Arnold Kling

Explaining Property Values

Arnold Kling, Great Questions of Economics
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Virginia Postrel's New York Times column looks at a study of the causes of high property values.

In Los Angeles, for instance, going from a quarter-acre to a half-acre lot for the same house costs about $2.60 a square foot, or roughly $28,000. But a quarter-acre lot with a house on it, minus the cost of the house, comes to almost 12 times that $30.44 a square foot, or about $331,000.

The difference represents the value of the right to build. Going from a quarter-acre lot to a half-acre lot in Los Angeles does not give you the right to build a second house.

The difference between the land prices is the implicit cost of all the local land-use controls, from zoning to the time it takes to get a permit. Some regulations simply raise the cost of building by slowing down the process. Others limit density, making it illegal to subdivide expensive land.

Postrel ties the restrictions on building to political values. She suggests that in communities dominated by liberals, who support government intervention, there will be land use restrictions that raise the cost of a house.

Discussion Question. How could the extent of government land-use regulation affect the elasticity of supply of housing, and how would this affect the price of housing?

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