the relationship between land-use regulations and housing costs. We find that a significant majority of studies show that stricter zoning rules increase the cost of housing. These higher prices hurt low-income people, reduce income mobility, and even limit national economic growth.

The cities with the most prohibitive housing costs — the San Francisco Bay Area, New York, Boston, and Washington, D.C. — all have very restrictive zoning rules. These regulations make cities inaccessible to young people and renters who would otherwise take advantage of the education, jobs, and other amenities on offer.

Here's a breakdown of the most important types of zoning rules that increase housing costs:

1. Lot Size and Density Restrictions

Minimum-lot-size rules — which state that a lot must take up a certain amount of space for each family that will occupy it — are perhaps the best-known rules that suburbs use to keep lower-income residents from moving in. By only allowing only single-family homes to be built on many lots, even rather large ones, these rules can dramatically increase the cost of housing. In one study we surveyed, minimum lot sizes were found to be the type of regulation most responsible for increasing housing costs in the Boston area.

Like minimum-lot-size rules, maximum-density rules limit the amount of housing that can be built in a specified area. Maximum-density rules often take the form of limits on floor-area ratio, or FAR — the ratio of total floor area (with each story of the building counted separately) to the area of the plot. For example, the maximum allowed FAR for office buildings in downtown San Francisco is 9:1, meaning that if a building took up an entire plot, it could have a maximum of nine floors. (If it took up half the plot, it could have 18 floors, and so on.) Washington, D.C.'s Height Act is another example of a maximum-density rule; it effectively prevents the city's tallest buildings from exceeding 160 feet.

Maximum-density rules are often a binding constraint in urban areas, as evidenced by developers' tendency to take advantage of every square inch of floor area permissible under local laws. In a 2003 paper, economists Edward Glaeser, Joseph Gyourko, and Raven Saks find that restrictions on building supply account for up to 40 percent of the housing costs in some of the nation's most expensive cities.

2. Parking Requirements

While driving through a typical American shopping center, most shoppers probably think that stores provide huge expanses of parking lots for their customers' convenience. However, in his extensive research on parking policy, Donald Shoup finds that gigantic parking lots are often built simply to comply with arbitrarily determined parking requirements.

These rules are intended to make life easier for drivers, and to keep businesses' customers from parking on the streets of nearby neighborhoods, but they also have the effect of devoting land to parking lots that could be better used as housing or commercial developments. In a study of parking requirements in Los Angeles, Shoup finds that required parking at apartment buildings contributes $104,000 to the cost of an apartment. This isn't to say that all Los Angeles apartments would be devoid of parking without the rules requiring it. However, in a freer market, some developers would very likely cater to apartment dwellers without cars, who could save money by not paying for land dedicated to other residents' parking spaces.

3. Urban Growth Boundaries

An urban growth boundary (UGB) is a greenbelt preserved around a city for open space or farmland. Commercial and residential development is permitted only inside the boundary. UGBs are a type of "smart growth" regulation. In reaction to some of the negative effects of traditional land use rules such as minimum lot sizes, maximum-density rules, and parking requirements, smart growth emerged as an alternative framework of regulation. The objectives of smart growth include reducing sprawl and creating more walkable cities.

Portland has the most famous UGB, which has been in place since the 1970s. Studies have found that UGBs increase the price of land inside the boundary, in turn increasing housing costs. While some of smart growth's objectives are to counter the effects of traditional zoning rules, the two have this in common.

4. Historic Preservation

Historic-preservation rules reduce potential housing supply by preventing old buildings from being replaced with denser housing. Additionally, historic preservation limits "filtering" in the housing market. Typically, we expect to see a city's wealthiest residents living in new construction. As these new buildings age, high-income people move to newer buildings, leaving older buildings available for middle-income people, and leaving even older construction available for low-income people. When new construction is prevented, wealthy residents stay in older buildings that may have plenty of charm, but lack the conveniences of newer construction. These preserved buildings remain unaffordable to low-income tenants, who are then shut out of a neighborhood or city entirely. In Manhattan, people who live in historic districts are 74 percent wealthier than those who do not, indicating that the filtering effect is stifled for some of the country's most desirable neighborhoods.

All of these rules may have some beneficial effects, such as facilitating the development of leafy suburbs, making car transportation easy, or preserving architecture. And rules that increase housing costs are very popular with homeowners, for obvious reasons. However, they come at the expense of people who may not be able to live in an expensive city, and these costs are hard to see.

The burden of land-use regulations largely falls on renters. Renters tend to have lower incomes and are on average younger than homeowners. Land-use regulations have effects similar to those of a sales tax in that they raise the cost of all rental housing in a city. Because lower-income people tend to spend a higher proportion of their income on housing, they bear an unfair share of the costs of these land-use rules, while established, high-income households reap an unfair advantage at their expense.

Aside from these regressive effects, land-use regulations have broader implications for the economy. Research from economists Chang-Tai Hsieh and Enrico Moretti finds that land-use regulations not only harm low-income people and reduce income mobility, but also reduce economic growth. Because the cities with the most restrictive land-use rules are also some of the most productive places in the country, the rules prevent people from living where they can contribute the most to economic growth. Hsieh and Moretti find that reducing land-use regulations in New York, San Francisco, and San Jose to the level of regulation in the median American city could increase GDP by an astonishing 9.5 percent.

These striking findings demonstrate the importance of reforming land-use regulations. However, homeowners are a powerful political force who benefit from the current policy environment. In our paper, Sandy and I summarize some of the proposals for liberalizing zoning rules, including municipal commitments to permit a given amount of development and proposals to allow homeowners to benefit financially from the increase in the tax base that new development can provide. Others have proposed state limits on municipalities' ability to restrict development. Liberalizing land-use regulations is crucial to increasing income mobility and economic growth.