On the causes and consequences of land use regulations

Frédéric Robert-Nicoud, Christian Hilber

Zoning policies and land use regulations are widespread. This column presents recent research suggesting that regulations have in fact gone too far. Land use regulation is the outcome of competing property owner and land developer pressure groups, and it seems that local authorities respond well to lobbying, in addition to more traditional welfare and electoral considerations. The most over-restrictive regulation is in highly desirable places, New York and San Francisco being some of the worst offenders.

Land use regulations vary tremendously in shape and scope across space and have become more widespread and stringent over time. Although land use regulations have a long history dating back to at least the 17th century, they were initially pro-growth (McLaughin 2012). Even a century back, hardly any countries systematically regulated land use in a restrictive manner. The first comprehensive zoning law in the US, for example, dates back to 1916 in New York. In contrast, all modern states now regulate land use intensively, and in an overwhelmingly restrictive way.

Land use planning policies

Land use planning policies can, in principle, raise welfare by correcting market failures. Recent evidence, however, casts doubt on this proposition and suggests that such regulations have strong adverse net effects. Turner et al. (2012) estimate the net cost of land use regulations as a proportion of land value to reach a hefty 38% in their sample of residential plot transactions across the US. In an earlier study, Cheshire and Shepphard (2002) estimate the net costs of land use planning policies in the UK to amount to as much as 3.9% of annual household incomes. We are talking about big numbers.

These big numbers hide substantial heterogeneity. Glaeser et al. (2005) estimate that land use regulations are akin to a ‘shadow’ tax that represents over 50% of the values of houses in Manhattan and San Francisco, 20% in DC and Boston, 12% in NYC or Salt Lake City, and 0% in Detroit, Baltimore, and Houston (see Table 1, column 3). Likewise, Cheshire and Hilber (2008) estimate the regulatory tax for 14 British and 8 continental European office locations. The average shadow tax over the sample period amounts to a staggering 800% of marginal construction costs in the West End of London, 437% in Frankfurt, 97% in Newcastle, and 68% in Brussels.

Table 1 Development and regulation rankings for a subsample of a selection of 21 US Metropolitan Statistical Areas, 1990s

Metropolitan Statistical Area

[1]

Rank share developed land, 1992

[2]

Rank regulatory tax, 1998 (Glaeser et al. 2005)

[3]

Rank WRLURI, 2005 (Gyourko et al. 2008)

[4]

Los Angeles 1 3 8 New York City 2 8 6 Boston 4 7 2 Salt Lake City 6 9 17 Detroit 8 21 (tax = 0) 14 Houston 14 21 (tax = 0) 20 Washington, DC 17 5 10

Who benefits?

This heterogeneous regulation of land use begs the question: Who benefits from tight land use controls? The prime suspects are landowners and homeowners; by restricting supply, land use regulations raise house prices and the price of already developed land. In his influential book, Fischel (2001) postulates that homeowners elect local politicians who implement policies that protect the value of their most important asset, their home. The ‘homevoter hypothesis’ implies that local regulations reflect the wishes of the majority. Consequently, local jurisdictions that house a large fraction of homeowners are predicted to be more regulated than jurisdictions that host only a few; empirical evidence at the local level backs this hypothesis (for example, Dehring et al. 2008). The bitter consequences of higher house prices are felt by newcomers, potential or real, who are disenfranchised. But disenfranchised does not necessarily imply powerless.

Land-based interests

In a recent paper (Hilber and Robert-Nicoud 2013), we formalise a theory in which land use regulations reflect land-based interests, more broadly defined, following the pioneering work of the sociologist Molotch (1976). These land-based interests encompass those of homeowners and also those of landlords and those of absentee landowners. This is consistent with the idea that planning boards are amenable not just to the electorate but also to lobbying influence and to pressures from various interest groups. Solé-Ollé and Viladecans-Marsal (2011) and Schone et al. (2011) provide indirect empirical evidence for the relevance of lobbying by land developers in Spain and France, respectively. The conviction of former Baltimore mayor Sheila Dixon for taking bribes from developers in 2009 suggests that such pressures can also take malign forms.

In our study, we also uncover novel evidence across US cities (Metropolitan Statistical Areas) that the extent and breadth of regulations is positively associated with urban development. The former is quantified by the Wharton Residential Land Use Regulation Index (WRLURI) computed by Gyourko et al. (2008) for the 93 largest US Metropolitan Statistical Areas in 2005; the latter is defined as the fraction of land in 1992 that is amenable to urban development (buildings and roads) and that is actually put to urban use. Insofar as regulations increase the cost of living, they reduce the equilibrium population and the share of developed land relative to the laisser-faire. Put differently, this economic mechanism implies a negative relationship between land use regulation and urban development. Yet, the data for the US robustly suggests otherwise (see Figure 1, panel a): the share of developed land in 1992 is positively associated with the extent of regulation pertaining in 2005. A similar pattern was already visible in earlier data from the late 1970s (see Figure 1, panel b): the share of developed land in 1976 is positively related to a regulatory index compiled by Saks (2008) for the late 1970s.

Figure 1 Unconditional correlation between regulatory restrictiveness and share developed residential land

Our theory is consistent with this empirical finding. In our framework, owners of developed residential land favour additional land use constraints as this raises the price of their land (Glaeser and Ward 2009); owners of undeveloped land oppose such tightening because it increases the cost of development. Mobile households evaluate heterogeneous local amenities – such as access to a major ocean coast or January temperatures – and housing costs – which also reflect local regulation – and pick their location accordingly. The model leads to two key equilibrium relationships. First, places with desirable amenities are more populated and their land is more developed than that of less desirable places. Second, places that are more developed adopt tighter land use regulations. Inspection of Table 1 and the patterns in Figure 1 provide casual evidence for the positive relationship between local amenities and the city-wide share of developed land, and between the share of developed land and the extent of land use regulation, respectively.

Using more comprehensive, systematic and rigorous econometric techniques, we find that both theoretical predictions are consistent with patterns we uncover in a cross-section of 93 major US cities. The effect is also quantitatively meaningful. To fix ideas, compare Salt Lake City (the 56th most regulated Metropolitan Statistical Area in our sample) to San Francisco (16th). Salt Lake City has no access to a major ocean coast and its January temperatures average 28.1°F. San Francisco has a border with the Pacific Ocean and its January temperatures average 48.2°F. The implied difference in the share of developed land, as a consequence of these disparities and their historical population densities alone (but keeping other observable differences constant), is 20 percentage points (1.6 standard deviations). That is to say, Salt Lake City’s share of developed land would rise from its actual 23% to a hypothetical 43%, which nearly matches the 44% of New York City and Los Angeles! This, in turn, implies that granting Salt Lake City the same coastal access, warmer winter temperature, and historical density alone as San Francisco hypothetically makes it the 35th most regulated US city. In other words, these three variables enable us to explain half the ranking gap in land use regulations between the two cities.

Conclusions

We provide a land-based interest theory in which households make location decisions based on natural amenities and urban and housing costs, to which land use regulations contribute substantially, and land use regulations are the outcome of the relative influence from competing property owner and land developer pressure groups. The relative political influence of the two groups can be approximated by the degree of urban development. Our theoretical predictions are consistent with the most recent US data across major cities. We interpret this finding as suggestive evidence that local authorities and planning boards respond to lobbying and other pressures in addition to welfare and electoral considerations. Our findings are also suggestive that regulation in highly desirable places such as New York and San Francisco may be grossly over-restrictive.

References

Cheshire, P C and C A L Hilber (2008), “Office space supply restrictions in Britain: The political economy of market revenge”, Economic Journal 118(529), F185-F221.

Cheshire, P and S Sheppard (2002), “The welfare economics of land use planning”, Journal of Urban Economics 52, 242-269.

Dehring, C, C Depken and M Ward (2008), ‘A direct test of the homevoter hypothesis’, Journal of Urban Economics 64(1), 155-170.

Fischel, W A (2001), The Homevoter Hypothesis. How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies, Cambridge, MA, Harvard University Press.

Glaeser, E L, J Gyourko and R E Saks (2005), “Why is Manhattan so Expensive? Regulation and the Rise in House Prices”, Journal of Law and Economics 48(2), 331-369.

Glaeser, E L and B A Ward (2009), “The causes and consequences of land use regulations: Evidence from Greater Boston”, Journal of Urban Economics 65, 265-278.

Gyourko, J, A Saiz and A Summers (2008), “A new measure of the local regulatory environment for housing markets: The Wharton Residential Land Use Regulatory Index”, Urban Studies 45(3), 693-729.

Hilber, C A L and F Robert-Nicoud (2013), “On the origins of land use regulations: Theory and evidence from US metro areas”, Journal of Urban Economics 75, 29-43.

McLaughin, R (2012), “Land use regulations: Where have we been, where are we going?”, Cities 29, S50-S55.

Molotch, H (1976), “The city as a growth machine: Toward a political economy of place”, American Journal of Sociology 82(2), 309-332.

Saks, R E (2008), “Job Creation and Housing Construction: Constraints on Metropolitan Area Employment Growth”, Journal of Urban Economics 64(1), 178-195.

Schone, K, W Koch and C Baumont (2011), ‘Modelling local growth decisions in a multi-city case: Do spatial interactions and lobbying efforts matter?’, Public Choice, forthcoming.

Solé-Ollé, A and E Viladecans-Marsal (2011), “Lobbying, political competition, and local land supply: Recent evidence from Spain”, Journal of Public Economics 96, 10–19.

Turner, M, A Haughwout and W van der Kaauw (2012), "Land use regulations and welfare", mimeo, University of Toronto and NYFRB.