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Housing is one of the main drivers in the cost of living. Government increases this cost through zoning regulations, complicated impact fees, and permitting delays. This is a fact that was even acknowledged by the Obama administration when it stated:

“Barriers to housing development are exacerbating the housing affordability crisis, particularly in regions with high job growth and few rental vacancies.”

Land-use laws are one of the most prohibitive of housing regulations. It takes a scarce resource and makes it even scarcer.

A study by Glaser and Gyourko of Harvard University, found that land use controls play a dominant part in making housing expensive. They found that measures of zoning strictness are highly correlated with high prices. In areas such as New York City and California, where land-use regulations are strict, the cost of housing strongly diverges from the cost of construction. Owners and those who rent are paying for the cost of the land. So whilst regulations are put in place for one reason or another, it is the final consumer that pays for the privilege.

The Benefits of Flexible Zoning

We only need to look at Japan for the benefits of reduced regulation. It relaxed development rules the Urban Renaissance Law of 2002. The rules were relaxed, allowing apartments to grow higher. Height,is a key factor in increasing affordability due to very high land prices.

This approach has helped make Tokyo a relatively affordable place for a city of its size and type. For example, the price a 2 bedroom apartment rental is over 40 percent less than what it is San Francisco. It’s also 31 percent less than New York and 23 percent less than London.

Meanwhile, prices in the leading cities of North America and Europe continue to rise. But prices in Tokyo have flat-lined. Some might turn to Japan's declining Japanese population as an explanation — and that would work were we talking about housing demand nationwide. The population of Tokyo itself, however, has continued to increase due to increasing urbanisation. Between 2000 and 2015, Tokyo's population increased by 1.5 million, as more and more citizens moved to the city to find employment. The population of London also grew by a similar amount. By contrast, New York City added less than 400,000 people to its population between 2000 and 2018. Yet Tokyo is seeing more modest price growth.

A Boost to Supply

Naturally, the price of housing is known to go down — or at least remain stable — when supply is able to keep up with demand.

Is Tokyo keeping up? It is true that the city of Tokyo does destroy lots of housing. However, it still creates a net growth of close to 2 percent. This is over double the growth rates found in London, New York, and Paris. Tokyo's housing growth rate is far in excess of its population increases of just under 1 percent per year.

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So how is Tokyo able to produce so much housing so quickly? First, its units are smaller. The average property in Tokyo is 55 square metres, compared to 80 square meters in London. Second, there are fewer regulations within zoned areas. This means specific zoning areas can easily be turned into residential buildings. Moreover, zoning is also much less complex in Japan than in the US. Even then, residential housing can be built in any zone, providing flexibility in areas where housing is needed the most.

Indeed, housing producers and customers have a more flexible attitude toward housing overall. For example, housing is built in Tokyo with the assumption it will be replaced within a few decades. The average life-span of housing units is usually 30 years. In part, this is a historic and cultural phenomenon. After the Second World War, there was an urgent need for housing. Pre-fabricated buildings became the norm. There is also the need to keep rebuilding to improve earthquake resistance as more sophisticated techniques develop.

In a city with rapidly rising housing needs, there is really only one way to keep housing prices stable or falling: produce a lot of housing. Although Tokyo's population has continued to rapidly increase, builders in the city have managed to keep up far better than has been the case in cities like San Francisco and London. We often hear a lot about the need to produce more affordable housing, often accompanied by schemes for relatively small numbers of subsidized units. Meanwhile, cities simultaneously intervene to prevent the production of more housing overall. A widespread lack of affordability and availability of units has been the result. Officials in Tokyo, on the other hand, appear to be taking a different approach, and it may be working.