The impact of housing supply restrictions

by on May 18, 2017 at 1:26 pm in Economics, Law | Permalink

I calibrate the [spatial] model to the U.S. economy and find that the rise in regulation accounts for 23% of the increase in wage dispersion and 85% of the increase in house price dispersion across metro areas from 1980 to 2007. I find that if regulation had not increased, more workers would live in productive areas and output would be 2% higher. I also show that policy interventions that weaken incentives of local governments to restrict supply could reduce wage and house price dispersion, and boost productivity.

That is from Andrii Parkhomenko (pdf), a recent job candidate, there are 62 pp. at the link, and for the pointer I thank Tyler Ransom.

Here is a related column by Noah Smith.

1 Millian May 18, 2017 at 1:38 pm

Locations don’t grow productivity, people do. Move a lumberjack to San Francisco and you get a lumberjack.

2 Dude May 18, 2017 at 1:47 pm

Tools and teams matter. Especially in modern economies.

3 Ian Monroe May 18, 2017 at 1:47 pm

Move a software developer to SF and the software developer is more productive, since they can change employers easily and find someone hiring in their precise expertise.

4 dearieme May 18, 2017 at 3:28 pm

Plus they don’t waste time mowing the lawn, because they can’t afford one.

5 mulp May 18, 2017 at 11:58 pm

Housing is cheap in Detroit. What regulations prevent SF workers buying cheap homes with lawns in Detroit?

6 Millian May 18, 2017 at 4:51 pm

Sure, but the industry pays enough to let thousands of kids move to SF. High housing costs price out the people who don’t enjoy the sector-specific productivity fillip.

7 Lewis May 18, 2017 at 1:51 pm

Of course locations grow productivity. There is a huge literature on agglomeration economies. if you could disprove it all rigorously you could win a nobel prize and go on the speaking circuit.

8 prior_test2 May 18, 2017 at 2:54 pm

‘Of course locations grow productivity.’

Until they don’t – look at the capital cities of empires to see how that works. For a classic example, Rome’s history does not require all that much effort to learn..

9 Harun May 18, 2017 at 3:07 pm

Yes, for sea harbors, and such.

But for software development? Its not the location but the people and human institutions located there.

Move all computer programmers from San Jose to Maine. Are you claiming the soil of San Jose will re-grow into a computer programming mecca again?

10 Doug May 18, 2017 at 4:41 pm

No one ever said anything about the soil or geography. But the fact that so many talented software engineers are in San Jose, means that San Jose is a high productivity location. Yes, if they all coordinated to move, then there destination would be the new high productivity location. But that’s not how it works. If a single engineer moves to rural Iowa, he will now become low productivity.

11 Alex FG May 26, 2017 at 4:39 am

@Harun: Yes, it would. As software developer I can attest, that one’s productivity grows exponentially if you surround yourself with other high-skilled people. Same usually goes for the sciences as well.

12 Millian May 18, 2017 at 4:55 pm

Yeah – locations not random exogenous shocks – the low-income person in (say) retail isn’t really going to become more productive, but will maybe increase profits by moving to a higher mark-up location.

13 Milo Fan May 18, 2017 at 7:30 pm

The economist definition of productivity is not the same as the common sense definition. If person X pays 5$ to Bob for a service and he moves to an area where Jim will pay him 7$ for the same job, his productivity goes up.

14 Gabi May 18, 2017 at 7:53 pm

Sure, but people who move to SF aren’t randomly drawn and dropped there. Same goes for people who leave SF. You take a perch there if you are more productive there than you would be somewhere else. Making perches artificially scarce reduces the gains from trade available to all.

15 Slocum May 18, 2017 at 8:55 pm

“You take a perch there if you are more productive there than you would be somewhere else.”

Would I, personally, have been more productive in Silicon Valley? Perhaps. But certainly nobody was going to pay me nearly enough for it to make up the ~5x difference in house prices in Palo Alto vs the college town I live in now. I have friends who made the move to the SF bay area after graduation and my sense is that their quality of life is kind of lousy compared to what they could had with their skills and talents deployed elsewhere. Perhaps society is slightly better off for having had them in Silicon Valley, but I don’t think they, themselves have been.

16 Nathanael Johnson May 18, 2017 at 1:44 pm

I think the Noah Smith column link was supposed to be this one?
https://www.bloomberg.com/view/articles/2017-05-17/taking-on-nimbys-in-the-quest-for-growth

17 Dzhaughn May 18, 2017 at 4:42 pm

I am afraid your links to Bloomberg columns consistently have incorrect URLs, good Dr. Cowen.

18 Jeff R May 18, 2017 at 5:52 pm

Market failure.

19 Steven Sailer May 18, 2017 at 2:00 pm

I grew up in the San Fernando Valley near Beverly Hills and Malibu. From 1969 onward, it was obvious that Beverly Hills and Malibu were using environmentalist regulations on development to keep out Valley lowlifes like me.

The irony is that most of the residents of Beverly Hills and Malibu think it outrageous that their fellow Americans want to keep out foreigners from immigrating in such vast numbers the way they keep out their fellow Americans.

20 mulp May 19, 2017 at 12:02 am

If Beverly Hills and Malibu were densely populated and polluted which lots of congestion, crowded schools, poverty, crime, would you still want to live there?

21 Steven Flaeck May 19, 2017 at 1:41 pm

If the answer were any but “yes”, one wonders how they had become so densely populated in the first place….

22 Robert Pope Jr. May 18, 2017 at 2:05 pm

In my novel Jack’s World, I use “beyond” 233 times.

How’s Beyond Complacency?

23 Barkley Rosser May 18, 2017 at 3:32 pm

This is one issue where my libertarian tendencies are in synch with Tyler’s. I agree that most of these housing restrictions in places like the SF bay area and the Boston area are pointless, literally rent seeking, inefficient, and more generally unjustifiable, as well as damaging economic growth more generally. I do support some zoning, unlike what one finds in Houston, but what we see in these places has gone way beyond reason to create real economic damage.

24 mulp May 19, 2017 at 1:23 am

“Fischel (2001) describes reasons why homeowners might want stricter residential land use
regulation, but argues that most of the restrictions capitalize into higher house values. In
practice this makes it difficult to distinguish the actions of owners that are explicitly driven
by their willingness to increase or maintain the house value from those that are aimed at
improving local public services, controlling congestion, etc.”

So, you believe that regulations and taxes to provide better schools, better recreation, etc, are pointless because housing is merely a place to warehouse workers who need to do nothing but work?

That a town that acts collectively to make the community better for families are doing so only to inflate the price of their houses, not to make the town where they own a house a better place to have a family?

Nothing in the paper considered the infrastructure required to build houses that have actual productive value.

Building houses in an arid region with no water would likely be cheap, and the houses would sell for low prices, but without water, they would be unproductive as houses for raising families. Ditto for houses without roads, schools, police and fire, etc.

If a town with a school built circa 1965 were to double in size, taxes would need to be hiked on the people who paid taxes for decades to pay off the debt to build the school and then maintain it, in order to build another school, …

… unless zoning, whatever, either
1) makes the new housing hostile to kids so only old people or single people without kids move in or
2) sets lot sizes so large the houses built cost 3 times the rest of the existing houses so the current tax rates will raise more taxes per new house to pay to service the debt on a new school.

I have lived for three decades in New Hampshire, and basically all zoning and other regulation is done to ensure no hikes in property taxes and no sales tax or income tax. That means the number one priority is keeping out kids and poor young people who will have kids, where “poor” is any family with income less than about $80,000.

After making sure taxes aren’t hiked to build schools, making sure taxes aren’t hiked to build water and sewer, hiked to address road congestion, hiked to build new roads, hiked to fix roads built by developers, hiked provide emergency services, etc.

Now the lack of young people to fill jobs is a well known problem, but everyone wants a solution that will cost everyone nothing. No taxes on anyone to pay for schools to educate the relatively few kids raised in New Hampshire, etc.

25 Jay May 19, 2017 at 1:08 pm

What’s wrong with Houston zoning or lack thereof? I’m from the area (The Woodlands) and the entire metro area has boomed in the last decade. Are the previous home owners slightly worse off due to increased congestion and development…of course…but hundreds of thousands of people are WAY better off now for moving to the area (or they wouldn’t have in the first place) and long term the area is richer because of it.

26 Franz Kafka May 18, 2017 at 4:02 pm

Vaporized oxalic acid, or a 3.2% solution of oxalic acid in sugar syrup, is used by some beekeepers as a miticide against the parasitic varroa mite.

Oxalic acid is an organic compound with the formula C2H2O4. It is a colorless crystalline solid that forms a colorless solution in water

27 rayward May 18, 2017 at 4:23 pm

NIMBYs and NAMBYs and LITTLE BAMBYs, I like Paris. I really like Paris. Paris doesn’t have sky scrapers. Not because developers don’t want to build them, but because “regulations”. Would Paris be Paris if the skyline looked like Manhattan? I don’t think so. But times are changing. Paris has approved the ‚ÄúTour Triangle”, a 590-foot tall building in the 15th arrondissement. Are the floodgates open? I hope not. I prefer “regulations”.

28 JWatts May 18, 2017 at 5:46 pm

Rich lawyer prefers regulations.

29 Mr. Econotarian May 18, 2017 at 9:47 pm

Paris had a building height limitation of 37 meters since 1977. But in 2010, Paris actually increased allowed building heights; residential buildings can now reach a height of 50 meters and commercial buildings can go as high as 180 meters.

Paris population density is actually very high, 55,673 per sq. mi. Compare to New York 27,012 and San Francisco, 17,179.

Most of San Francisco has a 12 meter height limit. It could easily double its population by having a Paris building height limit on residential buildings.

30 JMCSF May 19, 2017 at 11:50 am

Ever heard of the La Defense business district? There is a large cluster of office towers similar to London’s Canary Wharf.

Paris has 16 towers over 500 feet (excluding Eiffel), and 73 over 100 meter/330 feet. Of course these are not built in the historic core.

31 Jay May 19, 2017 at 1:11 pm

Well of course you as a tourist want Paris to be Paris forever, but some poor Joe trying to get to work in the morning that can’t find housing anywhere close would prefer a shorter commute.

32 Colin May 18, 2017 at 5:04 pm

Now I’ll hold my breath while self-described housing activists and advocates for the poor clamor for housing deregulation. Here is one example of what I’m talking about: https://www.washingtonpost.com/local/dc-politics/is-this-champion-disrupter-of-dc-development-a-crusader-or-an-extortionist/2017/05/16/64460b88-3279-11e7-9534-00e4656c22aa_story.html

33 The Anti-Gnostic May 18, 2017 at 6:56 pm

Surely there’s a limit to this. San Francisco could allow gigantic, 30-story a side apartment flats on every block but at some point you’re still on a peninsula surrounded by water. Not to mention, smart, wealthy people with families tend to favor lower population density and will do what they always do: buy up housing in human scale, lower density Palo Alto and vote for a local government that keeps it that way.

34 Mr. Econotarian May 18, 2017 at 9:58 pm

Imagine if the square mile of Alameda Naval Air station could be built with the population density of Shanghai’s inner core – we could add 120,000 residents to the Bay Area. It could be car free, and connected directly to BART’s lines through West Oakland.

35 Alain May 18, 2017 at 6:59 pm

Noah Smith’s article was perhaps the worst in a succession of bad articles. Markets are forward looking. They priced in the positive effects of the Trump administration’s light touch with regulation (as opposed to the constant Obama hammer) almost immediately. Why would noah expect a constant climb there after? I suppose he is a liberal and therefor has no idea how markets work?

36 spencer May 19, 2017 at 1:03 pm

In the months leading up to the election the S&P 500 P/E on trailing operating earnings was trading just over 21. In the months since the election the same P/E is trading just below 21. That does not look like the market is pricing in much of a boost from Trump’s light touch.

Actually, S&P earnings bottomed shortly before the election and was rising at double digit rates in the first quarter. This more than explains the rise of the S&P 500 since the election.

37 GoneWithTheWind May 18, 2017 at 7:47 pm

If you want more of something then reduce or eliminate the taxes and regulations. If you want less then increase taxes and regulations. For reasons that sometimes defy common sense America is full of people who are willing to put up their own money and work 80 hours a week to build a business. And our government(s) are full of people committed to stopping them. That’s the entire story in three sentences. You don’t need a study or a book or a degree in economics. That’s all you need to know. Now the question is do we let productive people succeed and create jobs or do we stop them???

38 ohwilleke May 19, 2017 at 8:19 pm

Two observations.

1. Land use regulations purportedly has a 3% impact on wage growth, with 97% of wage growth due to other causes.

2. 2007 was an outlier pre-crash year for real estate values that substantially corrected immediately thereafter and wasn’t supported by fundamentals. Meanwhile 1980 was a near trough in real estate values.

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