Zoning Increases the Price of Housing in Australia by a Lot

Researchers at the Reserve Bank of Australia estimate that house prices in major Australian cities are pushed well above the cost of production, including the land, by zoning regulations such as floor space index (video link) restrictions.

Zoning regulations provide benefits, but they also restrict housing supply and hence raise prices. This paper quantifies their importance by comparing prices to the marginal costs of supply at different points in time. For detached houses, marginal costs comprise the dwelling structure and the land that other home owners need to forego. Relative to our estimates of these costs, we find that, as of 2016, zoning raised detached house prices 73 per cent above marginal costs in Sydney, 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth. Zoning has also raised the price of apartments well above the marginal cost of supply, especially in Sydney. We emphasise that this is not the amount that housing prices would fall in the absence of zoning. The effect of zoning has increased dramatically over the past two decades, likely due to existing restrictions binding more tightly as demand has risen.

Hat tip: Matt Yglesias.

Comments

Tabarrok opposes zoning. Man bites dog. Maybe zoning doesn't restrict the supply of housing, but actually contributes to supply. How? By providing investors with protection against both overbuilding and building deterioration. But doesn't overbuilding mean a greater supply? Yes, but investors need incentive to supply the housing, and the absence of the protection may discourage investors from investing in housing. Well, it's a counter-argument (to Tabarrok), but I don't buy it. I have a home in a sometimes rapidly growing area, an area where many of the homes are second homes. I've been here long enough to have been through several real estate cycles. The cycles are all the same: when times are good and lending plentiful, developers and builders run amok, developing subdivisions and building houses as fast as they can, as buyers line up to purchase the inventory with mostly borrowed funds, all with little or no resistance from government (but lots of ineffectual resistance from those who purchased homes in prior cycles). Then the inevitable bust, either as part of a Fed-led tightening of credit, a financial crisis, or local conditions (over-supply), creating a large wave of distressed housing, foreclosures, and partially completed development and construction, along with bankrupt developers and builders. And the bust affects everyone, including those who purchased homes in prior cycles, as housing prices plummet, leading to foreclosures of older homes as well as the newer homes constructed in the current cycle. And then the long wait for recovery. The one positive of the long wait is the large increase in rental housing, as owners resort to extreme measures in an effort to avoid foreclosure. After the long wait, then comes the recovery, first slowly but then accelerating as the race to beat the next bust proceeds in earnest. Wash, rinse, repeat. I don't know about Tabarrok, but I would assume that Cowen would approve, since Cowen abhors complacency, preferring "dynamism" (it's dynamic, all right) over order and stability.

Exactly. Not unlike how it takes a ten thousand page agreement to specify the meaning of “free trade”.

Surprise! This is, after all, the main purpose for government, i.e. to make everything more costly, difficult and expensive for citizens while rewarding government.

marginal costs comprise the dwelling structure and the land that other home owners need to forego.

No, in English one says, "marginal costs comprise the dwelling structure and the land that other home owners need to forgo."

It’s a bit of a tangent, but I’ve long wondered why - if low regulation is the default ideal - why do so many homeowners voluntarily participate in and perpetuate homeowners associations? Hoa design reviews can be far more restrictive and proscriptive than any zoning regs a town would dare try. And in my observation, the more valuable the neighborhood, the more likely the wealthy (and presumably otherwise libertarian leaning) owners zealously enforce a fat book of rules about their neighbor’s choice of shrubs and window treatments.

Order and stability, that's why. Senator Paul prefers dynamism; thus, he ignores those pesky HOA rules. I've spent my life in the South, a region that prefers dynamism; thus, few HOAs or HOA rules. What I've noticed, though, is that with the mass migration of Northerners to the region, HOAs and HOA rules have spread across the region like a plague (as have Northerners).

Yes. Hordes of damn yankees spreading order and stability on the benighted south. Whether they want it or not. It’s the Northern Man’s burden.

Any insight into the real reason his (Rand Paul's) neighbor attacked?

One of the reasons there are HOA's is because people get pretty damn intense about their yards and property lines; which is why we have zoning too...

Glad you brought that up though. What does it say that Paul knowingly bought into a property with an HOA, and then willfully ignored the rules?

Could you be more specific?

Which HOA rule did Rand Paul break?

I did a google search, and only found hints that he broke rules, but no specifics in complete clear sentences.

I am not privy to any inside information from their HOA beyond what is in the media, which is that an HOA official was willing to go on the record and say that a US Senator was a difficult and noncompliant member of the association. Which would be potentially slanderous if untrue.

And is more than a little ironic, if true.

I do realize, on rereading the OP, that these hoa regs have at least the intended effect of raising prices. But of course thats the point of hoas and zoning alike isn’t it?

The libertarian argument here is not about whether standards should exist if people want them, but whether government should impose those standards.

Homeowners' associations are a perfect example of how the free market can provide what people want in the absence of government regulation. If people want to live in a neighborhood with standards for appearance, construction, etc., they can. But it is not imposed on everybody else who doesn't want that. And the neighborhood associations allow much more variety, diversity, and competition in regulatory regimes. They suit a variety of tastes, and market effects prevent onerous/counterproductive regulations.

I disagree. Homeowner associations are exactly like a subdivision of local government. A local government is simply an older and larger form of HOA. In fact, my little town is smaller by far than some of the massive suburban HOAs.

People CHOOSE to live in either. In both, rules are made and enforced and available for inspection before deciding to relocate. In both, the decision-makers are elected by the people that live there following charter/bylaws that define the democracy. The State regulates both. HOA powers are very broad, often governing conduct and private behavior that many towns wouldn't dare try and regulate. HOAs even have police powers, with the ability to hire security and to fine and even foreclose owners.

There's no meaningful difference. In fact, in my state. a series of laws were created at the state level to reign in the perceived (and or actual) problem of out of control HOAs that had deteriorated into corrupt, anti-democratic, arbitrary & capricious, and overbearing totalitarian fiefdom and mini-states. HOA horror stories abound of them racking down on their subjects in a way most towns would end up in state receivership and criminal investigation.

I am guessing you don't live in an HOA community.

+1

I have lived in a couple of HOA communities in the past. They weren't perfect, though I haven't had any horror story experiences.

I disagree with your characterisation that there is no difference between association and town governments.

1) The size difference between neighborhoods and towns really is significant overall, even if there are outliers like small towns and really huge associations the size of towns. Zoning rules being set at neighborhood level rather than town level really does increase the number of options. Also, you don't have to live in an HOA controlled neighborhood at all. But most people don't have the option of living outside an area with local government.

2) HOAs decouple housing from other things managed by local government. If you are deciding whether to live in town X, you usually won't decide based on its rules about grass cutting our house construction, because you also have to consider the town's school system, taxes, law enforcement, etc. Thus you don't really have an opportunity to "vote with your feet" on zoning rules.

Perhaps it's so hard to live in unincorporated places, because people overwhelmingly prefer to live in incorporated towns?

HOAs govern your vehicle choice and parking, your recreational equipment storage, your landscaping, your building materials, your use of amenities, your political signs and solar panels and satellite dishes, your home maintenance schedule and color and material selections, whether you can operate a business in your home, your pets, rental of a room or use of airbnb, how many people can live in your home, how many bedrooms it can have, your use of a backyard firepit and fireworks, whether you can repair your car in your driveway, what insurance you have to carry, and on and on...

Oh and they have fees and fines that can rival local taxes.

Homeowners’ associations are a perfect example of how the free market can provide what people want in the absence of government regulation.

Why is an incorporated town of 10,000 considered a government but an equally populous HOA isn't considered a government? All the arguments about a town could be applied to the HOA. If you don't want to live by the towns rules move out of town, etc.

Ironically, most HOAs are started by developers specifically because local zoning regulation aren't strict enough.

The developer gets his parcel annexed into the town (to free-ride onto the existing water/sewer, police/fire systems, and recreation amenities) - whining incessantly about the onerous town regulations the entire time - yet his own first official act for the new mini-town is to enact a regulator body with broader powers, less transparency, stricter rules, and more zealous enforcement than the town itself has.

Homeowners benefit from limiting supply and driving up prices.

I'd say because HOAs you have more say. You can easily get on the board and sway decisions if you care enough. And if you don't like it, you can always leave. Compare this to zoning - where it's very difficult to change zoning as an individual, and leaving means leaving your town (and unlikely you can escape to a town without zoning).

HOAs also offer greater benefits than zoning (IMO) and more tangible to your day-to-day life. I'm thinking more in DC where townhouses/condos and you collectively pay for snow shoveling, gardening, building maintenance items, or amenities like gym, pool, roof deck. Some people like to shovel/garden themselves, but plenty don't. And I come from Florida, where many have their own pool - it eats up a lot of your time and money, I'd say it's rarely worth it for most people. I can see why shared amenities and a property manager are desirable enough to eagerly want into the HOA world, even for a libertarian-minded person.

"You can easily get on the board."

Sure, maybe in a three unit townhome condo association. But getting elected to an HOA Board is exactly as difficult or easy as getting elected to Town Council. And at least Council at least pays a stipend.

The list of HOA nightmare stories of Boards fighting change and avoiding transparency through anti-democratic dirty tricks and parliamentary shenanigans is likely far more lengthy, and salacious, then the occasional story of a town council gone rogue. Last-minute unannounced elections, secret quorums meetings, waiving rules adhoc, failing to keep minutes, and on and on. HOAs pull crap that local governments wouldn't last five minutes trying, with their enhanced media scrutiny and state attorney generals waiting to pounce.

It is easy to get on an HOA board - it is a decent amount of work and responsibility with no pay, but perhaps more than the work, it's that you could be sued if you don't do your job or make a mistake. Do you think people are itching to sign up for that? Town Council at least makes money and can be a stepping stone to higher office.

Even if it was hard to get on a HOA board (never heard this to be the case) - you can attend all the meetings and easily and frequently lobby the officers. Unlike town council members, you run into them on your block frequently, they may live next to you. How many HOAs have you lived in? Can you point to one 10,000 person HOA?

Again, you have the option of leaving a HOA and be outside the HOA system pretty easily. I could leave my HOA and move one block over to a single family house. If you want to leave your city, you have to move geographically further, and you're still going to be governed by a fairly similar set of zoning rules. You have more say in a HOA, and more leverage because you can easily pick the alternative.

I have lived in a modest sized HOA community for 20 years, and (due to business acumen and probably some misplaced noblesse oblige) been on its board nearly the entire time.

Whether it is comparatively hard or not to get elected, or to lobby this or that board or government agency is completely besides the point. All you are really arguing for is smallness. In my small town, I can get elected or lobby or run into officials on the street just as easily in HOA or town government.

But but but, HOAs are different, you can CHOOSE to live there. Nonsense. HOAs are in every single aspect that matters effectively identical to City government. The fact that they are a subdivision of a town usually is also irrelevant. That is a no-true-scotsman argument invented to create the illusion of differentiation in choice. In the vast expanses of surburbia. where municipal boundaries are invisible without maps, one could just as easily shop towns as HOAs, and still be within walking distance of their favorite strip mall.

In the real world, getting governed by an arbitrary, unaccountable, amateur HOA Board is generally indistinguishable from being governed by an icky government, and often, if you want to do something resembling having a life, often worse.

As I said above, aside the canard about choice, you are essentially arguing for smallness. For the record, I agree about the virtues of smallness. To a point.

PS: Highlands Ranch: 31,000 homes
https://hrcaonline.org/

@McMike

"But but but, HOAs are different, you can CHOOSE to live there. Nonsense."

Uh, you lost me here. Someone is forcing you to live in an HOA? You're unable to purchase a single family dwelling?

Despite not getting your point you can't choose to not live in a HOA, I do appreciate the 31,000 home HOA example - I will agree an HOA becomes closer to a tiny small gov't the bigger the HOA and the smaller the town gov't.

However, my point remains you can leavea an HOA, you cannot avoid zoning if you just move. If you disagree, I'm curious where you can build a 100-story building by right.

Scale is important. To take it to the extreme imagine if the USA Federal Government said no new housing will be built and banned having more than one family in a home. People would have no place to live. (I guess that they could go to Argentina.)

Existing homeowners very, very rarely create HOAs. Developers create HOAs and sell lots, homes, or condos with the HOA already created.

Once bought into an HOA, usually the HOA has some responsibility for taking care of a common area (roads, drainage devices, landscaping, etc), and so even if most regulations are pulled back, there is still a core purpose that needs to be maintained.

My question is how much this is 'Zoning' and how much is other factors here? I put it at 10 - 20% not 70. And since when do economist believe the price is determined by the cost?

1) They aint make more land in the urban cities so we need to assume the cost of this land is heavily increasing with every new house
2) In terms of increasing supply who is going to invest in land that is decreasing in price by 20%? Builders want profit and falling prices keeps suppliers away.
3) People don't pay as much for condos.

Indeed. I would expect that clear and stable zoning creates predictability. And that's attractive to developers, so they can build an expectation of predictable profits. I suppose it's not as fun to say that zoning protects profits.

And on the flipside of that, as rayward posed above, a decline in prices in an unregulated or deregulated area might be spun as "lower cost," But is in fact accompanied by declining asset values for some innocent bystanders.

Zoning, as McMike says, is attractive to developers also for this reason (and I've seen this many times in northern Virginia where my 1% family owns real estate): the developers buy zoned land 'for cheap' (under market) because the land is zoned for single family homes only, then the developer, after spending money on architects, site plans, environmental impact statements, and I would be tempted to say 'bribes' but NoVA is pretty clean, unlike say Arkansas (and I have experience there too), then has the land "rezoned" to support higher density condos or multi-unit apartments. That's how developers get richer and why developers 'like' zoning. From a Coase theorem point of view, does society really get harmed that much by zoning? There is a decrease in quantity of housing supplied due to tax-like effects, but I wonder sometimes what the real harm is, since businesses don't need proximity that much anymore and you can always expand away from the city center. So "70%" seems excessive.

Bonus trivia: the headline is unintentionally ironic: "Zoning Increases the Price of Housing in Australia by a Lot " - a lot, get it? ;-)

Pun intended? You decide.

Exactly, the high profit dollar attraction to developers - the perfect storm (in a good way) - is when they can find a parcel whose zoning is below its development potential, yet the intangible value (i.e. surrounding infrastructure and values) have increased since the parcel was last zoned. In other words, zoning-wise, the parcel is under-priced. The developers then arbitrage that gap by lobbying for higher use of their parcel at the same time doing their best to inherent the accumulated intangible value from the surrounding community for free.

The libertarian solution seems to be to wish away the zonnig regulation, so there's no gap for entrepreneurs to arbitrage. But, alas, the pesky actual people actually want the rules, because the only thing worse than rising home prices, is living in a s**thole of ad-hoc, unplanned, unmanaged unregulated lowest-common-denominator development. (Although to be fair, the housing might be cheaper next to that new hog farm).

I think you're missing most of the story. People who already live there want their home prices to go up. People who don't live there yet don't get a say.

Re anonymous "People who already live there want their home prices to go up. People who don’t live there yet don’t get a say."

Exactly, and in a democracy, or a contract-based libertaritopia, that's just about right.

As if people have to worry about a hog farm next door in Sydney or San Francisco, but your neighbors might be poorer (brown) people with different aesthetics and habits. Diversity for thee but not for me.

re anon7. I do not understand your point.

Of course you can effectively create more land by building up.

Which (ahem) "raises" the question: which zoning consideration trumps the other?

The right of a property owner to develop as high as they want. (And thus theoretically reduce the unit cost of housing). Versus the right of the developor's neighbor to enjoy their views and have some sunlight hit their backyard garden?

Zoning is the process whereby those rights are clarified, so everyone knows what to expect when they invest.

Compete tangent: I had friends with downtown apartments in tall buildings facing each other in a big city. I must say that based on my unscientific study, there is a non-trivial proportion of occupants who walk around naked and engage in graphic adult behavior with the lights on and shades open.

"enjoy their views and have some sunlight hit their backyard garden?"

Views of a beautiful big building and nice shade from the scorching sun?

Really though Coase's theorem and mostly that is not worth that much. Is having a big building nearby really that much of a minus, it might be a plus if draws in amenities.

Zoning greatly increases quality of life.

Might as well whine that “a low crime rate greatly increases housing prices.”

lol. We have to do something about this scourge of good schools in some neighborhoods.

Actually, yes, we do. We need to increase school choice so that everyone can access good schools not just rich people who pay through t he nose to be around other rich people.

That has nothing to do with school choice and everything to do with location and funding. Local funding of schools guarantees disparities in quality. That's why the Big Government experimented with busing.

The entire premise in most of these threads here is that you choose where you live. Which means you choose how much you can/will pay for your local school.

Or else you switch to a individual-payment system and get rid of tax support for schools, which would of course lead to even great disparity in outcomes.

Disparity in schools is a libertarian outcome: local choice, local funding, local outcomes. Leveling of quality between poor and rich can only happen with government meddling and subsidies.

What's your evidence?

Zoning operates like any extensively regulated industry. During the cozy cartel era when airline ticket prices were regulated, airlines competed on offering nicer amenities rather than lower prices (much the like effect of zoning). And no, decreasing crime is not like the rent seeking of those who demand extensive zoning regulations to keep out the rabble.

Zoning is not at all mysterious. The majority of the citizens of a community, acting through the decision makers that they elected through the democratic process, take steps to protect the value of the citizen's real property investments, and also enhance/protect their quality of life, by setting limits on what property owners can do in the future with any property that they want to modify.

It often leads to higher costs because it creates more desirable communities. Which is the point, and generally considered a desirable outcome.

It's not rocket science. And its not a Soviet plot to steal everyone's precious bodily fluids.

Property zoning should be abolished. American libertarians are the biggest bunch of hypocrites and woosies in the world.

Tabarrok is barking up the wrong tree.

The reason resi real estate is ruinously expensive in Australia is that banks have been allowed to drive up the price of land to nosebleed levels, owing to the malfeasance of 'regulators'.

You know, like the Reserve Bank & APRA.

Thanks for fucking up the country, guys.

You know in all the complaints that I have heard about the banks recently, I have heard no one claim that the were making interest rates too low, or mortgages too easy to get.

In fact even you didn't claim those things. You just assume they have magically bidded up prices, apparently without the involvement of the people who (a) supply housing, (b) demand housing or (c) regulate housing.

The banks are making interest rates too low, and mortgages are too easy to get.

There, I fixed it.

That's something I almost never see: a comparison between the price of a property, and the cost of owning that property.

If you have a low mortgage rate, the same property can have a higher price but an identical cost of owning, for example. What about the cost effect of property taxes? HOA fees? Insurance? I won't talk utilities, because that's a bit less directly related to the property itself...

I'd much rather see a greater comparison of the cost to own a property than price movements.

You can't really get into comparing cost of ownership without getting into quality of life resale value, house size/quality etc etc

Oh, also tax preferences. We really ought not talk about price or cost of home ownership, without talking about tax preferences.

Its the greatest misallocation of wealth in the history of this country, and all you can do is reply to my comment in gibberish, with your very own straw men.

REPEAT: the credit provider is responsible for both the valuation of the dwelling and the land price.

And ensuring the latter doesn't get out of whack. If they can't, or won't do this, its the job of regulators to step in & tell them how the bear is going to shit buckwheat.

Your ignorance of the banking oligopoly in Australia is complete.

Zoning is a good thing - I don't really want someone to build a dump next door.

The study cited is not without its critics who point out that the study looked at the increase in the value of land when its zoning was changed from agricultural to residential. Yes, the value of the land goes up, but that doesn’t mean someone will build on it. Others point out that there may actually be excess housing in Australia: http://mobile.abc.net.au/news/2017-07-03/housing-surplus-raises-price-crash-risks/8663860 At any rate, hats off to Australia for leading the way in using evidence based public policy.

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