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The Consequences of Land Use Regulation: Evidence from Boston

Posted by: Chris Steins
Thanks to: Hugh Pavletich
25 October 2006 - 1:00pm

Over the past 30 years, eastern Massachusetts has seen a remarkable combination of rising home prices and declining supply of new homes. Edward L. Glaeser and Bryce A. Ward examine whether reductions in new supply reflect a real lack of land or a response

From the Abstract:
Over the past 30 years, eastern Massachusetts has seen a remarkable combination of rising home prices and declining supply of new homes. The reductions in new supply don’t appear to reflect a real lack of land, but instead reflect a response to man-made restrictions on development. In this paper, we examine the land-use regulations in greater Boston. There has been a large increase in the number of new regulations, which differ widely over space. Few variables, other than historical density and abundant recreational water, reliably predict these regulations. High lot sizes and other regulations are associated with less construction. The regulations boost prices by decreasing density, but density levels seem far too low to maximize total land value.

From the conclusion:
"Over the last 25 years, greater Boston has seen a remarkable increase in housing prices and a decline in the number of new units. This change reflects increasingly restricted supply. The reduction in supply doesn't reflect an exogenous lack of land. There has been no significant increase in density levels associated with declining construction.

Development is greater in dense places. Lot sizes are increasing, not falling. The value of land when it extends an existing lot is not great. Instead, the decline in new construction and associated increase in price reflects increasing man-made barriers to new construction.

In this paper, we catalog the barriers to new construction. Minimum lot size is the most important of these barriers, but wetlands regulations and septic rules have also become increasingly tough. All barriers have all increased over time, but our ability to explain where they have been adopted is quite limited. The two most important explanatory variables are early twentieth century density patterns which correlate well with current minimum lot sizes and the presence of recreational water which explains water-related rules."

Full Story: The Causes and Consequences of Land Use Regulation: Evidence from Greater Boston (PDF, 200KB)
Source: Harvard Institute Of Economic Research, October 21, 2006
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Housing Affordability and Land Use Regulations

Submitted by Bob Cowell on Thu, 10/26/2006 - 06:48.

First, let me say that I beleive housing affordability is a significant issue in many areas of the country, second let me say that I too believe that regulations play a role in this issue. However, I find it problematic that what I perceive as market factors is so often ignored when analyzing housing affordability. We currently sit in the midst of a glut of housing supply. Fromwhat I understand this is largelya result of lack of demand, that is there are enough houses on themarket and rents are low enough that buyers are willing to sit out the market and wait for prices to drop before they enter. I ask what possible incentive exists for more homes to be built? I understand that an increase in supply would lower the price of new homes, but why would the development community (especially as this industry becomes more and more dominated by large firms) wnat to supply even more homes only to watch the price they can get for these homes continue to fall.

Is it not possible that a large part of the high cost of housing can be attributed mostly to two things. First, supply and demand and second greed? The first is simple in my mind. Just as in the case of nearly every industry out there, the housing industry has finally figured out it is in their best interest to keep the supply of homes as close to the demand as possible, this is akin to the just in time delivery that all other businesses have practiced for years. I beleive that if you look at the statisitics supply of housing as realted to per capita is lower than other times in our history, just I suspect as the number of cars, stoves,and tv's that are sitting in inventory have declined to be very near the projected demand for these products.

The second issue deals with greed (I use this term in as positive a manner as I can). Again, in my mind this is simple we all want the most money we can get for something. The current homeowner, the property owner, and the developer all have incentives to seek the highest return on their investments as they can. Remember that one persons unaffordable housing price is another persons equity to send their children to college, start a business, etc. Again, what incentive do any of these players have to seek a reduction in price (i.e, property values)?

How can arguments be made (and they are by many) that we need to do everything we can to keep investments in housing (i.e., equity) as hgih as possible as they are a key driver in the middle class America and at the same time argue for the need to drive down housing prices (i.e., property values) by "over-supplying" the market. None of this makes much sense to me, but then maybe I am missing something.

Regulations do play a role in housing costs and in housing value, but so does old fashioned supply and demand and seeking maximum return on investments. The issue is far more complex than presented in this study. It is far more complext than a simple regulation is bad, unfettered development is good argument. Just my thoughts. Thanks

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