Regulation and House Prices
By Arnold Kling
the evidence points toward a man-made scarcity of housing in the sense that the housing supply has been constrained by government regulation as opposed to fundamental geographic limitations. The growing dispersion of housing prices relative to construction costs suggests that these regulations have spread into a larger number of local markets over time. Moreover, they appear to have become particularly severe in the past 2-3 decades.
The authors use a sort of Tobin’s q for housing, the ratio of house prices to construction costs, as a measure of impediments to construction. The question that their research poses is whether restrictions on construction are too high relative to the true negative externalities of development.
In restricting growth of new housing, owners of existing homes apparently are adding value to their properties. From their point of view, growth restrictions may not be as irrational as Bryan Caplan argued.
In a related paper, the authors write,
In places where limited regulation and low density facilitate the construction of new homes, urban success is more likely to take the form of higher population levels. In contrast, in places with high density and high levels of regulation, urban success is more likely to leave population levels relatively unchanged while leading to higher levels of housing prices and income.
One gets a picture of blue states with strong regulations leading to an under-supply of housing, reducing population and higher nominal wages, while red states gain population with lower nominal wages (but not necessarily lower real wages when the cost of housing is taken into account).
For Discussion. Are there other factors that could account for the Tobin’s q measure of house prices in some areas?