Wrong Way Cities

In a New York Times column entitled "Wrong Way America," Nobel laureate Paul Krugman again reminds us of the high cost of overzealous land-use regulations. Krugman cites the work of Harvard economist Ed Glaeser and others in noting that "high housing prices in slow-growing states also owe a lot to policies that sharply limit construction." He observes that "looser regulation in the South has kept the supply of housing elastic and the cost of living low" (Note 1).

Supply is the Issue

Krugman specifically cites Houston, Atlanta and the Sunbelt for their lower house prices and less restrictive housing regulation. In contrast, he points to New York and California as having high house prices and greater housing regulation. Krugman further observes that the secret of growth is "not getting in the way of middle- and working-class housing supply." 

This concern about housing supply is echoed by former World Bank principal planner Alain Bertaud who notes that the solution to the housing affordability problem "is to increase the supply of land" (Note 2). Bertaud further points out that "Restricting land supply and imposing too many controls also stifles business growth."

Wrong Way Cities

However, the real problem is not a "Wrong Way America" that "gets in the way of middle- and working-class housing supply, but "Wrong Way Cities" (metropolitan areas) that have adopted land use regulations severely restrict the supply of land for urban development. The price increasing policies are often referred to as "smart growth" or "urban containment" and routinely involve restricting the supply of land for development through urban growth boundaries, large lot suburban, and exurban zoning and other strategies.

This destroys what Brookings Institution economist Anthony Downs (p. 36) calls the "competitive supply of land." The result is higher house prices, because, all things being equal, the price of a good or service is likely to increase if its supply is severely limited. Otherwise, OPEC oil supply restrictions would never have raised concern.

Where more traditional, liberal land use policies remain, housing remains affordable. For example, during the housing bubble, an analysis by the Federal Reserve Bank of Dallas attributed the lower, and still affordable house prices in Atlanta, Dallas-Fort Worth, and Houston to avoiding more restrictive land use polices: "... these markets have weathered the increased demand largely with new construction rather than price appreciation because of the ease of building new homes."

Housing and the Standard of Living

Housing is the largest category of household expenditure. Moreover, housing costs vary far more between metropolitan areas than other expenditure categories, such as transportation, food and apparel. As a result, housing is the most important driver of the standard of living, especially for middle and lower income households. Where house prices are higher compared to incomes, households have less in discretionary income --- the amount left over after taxes and necessities. With less left over, a lower standard of living and greater poverty is inevitable.

The differences are even greater for young households moving to metropolitan areas with restrictive land use policies. These households must pay elevated house prices, not having benefited from the lower housing costs that longer-term residents were able to lock in by purchasing years ago.

The higher housing costs prices can more than offset higher wages. Thus, a prospective domestic migrant may choose to move to Houston rather than New York, because Houston's wages, although lower, translate into higher discretionary incomes and a higher standard of living.

These price increases create a "double hit" to the standard of living. Not only do households have to pay higher house prices, but they usually get less, as house size and lots are reduced in size as a result of the more restrictive regulations. Indeed, regulations in California are being interpreted to make it difficult, if not impossible to build the detached housing most Americans prefer (See: California Declares War on Suburbia). The irony is that smart growth advocates claim this increases "housing choice," an Orwellian turn of phrase if there ever was one.

It is no wonder that young and aspiring households are drawn to metropolitan areas where housing is more affordable. Meanwhile, house prices have escalated strongly in the restrictively regulated metropolitan areas of California and the Northeast despite low demand. This has much to do with the significant domestic migration loss, as Paul Ganong and Daniel Shoag of Harvard have indicated. Between 2000 and 2013, more than 4,000,000 loss in net domestic migrants between 2000 and 2013, according to Census Bureau data.

The problem is acute for lower income households, which are disproportionately minority. The Thomas Rivera Institute, a Latino oriented research organization, found that California's land regulations "are making it particularly difficult for Latino and African American households to own a home."

The Consensus

There is virtual agreement that more restrictive policies are associated with higher house prices. The only issue in dispute is the extent of the impact. But even seemingly small differences can be important. Downs (p. 36) characterizes a modest 10 percent differential to be socially significant, because of the number of households that the higher prices made ineligible for home purchase.

In fact, the differences in house prices relative to incomes are substantial, ranging up to a nearly 250 percent difference between Atlanta and San Francisco. The differences are so significant as to attract the attention of economists like Krugman, Glaeser and others for their influence on domestic migration.  This is socially significant.

The Risks

No city in the United States can expect immunity from low housing affordability due to overly restrictive land use regulation, even in more depressed areas with lower housing demand. This is illustrated by Liverpool, in the United Kingdom, where smart growth policies are well entrenched. Liverpool has lost a larger percentage of its population since 1950 than any of the other 1,700 urban areas in the world with more than 300,000 population. Yet Liverpool has seen its housing affordability deteriorate to among the worst in the UK, US, Canada, Australia or New Zealand.

The smart growth planning philosophy now pervades virtually all of the urban planning community, which seeks its spread to virtually everywhere (Note 3). Current targets include Minneapolis-St. Paul (see Thrive 2040: Toward a Less Competitive Minneapolis-St. Paul), and San Antonio and the rest are on the list. The research is clear, where there is more restrictive land use policy, house prices can be expected to rise relative to incomes.

Cities for People

Current urban policy is misdirected and needs correction. Fundamentally, urban policies should be aligned with the purpose of cities. Cities are for people. People have moved to cities principally for economic reasons, as they aspire to better standards of living. Public policies that raise the price of housing substantially interfere with the reason that cities exist.

There is a need for a paradigm shift. Currently in-vogue urban policy focuses on tactics, such as urban form, legally mandated higher densities, mode of transport and urban design ("place-making"). Economist Glaeser writes that "Bad policy puts place-making above helping people..." Bad policy should be discarded. The focus should instead be on the fundamental objectives of improving the standard of living and reducing poverty. At a minimum, this requires housing that is affordable (See Toward More Prosperous Cities).

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Note 1: In the column, Krugman suggests that differences in housing regulation are more important than business regulation and taxation in explaining the migration patterns that have people generally moving from higher cost areas with higher housing costs to lower cost areas. There is strong research on both issues, and both issues are important.

Note 2: Housing affordability refers to the price of houses across the entire spectrum of income, not just low income housing.

Note 3: Perhaps the most frequently cited justification for restrictive land use policies is greenhouse gas (GHG) emission reduction. A growing body of research indicates that urban land use policies are a generally minor and expensive means to that objective and that technological improvements are far more effective. Smaller scale strategies are also better than "one-size-fits-all" land use regulation. It is notable that the most comprehensive US review (Jones and Kammen at the University of California, Berkeley) of GHG emissions at the local level (zip codes) found: "Generally ... no evidence for net GHG benefits of population density in urban cores or suburbs when considering effects on entire metropolitan areas." They suggest "an entirely new approach of highly tailored community strategies."

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Wendell Cox is principal of Demographia, an international public policy and demographics firm. He is co-author of the "Demographia International Housing Affordability Survey" and author of "Demographia World Urban Areas" and "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life." He was appointed to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member. He was appointed to the Amtrak Reform Council to fill the unexpired term of Governor Christine Todd Whitman and has served as a visiting professor at the Conservatoire National des Arts et Metiers, a national university in Paris.

Photo: Minneapolis-St. Paul, by author