Wednesday, January 6, 2010

Krugman on Land Use Regs

Paul Krugman rightly notes that one of the key differences between the metropolitan areas that experienced housing bubbles and those that didn't is that the bubble cities tend to have much more restrictive land use regulations. Land use is actually an area of policy/law which, for some odd reason, I've always enjoyed a great deal (and which I'm looking forward to getting back to, once we make it to the other side of this financial crisis). Land use is the only area of law that can rival finance in terms of complexity (which I thrive on), as well as real world policy relevance.

In any event, Krugman cites the Brookings survey of land use regulations in his post. The Brookings survey is fine, but for a variety of methodological reasons, the Wharton land use database is vastly superior, and much preferred in the urban economics literature. I've uploaded the Wharton database here, in case you're interested (which you should be).

25 comments:

Anonymous said...

Just a thought about Texas. In the oil bust of the 1980s, Texas housing crashed and burned - especially Houston's. This time around, the oil business has remained fairly solid - especially in the early days of the crisis.

doc said...

One helluva data set, but with some astonishing omissions. I live and work in northwest Indiana, and a bunch of the largest cities/towns (Gary, Hammond, East Chicago, Munster, Highland, Griffith..) aren't included, while Whiting (with 5,000 residents--and one of the world's largest petroleum refineries) is. Slightly weird.

Doc Merlin said...

I am glad he made the observation. One thing our legislators and regulators should concentrate on is making changing legal land use easier and faster.

Overall, reducing governmental transaction costs is a good thing, imo.

Anonymous said...

I know this is late in the conversation, but I find the whole intuition underlying this relationship between land use regulations and house price sensitivity a little suspect.

First, if households are free to migrate between cities that are ex ante identical in terms of the bundle of wages and amenities offered to residents, then only city populations, not house prices nor the return to housing, will be affected by supply constraints. Cities with more arduous hurdles to development or that are restricted by the availability of land to develop will be smaller, not more expensive, in equilibrium.

Why? Consider a perfectly competitive industry where different firms produce, for whatever reason, at different marginal costs of production. Firms with higher costs do not receive higher prices, they only produce less. So, if we consider city choice and migration as part of demand, this intuition that has been popularized by Glaeser and taken at face value by Krugman, no longer holds water.

So, next question, why is it that we observe cities with such restriction with higher prices? Well, cities are not identical in terms of amenities and wages and some cities offer natural amenities or returns to particular types of human capital investments that are relatively unique and hard, if not impossible, to replicate elsewhere. If you have an MBA in finance, you no longer have an unlimited ability to choose among different cities. You'll most likely end up in NY, Chicago or SF. Same for technology (SF, Seattle, Boston) or entertainment (NY, LA). If residents have limited choice, then, and only then, will supply side restrictions begin to matter.

On the other side of the coin, you can put all the land use restrictions you want on land in Detroit or North Platte Nebraska and, guess what, there will be no effect on prices or returns whatsoever.

In fact, if one takes the land use regulation story to its logical limit, a city could easily increase their tax revenues by imposing lots of land use restrictions on existing households. While I think there is probably some evidence for this, it is not particularly wide spread. Why? People will leave for less expensive cities offering marginally lower amenity levels and the number of new residents incoming will decrease, taking us back to the reason why land use restrictions are not as important as econ 101 might lead you to think: migration.

taxpayer said...

The missing factor: real estate taxes. High real estate taxes, in places like Texas and Illinois, limit the amount of speculative buying, and therefore prices haven't as far to fall. Prop. 13 in California, and similar provisions in some other states, make it cheap for speculators to hold real estate, worsening the crash when it comes.

I can't seem to load your Wharton data from docstoc, wonder if it's available anywhere else?

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