Major urban centers across the United States are experiencing steep increases in housing prices. Economic and population growth have created increased demand for housing. Wages have not been able to catch up to home prices.
Politicians come to the rescue with policy proposals: subsidies, rent controls, etc. — to solve the housing affordability crisis. Governor Jerry Brown signed a package of housing-affordability bills into law recently. They include more state funding for below-market-rate housing. They offer cash to local governments to create high-density housing next to public transit. These are not permanent solutions.
The real issue in these discussions is housing supply. Housing supply has not been able to keep up with the demand for housing in large urban centers. Most policymakers and pundits overlook this elephant in the room. And, the cause of much of the housing supply dilemma is onerous zoning regulations. These regulations reduce the supply of housing units in the market and increase the cost of those homes that are finally built.
Understanding Zoning Regulations
Zoning regulations are a type of land-use regulation that is under the purview of city or county ordinances. Local governments determine how we can use property within their confines. These laws limit the commercial use of land and segregate it from residential neighborhoods. Zoning laws may also set standards for buildings and the land area surrounding them. This may include size, dimension, and scale limitations. These standards aim to promote urban growth in a reasonable and sustainable fashion.
The zoning approval process is no simple matter. Builders must jump through many bureaucratic hoops for planning commissions to approve their projects. Over time, the number of zoning regulations has increased. They have become a regulatory fixture that all developers must face when planning out their projects. We have represented developers and see their economic analyses – one of the glaring line items is the cost (and time) spent in satisfying development and zoning regulations, which costs get added to the selling price of a residential unit.
The Negative Economic Effects of Zoning
At first glance, zoning regulations make sense. They allow cities to control neighborhood traffic, contain pollution, and preserve home values. But as time passed, the scope of zoning laws has expanded beyond their original goal.
Modern zoning laws now dictate aesthetic standards for creating pleasing urban environments. They also aim to protect the environment. This is a noble cause, but their diverse objectives conflict with one other. They create a set of unintended consequences that harm consumers.
They’ve mutated into a multi-layered regulatory tangle.
City planning bureaucrats have considerable power in the approval process of housing developments. This power delays or even bans the construction of certain housing units. This reduces the supply of housing.
Excessive zoning laws are at the root of the supply problem. This has created housing affordability crises in major cities across the country. When local governments restrict commercial from residential areas, it decreases the housing supply. So, the decreased housing supply leads to price increases in housing. This is a stark reflection of the perverse effects of zoning restrictions.
Vanessa Brown-Calder illustrates how increased zoning regulation increases average home prices in 36 states. The states that increased land-use regulations the most tend to have higher housing prices.
Socially Destructive Effects of Zoning
It’s not just an economic issue, either. Onerous zoning regulations also have questionable effects on social cohesion. Jane Jacobs coined the planning term “Eyes on the street.” This is where the presence of people in mixed-use areas could prevent criminals from committing crimes at will. But most current zoning codes hinder the development of a mixed-use environment.
Jacobs shows that stable urban areas emerge from a voluntary human action, not so much from central planning. Planning bureaucrats try to design cities by fiat and create a host of unintended consequences. They breed high crime and create increased housing costs that hurt the people they intend to help.
Current Solutions: Half Measures at Best
Current debates tend to focus on various interventionist strategies, as opposed to private solutions. Common proposals include rent controls and subsidized housing, which are full of unintended consequences. Rent controls function just like any other price control. Low artificial rents lead consumers to demand more housing than producers are willing to supply. When housing demand exceeds supply, housing shortages emerge. This is a common occurrence in cities that put in place rent control.
And subsidized-housing misses the mark by subsidizing the dwellers and not the dwellings. So, the number of families looking to occupy subsidized units increases instead of the number of housing units.
Give the Free Market a Chance
The solution is to increase housing supply by allowing markets to meet the demand. Policymakers should have zoning deregulation on the table.
Many believe that deregulating zoning will lead to a chaotic environment leading to chaos, crime, and decay. But this was not the case throughout most of US history.
Today, cities like Houston have a liberalized zoning and entrepreneurial environment. It seems to have served Houston well, as it has turned into one of the most affordable and prosperous metro areas in the nation.
Housing policy should focus on consumers. It should not be a political tool for entrenched developers or housing bureaucrats. It should strike at the root of the problem — housing supply. It should not hack at the branches with more of the same policies that created the current supply crisis in the first place.
Housing is not a right, but consumers deserve better when it comes to housing variety in the marketplace. And the best way to do that is by hacking away at cumbersome regulations like zoning ordinances.
Zoning, Land-Use Planning, and Housing Affordability, Vanessa Brown-Calder, Cato Institute, October 2017
Death and Life of Great American Cities, Jane Jacobs. 1961
Zoning, the Nemesis of Housing Affordability, Institute for Economic Research, José Alberto Niño, November 2017