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Dueling zoning regulations don’t work

By John Garen

The subprime mortgage situation should sharpen our focus on issues related to housing and home ownership.

Much of the recent coverage relates to lax conditions under which lenders wrote many subprime mortgages and how that problem has been compounded by a flat housing market.

However, running ahead of this damaging combination were extraordinarily high housing prices in many parts of the country. Many individuals applied for, and received, subprime mortgages who otherwise might not have purchased a home.

In many cases, the high price of homes left buying out of reach for those in lower income brackets, which raised the issue of “affordable” housing and prompted “inclusionary zoning.” This requires new developments or redevelopments to set aside a certain percent of the development for low-income earners.

But before we feel triumphant that zoning serves as the salvation for low-income earners seeking a home, we need to look at what leads to high-priced housing. And guess what? It turns out that zoning is one of the factors.

Of course, several causes come into play, including population and employment growth, construction costs and income. And the weight of each depends on location. But research by Edward Glaeser, Joseph Gyourko and Raven Saks reported in “Why Have Housing Prices Gone Up?,” a National Bureau of Economic Research Working Paper, makes it clear that zoning and land-use restrictions played a major role.

These researchers attribute much of the large price increases during the past two decades to regulatory/zoning limitations on new construction and development. Cities where these limitations appear strongest feature the most significant price increases.

Such restrictions often come with the innocuous sounding names such as “open space” or “smart growth.” But the unmistakable result remains the same: restricted availability of land, increased costs for available land and a rise in the cost of housing on that land.

In this way, zoning reduces the availability of lower-priced housing. And the question becomes, “Why have these economically dueling zoning regulations?”

Clearly, well-planned zoning can play a positive role. Generally it leads to land uses of similar types clustered together that avoid, for example, noisy, busy industrial and commercial development in the midst of residential areas. Sometimes contracts lead to the clustering, but often it comes through municipal government zoning.

The same zoning techniques result in more open space, lower densities and more green space and parks – pleasantries I like but that research shows leads to higher housing prices. And those pleasantries appeal doubly to folks with higher incomes – who already own high-priced homes – because land-use restrictions create the pleasantries and increase the value of the homes they own.

Helping the poor afford housing through inclusionary zoning seems odd. High-income earners gladly pay for things others don’t find as appealing such as swimming pools, tennis courts, decorative walls and green space with landscaping. We ought to allow higher-income earners to buy these without forcing low-income earners to do the same. But “inclusionary zoning” may not allow that.

This quandary leads to one response: below-market price controls on homes designated for low-income buyers.

This would seem to force developers to bear the cost of amenity provision for the low-income subset of homes by forcing them to accept a lower price for these units. However, making up that lost revenue probably leads developers to fold the loss into the price of other units.

This means sticking the cost onto homes for high-income earners. Long-time homeowners remain insulated from this cost. It gets foisted onto new residents and equates to a peculiar form of taxation – transferring purchasing power from higher-income homebuyers new to the area to low-income earners looking to buy in the same place.

Concern over the plight of the poor implies developing an effective social safety net. But “inclusionary zoning” does not fill the bill.

It needlessly restricts the freedom of builders to provide developments that many homeowners desire while helping only a few.

We can do better.

– John Garen is department chair and Gatton Endowed Professor of Economics at the University of Kentucky.

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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