Regulation and Property Values in the United States

In this paper, John M. Quigley analyzes how land use regulations have affected housing costs in selected U.S. cities, and he looks at the welfare effects of zoning on the economy and nonpropertied groups. He concludes that land use regulations have increased housing values in many U.S. cities.

Quigley argues that land use regulations could be welfare enhancing, but only so long as special interest groups do not try to increase construction requirements beyond an appropriate level. Yet empirical and analytical evidence reveals that property owners who can influence land use policy have an incentive to use restrictive zoning in order to keep property values high (see also Fennell 2006).

To support this hypothesis, Quigley describes his own model and three other research projects in detail. The model generates two hypotheses: (1) when the amount of land restricted from development increases, housing prices everywhere will rise, leading to a drop in the demand for housing, lower consumer welfare, and an expansion of city boundaries; and (2) if the amount of area restricted from development remains the same but is located farther away from the city center where land values are low, property prices and land rents will decrease. As a result, the quantity of housing demanded in the city will increase and the urban boundary will expand less. Calibrating the model with stylized data demonstrates that even when only a small percentage of land is restricted from development, the effects on the prices of owner-occupied houses and rental properties are substantial. And locating restrictive areas peripherally generates large gains for existing landowners at the expense of renters and newcomers to the region.

In the first research project described, Quigley surveys studies of the relation between property prices and construction costs. His analysis reveals that since 1986 there has been a divergence between the price of a new single, detached home and construction costs (see figure 3.3 in this volume). Similar studies of Manhattan during 1984–2002 and of over a hundred metropolitan areas during 1950–2000 conclude that the ratio of selling prices to construction costs exceeded one beginning in the mid-1980s.

The second research project, carried out by Malpezzi, Chun, and Green (1998), constructs a regulation index using survey data to measure the direct price effects of land use regulations on properties. Studies using different sample sizes and alternative regulation indexes all find that housing prices correlate significantly with the level of regulation in a city. Moreover, heavily regulated areas exhibit low housing supply elasticities.

In the third research project described, researchers at the University of California, Berkeley, are measuring the impacts of regulation on property prices and on the ethnic composition of California cities using a detailed survey of regulatory stringency at the local level. They find that land use policies are likely to affect the distribution of minority households within metropolitan areas and that housing prices increase exponentially with the number of regulations.

Although empirical research has proven that land use regulations have significant impacts on housing supply and prices, Quigley emphasizes that abolishing zoning is not the solution. Rather, further research should focus on identifying an optimal level of government intervention at which the marginal social benefits of regulation equal the marginal social costs.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2006 and is Chapter 3 of the book Land Policies and Their Outcomes.