I came across a blog called The Antiplanner (evidently maintained by Randal O'Toole of the Cato Institute), which had a post titled, "Yes, Smart Growth Caused the Mortgage Meltdown." Now, I've argued before that land use regulations probably played a role in the housing bubble, but I would never go so far as to say that they "caused" the subprime crisis, or even the housing bubble. Nevertheless, I was intruiged, because the role of land use regulations is an area where I very much agree with libertarians (although I prefer to use an anticommons model rather than a Coasean framework). The Antiplanner post links to a Heritage Foundation paper by Wendell Cox, in which Cox argues that "if price-escalating smart growth policies had not been adopted in state capitals, county courthouses and local planning commissions, the financial risk in the current crisis would be at least $4 trillion less." As you can probably imagine, the reasoning that led to such a sweeping statement was, shall we say, strained. It's well-established that land use regulations can artificially constrain the supply of housing, thus raising housing prices above their equilibrium level, but the problem lies in connecting general housing price increases to the housing bubble. Cox cannot connect the two, and instead relies on bald assertion:

Between 2000 and 2007, house prices increased an average of more than $275,000 compared to incomes (house price to household income ratios) in the 10 markets with the greatest price escalation or the greatest affordability loss. Among the second 10 markets with the greatest affordability loss, prices rose $135,000 relative to incomes. By contrast, in the markets with the least affordability loss, house prices increased only $5,000. What the 20 markets that have lost the most affordability have in common is excessive land use regulation.
The first paragraph amounts to saying: housing prices are higher in the 20 markets where housing prices grew the most, and lower in the 10 markets where housing prices grew the least. Alert the press! Cox then makes the connection to the housing bubble by simply asserting that the 20 markets that have lost the most affordability all have "excessive land use regulation." Cox doesn't define "excessive land use regulation," nor does he even identify the 20 markets he's referring to. Instead, he provides the URL for another paper of his that supposedly establishes that the 20 markets he's referring to all have "excessive land use regulation." Table 3 of that paper lists the 20 markets that have lost the most affordability. I immediately noticed that Cox lists Las Vegas, Baltimore, and Virginia Beach -- 3 cities I know don't have particularly restrictive land use regulations -- among the 20 markets that he claims have "excessive land use regulations." The Wharton Residential Land Use Regulations Index is the only comprehensive database that measures the restrictiveness of land use regulations across the country. I have some minor issues with its methodology, but it remains the gold standard in urban economics. According to the Wharton Index, Las Vegas has the 1,547th most restrictive of land use regulations in the country (out of 2,730 cities). Baltimore comes in at #1,719. Virginia Beach is #1,835. To say that these cities have "excessive land use regulations" is to bend the truth. I honestly think land use regulations played a role in the housing bubble (though I certainly don't think they "caused" the housing bubble), but I don't have a dog in this fight ideologically. The Heritage Foundation does, and it shows in this incredibly sloppy paper. (If you're interested in my theory of how land use regulations could have contributed to the housing bubble -- and I know you are -- see here, here, and here. In a nutshell, empirical research has shown that a demand shock in metropolitan areas with more restrictive land use regulations leads to much higher and much longer housing price appreciation. The length of the housing price appreciation assures people of the stability of the upward trend, and gives realtors and homebuyers the impression that (stop me if you've heard this one already) "housing prices always go up!" The perceived stability of this upward trend would then induce people to borrow over their means to buy a house.)

2 comments:

Tim Worstall said...

And when you've got an entire country (like the UK) with much stricter regulations upon what can be built where (like the UK) then you'd expect there to be greater bubbles (like the UK?).

Economics of Contempt said...

Not necessarily. It would depend on a variety of other factors, such as the size of the demand shock, the availability of mortgage credit, and how well-regulated the mortgage lending industry is. The strictness of land use regulations is, relative to other factors, still a minor player in the formation of a housing bubble.

But if the UK housing bubbles end up being bigger than US housing bubbles when this is all over (I think the FT forecasted a 25% decline in UK housing prices), that would indeed provide an interesting data point.