This is a writeup of a shallow investigation , a brief look at an area that we use to decide how to prioritize further research.

In a nutshell What is the problem? Local laws often prohibit the construction of dense new housing, which drives up prices, especially in a few large high-wage metropolitan areas. The increased prices transfer wealth from renters to landowners and push people away from centers of economic activity, which reduces their wages and total economic output, likely by a very large amount.

Local laws often prohibit the construction of dense new housing, which drives up prices, especially in a few large high-wage metropolitan areas. The increased prices transfer wealth from renters to landowners and push people away from centers of economic activity, which reduces their wages and total economic output, likely by a very large amount. What are possible interventions? Local organizations could directly advocate for municipal governments to permit more and denser development. Changes in the local decision-making process (e.g. “zoning budgets”) could increase the likelihood of policy outcomes that allow higher density. Shifting decision-making to larger administrative bodies, such as state governments, could reduce the influence of the narrow local interests that most often impose barriers to permitting additional density. We don’t have a strong sense of how a new funder might best promote these outcomes.

Local organizations could directly advocate for municipal governments to permit more and denser development. Changes in the local decision-making process (e.g. “zoning budgets”) could increase the likelihood of policy outcomes that allow higher density. Shifting decision-making to larger administrative bodies, such as state governments, could reduce the influence of the narrow local interests that most often impose barriers to permitting additional density. We don’t have a strong sense of how a new funder might best promote these outcomes. Who else is working on it? Some major foundations support a variety of work related to affordable (subsidized) housing, but they usually do not focus on increasing supply more generally. Some local organizations support increased supply and allowing denser development, but these organizations are generally quite small.



Published: March 2015

What is the problem?

Local governments in the United States typically have a variety of laws that limit what kinds of building can be built in different places, including limits on how much total built floor area any given lot is allowed to contain. Our understanding is that one effect of these policies is to prevent the construction of dense housing. This drives up prices, and makes many people less productive by making it unaffordable for them to live close to centers of economic activity.

Economists Edward Glaeser, Joseph Gyourko, and Raven Saks have compared the sale price of housing to the combined cost of construction and price of land in different cities to estimate the level of regulatory “tax” that drives up prices by limiting construction. They estimate that land use regulations increase housing prices by 19% in Boston, 34% in Los Angeles, 12% in New York, 53% in San Francisco, and 22% in Washington, DC, while estimates for other areas are generally much smaller (close to zero). The real estate website Zillow estimates that total residential rents in those metropolitan areas are around $120 billion/year, which implies that the “tax” on renters in those metropolitan areas amounts to roughly $30 billion per year. However, these figures do not represent straightforward welfare costs, since the “regulatory taxes” would be paid as inflated rents to owners. A rough back of the envelope calculation drawing on the same Glaeser et al. 2005 figures suggests that foregone housing consumption in the five large supply-restricted metropolitan areas might add up to over $600 billion in value, and that the deadweight loss in those areas might be around $100 billion.

Allowing more people to move to a higher-wage higher-productivity area is also a way to increase overall productivity and earning potential in the economy. Economists Chang-Tai Hsieh and Enrico Moretti, in a working paper, estimate that these land use restrictions depress annual output by more than $2 trillion, and wages by more than $1 trillion, by restricting the movement of workers into more productive regions. In their model, a large majority of the foregone production is attributed to land use restrictions in New York, Washington, DC, Boston, San Francisco / San Jose, and Seattle. However, we regard this model as offering a conceptual upper bound on the gains to liberalizing land use restrictions, rather than a best guess, since its assumptions would require the majority of the US labor force to relocate to the few most productive regions for the gains to be realized.

What are possible interventions?

What policy changes could be helpful?

There are likely many types of policy changes that could reduce the harm caused by excessively restrictive local land use regulations. A few that have been mentioned to us include:

Local governments in high-wage high-regulation metropolitan areas could simply “upzone,” permitting more and denser development.

Local governments could change the process by which they decide how to regulate land use. For example, they could adopt a “zoning budget” targeting an overall level of housing growth, so that restrictions in one area would have to be balanced by expansions elsewhere. This would help align incentives of advocates for individual projects to support greater overall growth.

Decision-making in land use policy could be re-assigned from local to regional or state authorities, which would likely be less susceptible to neighborhood pressure to oppose new development.

We don’t have a strong sense of which of these policies might be most helpful in addressing the problem.

Where can additional funding make a difference?

This cause seems not to have generated a lot of activity relative to our sense of its promise, which makes funding opportunities difficult to assess. Amongst other possibilities, a funder might be able to:

Support existing local groups or seed new groups in key housing markets.

Fund a campaign to move land use decision-making power from the local to the regional or state level. We are not aware of any existing arrangements of this form in the United States, or of any active efforts to promote them, so this would likely be an exercise in “active funding.”

Support the development of a policy consensus (for example, by convening conferences or sponsoring work on this issue in prominent think tanks). This would have the benefits of both encouraging coordination on this issue by policymakers, and improving our understanding of what policy changes are most likely to be beneficial.

We don’t have a strong sense of which of these funding approaches might be most promising overall.

How likely is additional funding to make a difference?

We suspect that land use reform is unusually tractable for an issue of its importance, because:

The opposition to land use reform does not seem organized on any more than an ad hoc, local level, though it can be extremely strong at that level.

Support for land use reform seems to cut across partisan boundaries.

Some economists think that most of the harm caused by land use restrictions comes from a few very expensive metropolitan areas. If the need for reform is concentrated in a few key metropolitan areas, an advocacy effort with far less than universal coverage may achieve most of the potential benefits.

There are several interest groups that are potential allies on this issue. Groups that directly participate in development – e.g. real estate developers and construction workers – may benefit financially from laws that permit denser cities. Public employee unions may also benefit from increased municipal revenues in growing cities. Since land use reform would lower housing prices by increasing supply, in principle it ought to appeal to affordable housing advocates, though in practice the situation is complex; environmental advocacy groups appear to have a similarly ambiguous position.

On the other hand, changing local policy may be difficult if land use restrictions are an economically rational response to the incentive by homeowners to protect the value of their investments.

Some major foundations support work around affordable housing, but we have not found a large campaign specifically around relaxing regulations to increase housing supply (see footnote for details). Some local organizations are supportive of, and in a few cases directly advocate for, permitting increased and denser development. Generally, these organizations are quite small.

Questions for further investigation

Our research in this area has been relatively limited, and many important questions remain unanswered by our investigation. Further research on this cause might address:

How much room is there for national research or advocacy on this topic, given that actual progress on this issue is likely to be local or regional?

How feasible is it to support new groups in an area when there does not appear to be an existing organized effort to support?

What other interest groups could be most effectively mobilized in support of reform on this issue?

How likely are advocacy efforts to overcome existing opposition? How powerful are the contravening forces?

Our process

We decided to investigate this area because there appears to be an expert consensus that land use restrictions cause substantial economic harm, but little advocacy relative to its importance. The work of journalists such as Matthew Yglesias and Ryan Avent helped bring the issue to our attention.

We’ve spoken to roughly a dozen individuals in our exploration of this issue to date. Public notes are available from our conversations with:

Sources