Rules that wreck housing affordability
Burdensome zoning regulations raise building costs in the most productive cities
The White House recently released a report on housing affordability, pointing out that rental rates are rising faster than incomes in many cities, thanks to a lack of housing supply. Land-use regulations are the domain of local governments, but as the Obama administration explained, zoning policies also have national importance. Washingtonians, along with city dwellers across the country, are shouldering the costs of zoning rules intended for developers through higher rents and home prices, even contributing to bigger problems like income inequality and economic stagnation.
It hasn’t always been this way. The cities of New York, Los Angeles and Boston all have one thing in common: They would be illegal to rebuild today. Many of their great buildings are taller, closer together and provide less parking than current laws require. In fact, zoning rules that dictate what can — and cannot — be built in our cities have grown so restrictive over past decades that any major project typically needs special approval from city planners.
Nearly half of American renters spend more than 30 percent of their incomes on housing. They make this sacrifice in order to live in the cities that offer them the best economic opportunities. This is particularly difficult for the lower-income population.
The White House report cites Mercatus Center research by Sanford Ikeda and me on the regressive effects of land-use regulations, showing how zoning rules that drive up the cost of housing act as a tax on the low-income renters who can least afford it. Large lot requirements, height limits and parking mandates also make housing needlessly expensive while offering few benefits.
The White House report includes policy recommendations for municipalities, starting with the importance of creating a system of as-of-right development. Under as-of-right zoning rules, a developer seeking to build something that is in accordance with current zoning doesn’t have to go through a discretionary review process under which projects can be vetoed by planning departments, city councils or community groups. Without as-of-right development, each new development has to go through a lengthy and expensive approval process that drives up housing costs.
Washington, D.C., is home to many proposed buildings that take years to receive approval. Since 2000, the Washington Metropolitan Transit Authority has sought to redevelop the sprawling surface parking lot surrounding its Takoma station. A local developer has submitted multiple proposals to build townhouses or apartments at the site, but more than a decade later, the Office of Planning has not yet granted zoning approval because of neighborhood opposition to accommodating new residents.
The process that the proposed Takoma development has gone through is all too common. The costs that developers incur in legal fees, delay and uncertainty end up being passed on to renters and future homebuyers. San Francisco, for example, has the most constrained housing market in the country. Harvard economist Edward Glaeser estimates that more than 50 percent of the city’s housing costs are due to regulatory constraints alone. With less burdensome regulations, a $3,000 a month San Francisco apartment could be rented for as little as $1,500.
These rules also effect the economy as a whole. The country’s most productive cities that offer the highest-paying jobs also have some of the highest housing costs. Residents of expensive cities make budgetary sacrifices and endure long, stressful commutes in order to pursue opportunities that they hope will improve their families’ lives in the long run. But high rents in prosperous cities cause some workers to forgo opportunities because they simply can’t afford to live where the best jobs are. Some Americans are stuck in bad jobs or long-term unemployment because they can only afford to live in a depressed area. Economists Chang-Tai Hsieh and Enrico Moretti estimate that zoning rules in the country’s most productive cities cost Americans trillions of dollars in lost output each year.
President Obama deserves credit for recognizing a serious economic problem that is escaping our attention. What’s happening in Takoma is happening in every expensive city in the country, resulting in lost opportunities for the people who need them the most. Reforms to city land-use regulations would not only improve the lives of local renters, but could also improve economic growth for the whole country.