Land-use regulation makes housing less affordable

Published October 1, 2002

On August 12, 2002 the Wall Street Journal described a 350-square-foot former public toilet in south London that developers are turning into a “stylish apartment.” They expect to sell it for around $200,000. “Believe me,” a developer told the Journal, “there will be a lot of interest.”

First-time homebuyers in England will be more interested in a two-room house 60 miles from London, affordably priced at $92,400. The house—which the Journal described as a “beach hut”—is made of packing crates and has no plumbing or electricity.

“In the past decade, the U.K. has been building fewer houses than at any time since World War II,” reported the Journal. The resulting housing shortage is reflected in the fact that people spend an average of just 18 minutes looking at a house before making an offer.

The Journal attributed the housing shortage to “bureaucratic difficulties in getting planning permission—especially in protected areas of greenery surrounding cities.” As a result, “houses are so scarce that people will buy anything.”

This seems likely to be the future of housing in Portland and other “smart-growth” cities in the U.S. Housing affordability is being strongly influenced by government planning and regulation.

What drives housing prices?

On August 9, USA Today printed a housing index developed by Coldwell Banker for scores of U.S. cities. The index is based on the median price of a mid-level, 2,200-square foot, four-bedroom, two-bath home. Such a home sells for $1.26 million in Palo Alto, California, but only $101,000 in Yankton, South Dakota. Table 1 presents mid-level home prices for selected cities, along with the growth rates of the city and urban area from 1990 to 2000.

A scan of the numbers suggests there is little correlation between home prices and growth rates. In the fastest-growing urban area in America, Las Vegas, the mid-level home sells for $182,000. Despite slow growth and the dot-com collapse, housing prices in the San Francisco-Oakland and San Jose areas remain several times that amount.

By contrast, there is a strong correlation between land-use regulation and housing prices. Land-use regulations are severe in the San Francisco-Oakland and San Jose areas, in Boulder, and in Maryland, Massachusetts, and Oregon. Cities in these states and urban areas have the highest housing prices. Land-use rules are weak in Arizona, Idaho, Nevada, and Wyoming, and cities in these states have some of the lowest housing prices.

Of course, housing price is only part of the affordability equation. The other part is income. If incomes in Seattle are double those in Las Vegas, then housing in Seattle (which costs slightly less than twice as much as in Las Vegas) may actually be the more affordable. Alas for Seattlites, Seattle household incomes are less than 50 percent greater than those in Las Vegas.

Measuring “housing opportunity”

The National Association of Home Builders regularly compares median incomes with median home prices for nearly 200 metropolitan areas. The group’s “housing opportunity index” is the percentage of homes affordable to a family of median income in each metropolitan area. Table 2 compares the latest edition of the index (first quarter 2002) with the 1990s’ growth rates for those areas.

The r-squared (a statistical measure of correlation) between the index and growth was less than 0.007, which is no better than random (i.e., two random number sets easily score r-squareds higher than 0.007). Thus, housing affordability has little relationship with growth. Instead, other factors, such as land-use regulation, determine affordability.

According to the latest edition of this index, the nation’s least-affordable housing markets are almost all in California, Massachusetts, and Oregon, all of which heavily regulate land use. Affordable fast-growing regions are in Arizona, Florida, Georgia, Nevada, and Texas. Except for Florida, all of these are lightly regulated. It would be interesting to know how Florida maintains its affordability despite its regulatory environment.

Defenders of land-use regulations say planning makes cities more livable, so naturally they would be more desirable and housing would be more expensive. But is Portland really more livable than Albuquerque? Or Oakland more livable than Las Vegas? San Francisco is a fun place to visit, but is it really four times more livable than Phoenix?

Attempts to make housing more affordable through “inclusionary zoning”—an ordinance requiring developers to offer a certain percentage of their homes at prices affordable to low-income buyers—will only make the problem worse. The “affordable housing” provided by such measures will make up a tiny percentage of the entire housing market. But developers will have to increase the cost of the other homes they build in order to cross-subsidize the affordable units. This will drive up overall market prices as resellers take advantage of higher new home costs.

The main beneficiaries of inclusionary zoning won’t include many of the low-income people most hurt by housing regulation. Instead, recent college graduates, whose incomes are low enough to qualify for low-income housing but whose lifetime earnings are likely to be high, will probably snap up much of the low-income housing required by inclusionary rules.

How to get more affordable housing

Further research should develop an index of regulation that could be directly compared with, say, the NAHB housing opportunity index. Several counties in Nevada have no regulation—they do not even require building permits—and thus would score a 0 on the index. The highest level of regulation might be found in cities such as Boulder or some parts of the San Francisco Bay Area, which strictly limit the number of new building permits issued each year.

The most important thing home builders, realtors, and other affordable housing advocates can do, however, is to put a human face on unaffordable housing. The South Carolina Landowners’ Association is a coalition of realtors and low-income, often minority, landowners that is fighting land-use regulation in that state. The landowners are badly hurt by large-lot zoning and other planning requirements, but they lack lobbying skills. With the assistance of realtors and others, they are having an affect on state and local politics.

John Templeton, one of the association’s cofounders, was honored in 2000 by the South Carolina Association of Realtors as the Legislative Grass Roots Realtor of the Year. This group provides a model that people in other regions should emulate.

Randal O’Toole ([email protected]) is senior economist with the Thoreau Institute (

For more information …

on housing affordability, including a four-page brochure addressing the nation’s “silent housing affordability crisis,” visit the Web site of the National Association of Home Builders at