Monday, May 31, 2010

The housing price madness of restrictive land zoning

This extends a comment I made here.

If you want to see the effects of restrictive zoning of landing, compare the UK with Germany. Under the German federal constitution, there is a "right to build". It is almost impossible for officials to interfere with property owners building on their property. So housing supply responds to housing demand and German house prices move at about the rate of inflation.

In the UK, just about everywhere land use is subject to official discretionary control over market entry. The result is ridiculous housing (land) prices and a boom-and-bust cycle.

The suggestion that Germany (593 people per square mile) has some profound geographical and population density advantage over the UK (660 people per square mile) is not exactly plausible.

Another comparison is Texas (80 people per square mile) and Australia (7 people per square mile). Texas has a higher population, higher population growth, higher average income and crams more of its population in its five largest cities than Australia does. Yet Texan houses are a half or a third of the price of Australian metropolitan housing. That median houses in Sydney and Melbourne are 9 or 8 times median household income, more expensive than houses in London or New York (both median houses 7 times median household income) while in Dallas and Houston they are less than 3 times median household income is pure regulatory madness.

The national average ration of median (metropolitan) houses to median household income is 2.9 in the US and 6.8 in Australia. We have 22 million people in the area of the continental US. We do not lack space: what we lack is Texan/German land management. Instead, with have adopted California/British-style land management, with California/British-style problems such that houses in Sydney are now more expensive than those in London or New York.

Giving officials discretionary control over market entry encourages inflated asset prices due to impeding the ability of supply to respond to demand, so as to reward incumbent asset holders with inflated asset values. If you doubt that, just look at the price of taxi plates in any jurisdiction where numbers are controlled. (In Melbourne, taxi plates are currently about the same as the median house price.)

The geographical concentration of housing bubbles in the US is not a result of geography (except in the sense that geography creates positional goods—hilltop views, ocean views, beach fronts, etc—which encourage the adoption of restrictive zoning), it is the result of restrictive zoning.

There is a simple rule about giving officials discretionary control over market entry: don’t!


  1. Well observed. I have marveled at the house price differentials in most of the places you mention and the often irrational price differentials like ones we are currently enjoying (or suffering). However, I never heard about the German notion of a right to build. While I don't think I would generally enjoy the restrictions of German culture that sounds like a good foundation on which to build housing policy. ;-)

  2. Yes, I came across it while doing some research work for a housing policy consultancy.

  3. It was apparently a reaction to the Nazi's use of official discretions.