Wednesday, March 23, 2005

Houston dodges the zoning tax

The Economist has a recent article covering a Harvard study on the cost of housing and its relationship to government regulations, zoning in particular (if you're not a subscriber, an alternate copy of the article can be found here). Some key excerpts:

They studied the housing markets of more than 300 American cities since 1950 and have pieced together evidence of regulation-induced inflation in many places.
In a related paper, the authors look at Manhattan, where free land is so scarce that the cost of a new unit of housing is simply that of adding an extra floor to a building. Comparing this cost with the market price of housing, the authors estimate that the regulatory “tax” of Manhattan's planning laws has risen to more than 50% of the average price of an apartment.

Still, New York's zoning rules might be economically justified if they reflect the costs imposed by additional residents on those already living in Manhattan. The authors first estimated the value of views and sunlight lost when new flats are built. Then they examined the costs of extra congestion and of new public services, such as schools, sewers and so forth. By their calculation, all these costs taken together could not come close to explaining such a high regulatory burden. In other words, the zoning “tax” was much higher than the cost to existing residents of having new people in the neighbourhood.
Not in my backyard, or anywhere near
Since housing is by far the biggest expense for most people, any source of house-price inflation matters. Although zoning restrictions are often welcomed on the grounds of preserving the benefits of rural charm or urban character, their cost tends to fall disproportionately on poorer people, says Mr Glaeser. By raising property values, planning laws act as a windfall for existing owners and a burden on those who rent or seek to buy. Since renters typically have lower incomes and wealth, zoning is often a highly regressive form of taxation, he says.

One lesson for rich-country governments, says Mr Glaeser, lies in the way that they help people who cannot afford adequate shelter. Billions are spent every year on “affordable housing” schemes, either through grants or by requiring a certain portion of newly built units to be sold or rented at below-market prices. This latter requirement is, in effect, yet another a tax on new building. A more effective and cheaper way to make housing more affordable, he reckons, is to loosen restrictions on new construction. It is inconsistent, surely, for a government to offer help with one hand, while holding back the supply of housing with the other.

As you may or may not know, Houston is the largest US city without zoning, and has some of the lowest housing costs of any major American city. While much of the world has thought us crazy for avoiding it, now more and more of the negative side-effects of zoning are being recognized and "maybe those hicks in Houston are smarter than we thought?..." ;-)


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