How Building Regulations Subsidize Mansions

by on February 20, 2018 at 7:25 am in Economics | Permalink

Regulations that prevent land from being fully developed raise the price of housing. That’s true but land use regulations can also make some types of housing less expensive. In particular, Jaap Weel has a good post explaining how land regulations subsidize mansions.

Consider the buildings below: a mansion on a 1 acre lot in Atherton, and a 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City. The mansion just sold for $6m. The condo building, when finished, will probably fetch hundreds of millions.

If it weren’t for Atherton’s zoning code, you’d never be able to buy that mansion for a mere $6m. A developer that wanted to tear it down and build condos could bid far more than that. But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.

In a market economy bidding tends to move resources from low-valued uses to high-valued uses. Regulations that prevent bidding freeze resources into low-valued uses–that’s bad for the resource owners and bad for society as the total value of production is reduced but it can be good for the consumers of low-valued uses.

Addendum: For more on floor area ratio regulations, see my video on skyscrapers and slums in Mumbai.

1 russell1200 February 20, 2018 at 7:35 am

Yes and the person who want to put a big concrete plant there will be able to outbid all of them. Have actually seen that happen in North Carolina in a county that had no zoning. Guess what? Zoning came along pretty quick after that.

The argument ignores externalizes. The condos might be “more valuable” individually, but to the homeowners, part of the value is that there are other fancy houses in their neighborhood. The Condo’s, or concrete plant, would devalue the land value, but not have to pay for that.


2 Doug February 20, 2018 at 7:47 am

This comment is completely ignorant of Coase’s theorem. If owner of Alice owns plot A and wants to preclude the Bob next door in plot B from developing a strip club, then there’s an efficient equilibrium that will satisfy both parties. If Alice’s demand to avoid the strip club outstrips Bob’s demand to develop the strip club, they will come to mutually agreed upon terms. And vice versa. This is true regardless of who “owns” the right to approve/stop strip club development. If Bob starts with total rights to the property, then him and Alice can create a deed restriction. If a restriction on the lot is already in place, then Bob can offer Alice enough to nullify it. Just human beings, property rights, and freedom of contract. Kind of how like every other single thing in the economy works. There’s nothing inherently special about real estate.


3 MMK February 20, 2018 at 8:05 am

I tend to agree with russell from practical experience. What he described is pretty common in Russia, which tends to either not have or enforce zoning laws. Coase’s theorem is all well and good but it flies in the face of simple observation.


4 Candide III February 20, 2018 at 9:23 am

FWIW, there is no word in Russian that would translate “enforce” or “enforcement”.


5 hamilton February 20, 2018 at 10:18 am

No, it doesn’t. You cannot see the counterfactual. That the concrete plant (or whatever it is that you think a person’s house shouldn’t have to be next to) is there is evidence that that’s the highest valued use. If it weren’t, the existing neighboring landholders were always free to buy the land. If you want to say they weren’t because of some *other* regulation, then ok, but that’s still not evidence against the Coase Theorem.


6 The Anti-Gnostic February 20, 2018 at 8:24 am

I would submit that human history demonstrates there’s something very special about real estate.


7 Candide III February 20, 2018 at 8:57 am

Coase’s theorem only applies in very restricted settings, which do not obtain in real estate. This old article by Nick Szabo should be obligatory reading for everybody citing the theorem:


8 Candide III February 20, 2018 at 9:28 am

TL;DR: Coase’s theorem ignores the possibility of negative-sum games arising from threats and coercion. Threats and coercion are often difficult to distinguish from harmful externalities. Negative-sum games, especially in presence of transaction costs, can be almost arbitrarily inefficient. Transaction costs (unless tautologically defined as “anything that prevents Coase’s theorem from working”) are only a part of the story, and not the most important part either.


9 Ignacio Concha February 20, 2018 at 9:00 am

Coase’s theorem assumes no transaction costs and no opportunism for reaching the optimal solution through negotiation of the parties. However, in the real world, you have transaction costs (it is difficult to negotiate with all parties involved) and opportunism (the last one will hold the deal hostage, etc.).

Hence, the government should attempt to eliminate the transaction costs and chances for opportunism or, if this is not possible, to try to arrive at the optimal solution by fiat. This is what zoning laws are supposed to do. The problem is that this does not work in practice either, as the government is often captured by interests groups that have it decide in their favor (as described by Marcur Olson).


10 Art Deco February 20, 2018 at 10:33 am

This comment is completely ignorant of Coase’s theorem. If owner of Alice owns plot A and wants to preclude the Bob next door in plot B from developing a strip club, then there’s an efficient equilibrium that will satisfy both parties.

Which somehow invariably fails to emerge in actual social life.


11 Anonymous February 20, 2018 at 7:49 am

I don’t agree that a concrete plant would be able to outbid the other uses. A concrete plant can go anywhere (or at least anywhere where there sufficient capacity for freight transportation is available), so it would go in an industrial area. There isn’t a massive demand to put heavy industry facilities up everywhere.

I would further argue that restrictions on placing heavy industry in a residential neighborhood and restrictions on increasing density are different in kind. Heavy industry facilities usually have a real physical nuisance: noise, smell or something else. Housing doesn’t.

Banning housing construction to increase the value of existing housing is pure rent seeking.


12 Borjigid February 20, 2018 at 8:54 am



13 not necessarily February 20, 2018 at 9:35 am

” Heavy industry facilities usually have a real physical nuisance: noise, smell or something else. Housing doesn’t. ”

You don’t have my neighbors, lucky you.


14 Mulp February 20, 2018 at 10:19 am

So, having bought your home in a suburban town, you are lobbying the town to rezone to allow multifamily workforce apartments in your town so three times the kids can attend the great schools that drew you to the town. You will also be lobbying for higher tax rates on real estate to triple the school funding for buildings and teachers.


I have yet to see Alex report on his efforts to convert the zoning in his block to bring in apartments next door to him that will serve low wage workers. Why not set an example for everyone else instead of telling others in other places how they should live so much differently than Alex.


15 Brickbats and Adiabats February 20, 2018 at 11:19 am

This is a strawman argument. It’s perfectly consistent with Alex’s argument that he supports any and all efforts to increase density of housing, without necessarily including “affordable” housing. That last is the bete noire of progressive activist types, and Alex never mentions it. In fact, if an area is valuable, the higher density housing is likely to be luxury condos rather than housing for low-wage workers. I would welcome it, as would Alex.

Remember second-order effects. Allowing higher-income people the ability to congregate in more desirable areas for lower cost frees up housing in less desirable areas and decreases housing costs for low-wage workers in the same general metropolitan area.


16 JB February 20, 2018 at 12:03 pm

Also, increasing the gross supply of housing in desirable areas is the only way to increase housing supply for the poor, without requiring them to live in places too undesirable to gentrify.

The current pattern in coastal cities with restrictive zoning goes:
1) Good neighborhoods are too expensive
2) Hipster rich people move into crappy neighborhoods
3) Developers slowly make those neighborhoods less crappy
4) Poor people are priced out and move to crappier ones
5) Poor people in other crappy neighborhoods actively make their neighborhoods even crappier, to discourage hipster rich people

If you replace (2) with “Developers build denser construction in already-good areas,” the hipster rich people will move there, allowing the poor people to improve their neighborhoods without pricing themselves out.

17 OldCurmudgeon February 20, 2018 at 12:40 pm

>ou will also be lobbying for higher tax rates on real estate to triple the school funding for buildings and teachers.

Maybe, maybe not. Using the OP’s numbers, the property’s accessed value would increase from “$6m” to “hundreds of millions.” The resulting additional property taxes could pay for a few teachers.


18 y81 February 20, 2018 at 8:49 am

Concrete plants definitely do not get located in areas where real estate is expensive. In fact, what you see in really expensive places, like NYC, is that industrial uses tend to leave the area as land prices rise.

Note however that Coase’s theorem does not answer the problem of negative externalities from incompatible adjacent uses, because of the collective action problem. No one neighborhood resident has the incentive to buy out the strip club, even though collectively they would be better off if it didn’t exist.


19 OldCurmudgeon February 20, 2018 at 9:52 am

There is no reason it needs to be ‘one’ neighborhood resident. FWIW, we have many solutions to the free rider problem.

Transaction costs might prevent this in practice, but that’s the real lesson of the Coase theorem.


20 Ray Lopez February 20, 2018 at 10:04 am

Where do aggregate companies and concrete making companies locate when land is dear? Given that transportation becomes expensive if such heavy materials have to be shipped long distances? Ergo it follows that every pricey parcel of real estate must have a “wrong side of the tracks” where such industrial users like concrete plants locate. East Palo Alto maybe?


21 y81 February 20, 2018 at 10:55 am

Absolutely. In the case of NYC, it’s more like wrong side of the river. Industrial uses tend to cluster, furthermore, because of the ease in transport, labor supply, etc. when there are other aggregate companies (or whatever) in the area.


22 GoneWithTheWind February 20, 2018 at 9:40 am

Replace the word “subsidize” with “allow” and the article is correct.


23 Art Deco February 20, 2018 at 10:38 am

Potshots at mansion-owners and barbers are not status-lowering on the arts and sciences faculty.

You’ll never see a discussion of deadweight loss derived from employment discrimination law in this forum.


24 Floccina February 20, 2018 at 10:10 am

How about a strong presumption in favor of allowing any residential build that would increase density.


25 OneGuy February 20, 2018 at 12:41 pm

Then who pays for the negative consequences of the higher density?


26 Anon February 20, 2018 at 1:36 pm

Should the same people paying also get paid for the positive consequences of higher density? Obviously cities exist for a reason, and are inherently dense. And the market demanding more density inherently says that it’s beneficial for some people.


27 John February 20, 2018 at 10:40 am

. The Condo’s… would devalue the land value

There is no evidence of that. The value of the land would increase as the legacy homes are demolished and condo buildings rise in their place. The land on Park Avenue didn’t decline in value when the single family mansions of the Vanderbilts were replaced by apartment buildings.


28 Bob from Ohio February 20, 2018 at 11:43 am

“Yes and the person who want to put a big concrete plant there will be able to outbid all of them.”

Neither site is big enough for a “big” plant.

Builders of concrete plants want cheap land, not $6 million dollar sites.

There are still nuisance laws/torts to stop foolish concrete plant builders from spending 10-15 times what they need for land.


29 Wei February 20, 2018 at 12:47 pm

The cement plant actually got put up in the hills in Santa Clara county where the limestone quarry is.


30 Jaap Weel February 20, 2018 at 3:00 pm

A concrete plant? Just a few miles from Sand Hill Road, the world center of the venture capital industry? That’s the highest value use of that land? Really?


31 athEIst February 20, 2018 at 6:53 pm

It’s a quarry(and cement plant)in the hills, not exactly prime real estate. After it is quarried out(a long time) it might be remediated with mansions and estates.


32 Jaap Weel February 20, 2018 at 7:37 pm

Ah, sorry about the out-of-order reply here. I meant this as a direct response to the top-level comment that literally seemed to suggest that (a) an argument against zoning that establishes exclusionary land quotas as a barrier to entry into a community is somehow invalidated by the fact that there is also nuisance zoning, and (b) a cement plant would be a higher value use of land in Atherton than single family homes just because this was the case in some random place in North Carolina that is economically in no way remotely similar to Atherton.


33 Charbes A. February 20, 2018 at 7:37 am

I think a city is better off having good houses than slums.


34 Floccina February 20, 2018 at 10:45 am

How about the people living in the city or who would like to live in the city? What is your definition of a slum?


35 Charbes A. February 20, 2018 at 11:00 am

The people living in he city benifit from better transit, less pressure over public services, lower populational density. I would not exchange my low-density house for an apartment under lax zoning laws.


36 Anon7 February 20, 2018 at 5:25 pm

They’re called favelas, not slums, and they’re great places to live.


37 athEIst February 20, 2018 at 6:55 pm

are they in Brazil, where Thiago lives?


38 Thiago Ribeiro February 20, 2018 at 8:09 pm

I will let you know Brazil is undergoing the biggest program of urban reform in the world. While poor people are hunted down in your beloved Beijing.


39 Thiago Ribeiro February 20, 2018 at 8:07 pm

In your country, they are called slums.


40 Jaap Weel February 20, 2018 at 7:39 pm

How does that relate to the piece? Are you suggesting that dwelling units at a density of more than one per acre are “slums”? Would you say that all of central Paris is made up of “slums”?


41 Thiago Ribeiro February 20, 2018 at 8:08 pm

I believe that high quality public services and low density are food for citizens. Speculators can make money far from our communities.


42 John February 20, 2018 at 7:43 am

Is this really true?

If ALL 1 acre lots in Atherton are zoned for high density condos, the supply of lots relative to demand from developers would be quite high. Furthermore, the bid from people looking for an “exclusive” community might disappear. Could you actually see values fall in this scenario?

If changing zoning restrictions turned these 6 million dollar properties into 30 million dollar properties, the objections of some die-hard NIMBYs aside, people would likely vote for it and move on.


43 asdf February 20, 2018 at 8:32 am

“If changing zoning restrictions turned these 6 million dollar properties into 30 million dollar properties, the objections of some die-hard NIMBYs aside, people would likely vote for it and move on.”

It’s a good question. I thought the NIMBY accusation is that they favor zoning because it helps them. If they favor zoning because it hurts them we might want to think long and hard about this rational economic actor thing.


44 Ignacio Concha February 20, 2018 at 9:04 am

Not everyone who opposes development are owners, many are renters who do not care about the windfall for landlords. Also, many people do not care about the long term, but can imagine the huge building next to their home.


45 John February 20, 2018 at 9:26 am

“many are renters who do not care about the windfall for landlords”

Yes, but renters are renting from landlords who do care about windfalls. I’d also suggest that the number of renters in places like Atherton is small relative to the population.

“Also, many people do not care about the long term, but can imagine the huge building next to their home.”

I agree that there are always going to be actors who aren’t profit maximizers or who fixate on short term costs rather than benefits; people who like the community just the way it is and will sacrifice dollars in the name of preserving the “neighborhood”. However, if the windfall is big enough, most people will come around. Additionally, as “asdf” points out, the prevailing NIMBY narrative is that they’re boosting their property values by limiting development. The claim above is that they’re limiting it. Can you have it both ways?


46 Ignacio Concha February 20, 2018 at 9:34 am

“the prevailing NIMBY narrative is that they’re boosting their property values by limiting development.”

This may be correct under some circumstances and certain time frames. if the development will change the character of the neighborhood, then property values of homes may go down in favor of other types of residents (e.g., businesses, etc.). In the short term, your property value may go down if they build a Walmart or a high rise next to you, and will take a while for the property to go up in value waiting for all of the neighborhood to change enough that someone will want your property for something other than a house (e.g., a Target or another high-rise).

However, some NIMBY is actually against boosting property values. Many people (especially renters) oppose developments that will change the neighborhood to gentrify it and make it too expense for them (maybe rents will go down on average in the city, but that particular neighborhood will become more expense as it gentrifies and the current residents will be priced out).

47 Viking February 20, 2018 at 10:29 am


“Is this really true?” It probably is true at the margin, for the first condo development, but I second your claim that there would be cheaper properties available, in the absence of zoning restrictions.

If there was only a better way to keep the riffraff out than participating in a mindless pyramid game!


48 BC February 20, 2018 at 1:00 pm

“If changing zoning restrictions turned these 6 million dollar properties into 30 million dollar properties, the objections of some die-hard NIMBYs aside, people would likely vote for it and move on.”

Yes, I have been wondering about this also. Condo *unit* owners should oppose development to maintain the value of their units by restricting supply. Landowners (including single-family homeowners), however, ought to oppose restrictions so that they can maximize the value of their land, but they don’t seem to.

We might be able to resolve this paradox by thinking of single-family homeowners as a cartel. They can maximize the aggregate value of their properties by restricting housing supply, but any given homeowner could maximize the value of his or her own land by building multi-unit housing as long as every other homeowner does not also build. To enforce the cartel, they use zoning laws. Each homeowner has a “production quota” of 1 housing unit. If this hypothesis is correct, then the supply of housing in these heavily restricted neighborhoods might be close to the quantity that a monopoly builder would build if that builder owned all the land in the neighborhood. I wonder how many people oppose Facebook and Google’s “monopoly” power, even though they give their product away for free, but support homeowners’ monopoly/cartel power, even though it raises housing costs for everyone.


49 Hazel Meade February 20, 2018 at 3:05 pm

I like this answer. Also, the $6 Million house’s value would decline if someone else built a $30 Million set of condos nearby, because the home’s value depends on local amenities which depend on low population density. And not everyone’s lot is going to sell for $30 million if everyone can do it. if everyone did it the lots would only be worth $4 million, or something.


50 asdf February 20, 2018 at 3:10 pm

It’s because housing and schools are a joint good and someone in the same school zone build cheap multi-unit housing makes your school worse thus hurting your property values.


51 Jaap Weel February 20, 2018 at 3:57 pm

How does that make your school worse? Does desegregation make your school worse?


52 Jaap Weel February 20, 2018 at 7:57 pm

It is definitely true that without any exclusionary low-density zoning, while land values per acre would increase near metropolitan cores, they might also drop off faster on the periphery. That said, the Bay Area is not the best example for this, and Atherton definitely isn’t.

First of all, all estimates I have seen of what Bay Area population would be if we didn’t restrict the number of households by limiting the number of homes are very high. There are basically two metro areas in the US that have extremely strong clustering externalities leading to much higher labor productivity than anywhere else, and they are the Bay Area and New York City, and in the absence of de facto internal migration controls, population would boom in both of those.

Now looking at Atherton in particular and the way it fits into the area, it’s hardly peripheral. If you look at land values and commute patterns, you find that the cluster around Palo Alto, Stanford University, and Sand Hill Road is essentially a CBD just as much as downtown SF, Oakland, and San Jose are. What massive upzoning would do to land values in Lafayette is an interesting question that I wouldn’t want to attempt to answer without some extensive modeling. But I’m pretty confident that when it comes to Atherton, the answer, with the possible exception of some of the steeper hillsides, is up, not down.


53 rayward February 20, 2018 at 7:48 am

A little historical perspective, 100 years ago the lot sizes, along with the houses on them, were much, much larger, what we might call estates, the country homes of San Francisco’s wealthiest citizens. One acre wouldn’t be large enough for the housing of the servants who worked on the estate. That lots today are “only” one acre is a testament to the down-zoning that has occurred in Atherton, not to mention the riff-raff who now reside in the place. In time, one might expect more down-zoning, and Heaven forbid the likely low caliber of the residents.


54 albigensian February 20, 2018 at 10:10 am

The house in that photo looks like a good deal less than a “mansion,” what makes it expensive is the acre lot in an area where these are rare. It looks pretty shabby compared to the mansions built by the Vanderbilts, etc., on New York’s Fifth Avenue in the 19th century (but these, as mansion-y as they were, did not have expansive estate grounds). Of course, the merely rich (rather than fabulously wealthy) made do with those skinny-lot brownstones one can still find in much of Manhattan.

Although if you want to see mansions that look more like estates (with grounds, etc.) then you might want to look to the south shore of Long Island in the early 20th century.

As for the lot sizes for the not-rich, it’s tough to find new-construction single-family lot sizes as small as those 33-foot-wide ones on which all those bungalows were built, ~100 years ago.


55 y81 February 20, 2018 at 10:58 am

North shore. The south shore had too much swamp and too many mosquitoes during the early 20th century.


56 rayward February 20, 2018 at 11:15 am

Reading is an acquired taste. My point was that, since the area was first developed 100 plus years ago, the lots and houses have gotten a lot smaller, from large estates and mansions to mac-mansions on one-acre lots; and in time, the lots and houses will become gradually smaller. In other words, the market is giving Tabarrok what he wants the government to provide by fiat (mandates as for example down-zoning for smaller lots or multi-family).


57 Dave February 20, 2018 at 1:49 pm

…in time, the lots and houses will become gradually smaller.

Hmmm, that doesn’t actually happen. It takes legislation and citizen action to change zoning. Atherton and other affluent cities are unlikely to do their share to house their gardeners, household help, and the rest of the service economy without legislation to require it. SB 827 in California is one way people are thinking about upzoning around transit to get more housing built.


58 Jaap Weel February 20, 2018 at 3:05 pm

FWIW the usual terminology is that allowing a wider variety of uses, including higher value ones, is up-zoning, not down.


59 The Anti-Gnostic February 20, 2018 at 8:17 am

It’s not “bad” for the resource owners. They want low-density living and are willing to forego the money they could make by subidividing the front yard into condos. Mark Zuckerberg promptly bought his neighbor’s houses and a thousand empty acres in Hawaii after Facebook went public. Non-billionaires don’t have the Zuckerberg option so they vote for zoning regulations, whether the houses are priced in the millions or the thousands.

Value is subjective and there is such a thing as diseconomy of scale depending on the value you’re trying to capture. Seaside, Florida has a distinct aesthetic and lots of people vacation there. Same with the French countryside for those further up the food chain, even though it would make a great location for lots of cheap refugee housing. George Clooney’s movie “The Ancestors” explores the theme of conflicting land use values.


60 OldCurmudgeon February 20, 2018 at 9:58 am

>They want low-density living and are willing to forego the money they could make by subidividing the front yard into condos.

Pertinently, they also want their neighbors to make the same decision. And don’t want to shell out the money for voluntary restrictive covenants.


61 Mulp February 20, 2018 at 10:33 am

What is the difference between 100 property owners selling each other restrictive covenants for $1, ie, every one pays $99 and gets $99, vs everyone agreeing to restrictive zoning?


62 OldCurmudgeong February 20, 2018 at 12:29 pm

Morally, one requires voluntary agreement, the other only requires control of the town counsel. And practically, restrictive covenants are fixed by the language; the politically powerful can’t change them.


63 Mulp February 20, 2018 at 11:25 am

By the way, Atherton exists because the land owners in 1923 incorporated Atherton to create a locally controlled covenant to restrict outsiders driving development in their area.

What is now Atherton was developed as a retreat for wealthy SF residents just after the railroad boom circa 1870s. In 1923, Menlo Park wanted to incorporate the land including Atherton for business and industrial development leveraging the RR.

The Atherton residents opposed that development and rushed to incorporate as strictly residential. Ie, in 1923, all the land owners entered into a restrictive covenant preventing development.

Every land transaction since has been done with that restrictive covenant defining the value and price.

Alex is reflecting the Trumpian view that “those property owners are stopping me from getting rich developing their land and government won’t give me their land by eminent domain, damn government.” Note the landowner who refused to sell to Trump was better at deciding the value of the land than Trump, who went bankrupt because the value was much less than the price Trump set.


64 charlie February 20, 2018 at 8:22 am

Never engage in virtue signaling.

Wait, is a period at the end a signal?


65 Thiago Ribeiro February 20, 2018 at 8:31 am

Let’s be clear: moneyed interests have too much power in America. A few laws protecting communities from speculation seem in order.


66 We live in interesting times February 20, 2018 at 10:48 am

I’m looking forward to the movie about Kelo.

There oughtta be a law!

Eminent Domain overrides all.

Sometimes so does the EPA.


67 Tom T. February 20, 2018 at 8:31 am

The torturing of the language tends to weaken the substantive argument. The author cannot identify anyone receiving a subsidy, so he simply posits that “the mansion” received one. How is the developer, who cannot sell the property for its full value, receiving a subsidy? How is the buyer, who also cannot sell the property for its full value, receiving a subsidy? How is the locality, which cannot tax the property at its full value, receiving a subsidy? Presumably the author understands this, and has chosen the term “subsidy” to evoke an emotional reaction despite the lack of factual accuracy.


68 Borjigid February 20, 2018 at 9:17 am

The buyer is also not buying the property at its full value.


69 Tom T. February 20, 2018 at 12:53 pm

Right, but the buyer derives no subsidy from that fact because the same limitation applies when that buyer goes to sell.


70 BC February 20, 2018 at 1:15 pm

Think of buying a home as pre-paying the lifetime rent of the property. Selling the home later is selling the *unused* rent. The buyer is receiving a subsidy on the imputed rent for the period during which the buyer lives in the home. He gets to rent a home for far less than the opportunity cost of not allowing multiple renters to rent the same property over the same period.


71 Viking February 20, 2018 at 10:21 am

The “mansion” is getting subsidized the same way fossil fuels are getting subsidized.


72 RustySynapses February 20, 2018 at 12:23 pm

Well, I agree, except for the fact of Prop. 13. I used to live a few blocks from there. When I moved in, I was paying 10X the property tax of my next door neighbor. When I moved away (unfortunately), a new buyer was paying 3X me. And prices have almost doubled since then. So that’s a 60 to 1 spread in property taxes. The 1s in that equation are getting something that looks an awful lot like a subsidy to me.


73 Jaap Weel February 20, 2018 at 3:06 pm

Hey there. Feel free to misinterpret my arguments but no calling me “he”, all right?


74 reaction February 21, 2018 at 2:07 am

” no calling me “he”, all right?” You one of those Xe/Xir people Jaap? Care to explain why?


75 Jaap Weel February 20, 2018 at 3:20 pm

Where did I use the word subsidy?


76 Thiago Ribeiro February 20, 2018 at 8:32 am

“so he simply posits that ‘the mansion’ received one”

Actually, I know lots of welfare queen mansions who retired to Florida to live it big.


77 Salim February 20, 2018 at 8:47 am

To add insult to injury, California taxpayers are subsidizing a CalTrain station in Atherton, slowing lots of commuters to pick up a handful of mansion-owners in a low-density neighborhood:


78 Mulp February 20, 2018 at 11:36 am

You screwed up the link so I have no idea what your point is.

However, Atherton has been opposing Caltrains development which must pass through Atherton because it was build around the rail line flag stop 150 years ago.

Then 95 years ago, the landowners incorporated Atherton as strictly residential and every buyer of land bought because Atherton was strictly residential opposed to development.

Alex is advocating for government central planning by economists, with landowners having no say.


79 Borjigid February 20, 2018 at 12:45 pm

No, he’s advocating for no central planning. Central planning is when the government tells you what you can and can’t build, i.e. zoning regulations. Landowners should have a say over their own land, including the ability to build a condo on it. Landowners should not have a say over what their neighbors choose to do with their own land.


80 The Anti-Gnostic February 20, 2018 at 3:21 pm

Landowners should not have a say over what their neighbors choose to do with their own land

Of course they should. Noise, pollution, light, traffic, smells, crime, infrastructure burdens are all externalities.


81 Kevin February 20, 2018 at 12:05 pm

Atherton residents would probably prefer there be no CalTrain stop in Atherton at all. It isn’t inconveniencing the mansion-owners who can afford to Uber wherever they want. It’s inconveniencing their nannies and gardeners.


82 Engineer February 20, 2018 at 9:05 am

I laughed a little at the “mansion” usage. It looks like a fairly nice house, on a bigger than standard suburban lot, but really guys …


83 Ray Lopez February 20, 2018 at 10:12 am

All housing in the USA is cheap “balloon frame” construction (a Civil War construct), which, if you protect against water damage and termites, is surprisingly durable (the old wooden “painted ladies” of Frisco come to mind), but nevertheless US houses are nothing compared to many houses outside the USA in building material quality. The little Philippine house I built has solid concrete pillars and concrete hollow block walls, an artistic steel roof (supported with wooden trusses), a concrete pond, sunroof, nice tile floors, wrought iron fence, generator with cross-over switch, completely grounded (a developing country rarity), nice gutters, attic, etc etc etc, and it cost the price of a fancy car(s). In the rich parts of the USA a wooden equivalent would go for over a million, depending on location x3.


84 Jaap Weel February 20, 2018 at 3:19 pm

That style of construction looks more solid but is actually less safe than light timber framing in earthquake country.


85 Ray Lopez February 20, 2018 at 11:41 pm

I doubt it, if constructed properly. They use reinforced concrete in earthquake prone Greece, in Japan and in commercial buildings in California.


86 RustySynapses February 20, 2018 at 12:19 pm

That’s about land value around there, and that’s not even a great location.


87 Per Kurowski February 20, 2018 at 9:16 am

Indeed, but let us not forget that part of the reason that the whole condo project will be priced so much higher than the mansion, is that it contains smaller units that count with so much more of subsidized finance.


88 Ray Lopez February 20, 2018 at 10:16 am

I think you overestimate the benefit of subsidized finance. This is typical of people who believe in money non-neutrality (I am betting you also think central banks are powerful). Per Kurowski (blog): “What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?” – replace “30%” with “3%” and does your opinion change?


89 Jaap Weel February 20, 2018 at 3:11 pm

This is irrelevant. The condos would individually price much lower. The reason it would add up to more is because you could have 200 of one or 1 of the other.


90 GW February 20, 2018 at 9:55 am

Free marketeers please note that Atherton is the most Republican political unit in San Mateo County.


91 Scott H. February 20, 2018 at 5:01 pm



92 JFA February 21, 2018 at 9:00 am

And the price of tea in China is what?


93 Klaus February 20, 2018 at 9:58 am

The longer I live here, the more I can see that Prop 13 (the property tax limitation) led to the breakdown of the Coase Theorem in California. Before that, various pressure groups in the municipality shared much more in the gains from maximizing the value of land. The city itself was essentially a co-owner in every commercial or rental development, since it captured a big slice of the rents. There was more of an incentive to upzone and to build infrastructure to greenfield areas so that they can be developed. That was the California of the 1960’s: constant building, boosterism and the middle class with pools. Unions and boosters and people who wanted big fat revenue sources for lavish public goods with returns-to-scale promoted development. The government built universities and beautiful schools and roads.

Today, there are bills in the statehouse which essentially threaten cities into allowing development, because city politics have become dominated by spiteful old misanthropes who scream and cry and threaten leaders over minor details of the Whole Foods parking lot. I have never seen such pitiful whining as at my city’s council meeting; it is nauseating and unmanly (in the way old philosopher’s used the term) and craven. Everyone sounds like an absurd villain in an Ayn Rand novel. In any local discussion, there is, implicitly, the assumption that anyone making money by actually doing anything productive with one’s property—as opposed to sitting on one’s house (preferably an inherited one)—is crass and wicked. It kind of reminds me of how the money-making main character is treated by the aristocrats in Henry James’ The American. This goes for municipal enterprise, too: there is such ranting and raving over the effort to redo the city parking garage that you can’t believe this city one built amazing public facilities.

If the people of California really cared about small government, they should have made an amendment to the constitution limiting the growth in spending—not a limitation on a particular local revenue source (the property tax) which creates good regulatory incentives, is stable and is relatively distortionary (relative to income or business taxes). What they did instead was create a big safe space for elderly liberals to retire in single family houses and look at horses standing on arid grassland worth millions, with destitute immigrants living in garages at their beck and call.


94 Mulp February 20, 2018 at 10:56 am

Elderly wealthy liberals were the driving force behind prop 13 with conservatives and the GOP in opposition?

Ie, Jarvis was a wealthy liberals and Jerry Brown a conservative as they respectively fought to pass and fought to block its passage in the 70s?


95 Brickbats and Adiabats February 20, 2018 at 11:25 am

Wealthy liberals are the ones benefiting now. Ironic, isn’t it, that the conservative anti-tax revolt resulted in regulatory capture by a development-hating gerontocracy.


96 JB February 20, 2018 at 12:07 pm

The only guarantee in politics is that your platform, if enacted, will have unintended consequences that dwarf the intended ones in impact.


97 OldCurmudgeon February 20, 2018 at 1:14 pm

The curmudgeonly version is:

The only guarantee in politics is that any reform promoted as helping the poor and disadvantaged will inevitably redound to the overwhelming benefit of richer and privileged members of the community.

98 Klaus February 20, 2018 at 12:24 pm

Didn’t make that claim.


99 daguix February 20, 2018 at 11:00 am

Why aren’t mansion owners lobbying for zoning deregulations to pocket the difference?


100 wiki February 20, 2018 at 11:04 am

If different groups have very different preferences, then those of the majority — who are poorer or less bourgeois may win out. Consider that in large parts of East Asia — with fewer restrictions — many allow people to have shops in the first or second floors while having flats on top. This is unacceptable to most European Americans but this would change if you allowed for pure Coasian exchange. Moreover, Coase never meant his theorem to be universal but as a starting point for discussion of the nature of transactions costs and bargaining issues that exist in the real world.


101 Daniel Klein February 20, 2018 at 11:53 am

I’d say the single-unit zoning favors, engenders, favors, privileges mansions, not subsidizes.

I don’t like it when people use transfer concepts for non-transfer concepts, notably when people speak of a cost as a price when it isn’t one.


102 Borjigid February 20, 2018 at 12:47 pm

Bastiat seems relevant here.


103 Jaap Weel February 20, 2018 at 3:15 pm

There’s a reason I avoided that word…


104 don February 20, 2018 at 2:33 pm

That urban condo thing on the right is damn ugly.


105 Jaap Weel February 20, 2018 at 3:09 pm

I disagree but if you are willing to pay actual market price for the house go right ahead. I only object to legislated uoward redistribution.


106 BJ dubbS February 20, 2018 at 2:33 pm
107 Win7 February 20, 2018 at 5:11 pm

I disagree but if you are willing to pay actual market price for the house go right ahea


108 Steve-O February 20, 2018 at 5:16 pm

The picture is fairly low resolution, but is that a mansion? It looks like a 3,000 square foot house to me, without too much ornamentation or the imposing stateliness I associate with a “mansion.”


109 Dave February 20, 2018 at 6:26 pm

Slightly off topic, but the recent fires in Sonoma County have exposed some home owners to the reality of modern infrastructure costs. One of the low density developments that burned is trying to add modern sewer service in place of the existing septic systems. The cost of approximately $70,000 per house is too much for many. Add in road rebuilding and undergrounding of other utilities and each residence is on the hook for at least $150,000 in hard costs. If they switched from 2-3 units per acre to 6-8 units, their costs would be halved. If they decided to build an urban village with 15-20 units per acre, they could have modern homes with the same square footage, lower infrastructure costs, and a more walkable neighborhood. Of course, they are opting to stay just the way they were. None of the incentives align their decision making with what would be best for the community at large.


110 Jaap Weel February 20, 2018 at 8:02 pm

It is my understanding that the high per-unit cost of infrastructure maintenance is what leads suburbs and unincorporated subdivisions in some other states to demand annexation by cities, which is a really curious phenomenon from a California perspective…


111 foobarqux February 21, 2018 at 12:27 am

Silly economist, keeping the character of a neighborhood is only NIMBYism when the plebes do it, not VCs, whose values matter.


112 Benjamin Cole February 21, 2018 at 9:50 am

Great post.

Time to end property zoning.

The same people who ascend the very pinnacles of righteous indignation on free trade or the minimum wage go mute on property zoning.

Don Boudreaux and Bryan Caplan come to mind.


113 George February 21, 2018 at 8:52 pm

I don’t have anything to say about concrete plants next door, but I do know that getting details wrong undermines any argument, even good ones. 4 Surrey Lane in Atherton is not a mansion by any stretch. Yes, it’s a big honkin’ house, but at 6,200 square feet and only four bedrooms, it is not a mansion. Jarp Weel’s misuse of the word suggests he does not have a great understanding of real estate in the real world. He might…. but his mistake suggests not.

He basically misses the point of residential zoning, which is not to subsidize large houses, but to keep out condos (and concrete plants) as neighbors. Exclusionary zoning values homogeneity over maximum use; it is purposefully inefficient. The wealthy can afford that. If Atherton allowed condos next door, big houses wouldn’t become more expensive, they’d go somewhere else.

This is not to defend Atherton at all. On the East Coast, the only restrictive zoning that has withstood court review is large-lot zoning based on environmental considerations… there’s no sewer system, so it’s fine to have a large lot because you need room for a septic system. (Which is why, for example, the woodsy part of Stamford, Connecticut, above the Merritt Parkway, has always opposed the extension of sewers to it.)

California, I don’t know about. But 4 Surrey Lane’s four bathrooms are all connected to a sewer system.


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