Perhaps the most serious problem with smart growth and other land-use regulation is that it can dramatically reduce the affordability of housing in regions that adopt such regulations. This denies the American dream to low-income people and place huge burdens on young families and middle-income people moving into a region. In turn, unaffordable housing slows regional growth as employers look to more affordable areas to locate their offices and factories.
While slower growth may please some, smart-growth advocates claim their goal is not to slow growth but to merely manage or control it. Whatever the goal, growth management creates clear winners and losers, with the winners being anyone who owns their own home at the time the rules are adopted and the losers being everyone else, including who moves into the region after the rules are adopted.
Zoning and other regulations designed to limit urban expansion or impose lifestyle choices on other people all serve to drive up the cost of housing, especially those forms of housing not favored by the planners, such as single-family homes with yards. Urban-growth or urban-service boundaries create artificial shortages of land that drive up land prices. Other regulations, including design codes, tree ordinances, and extensive review processes, all increase the costs of home construction.
In 2004, Coldwell Banker estimated the cost of a typical, 2,200-square-foot, four-bedroom house in more than 300 different communities (44-kb Excel spreadsheet). The cost ranged from $105,000 in Charlottetown, Pennsylvania to $1.7 million in La Jolla, California. While there is obvious some status involved in living in, say, Beverley Hills (the second most expensive community), in general the cities with the highest costs were ones with the most housing regulation. The most expensive areas tended to be in California, while the least expensive tended to be in the Midwest. (Updates for 2005, 2006, and 2007 are also on this disk.)
Housing prices don’t mean much unless they are compared with incomes, as high prices in one area may simply reflect high incomes. The National Association of Home Builders’ housing opportunity index (24-kb Excel spreadsheet), estimates the percentage of housing in various markets is affordable to a median-income family in those markets. Again, the least affordable markets are in California, Oregon, and other highly regulated places.
Some people have argued that the housing opportunity index is based on faulty data. The original source data, which everyone agrees are reliable, are from the Census Bureau, which estimates incomes and housing values for households and homes throughout America. In Did Smart Growth Make Portland Unaffordable? (588-kb rich text document), economist Randal O’Toole compares numbers from the 1990 and 2000 censuses and shows that four of the five regions with the greatest losses in affordability were Oregon urban areas that adopted smart-growth plans in the 1990s. A detailed 176-kb spreadsheet presents this data for some 300 urban areas. (These data are thoroughly updated in The Planning Penalty, American Dream Coalition’s 2006 research paper on this issue.)
All of this information indicates that land-use regulation makes housing less affordable. So it is no surprise that a recent study (364-kb pdf) published by the Harvard Institute of Economic Research concludes that “government regulation is responsible for high housing costs where they exist.” In particular, “difficult zoning seems to be ubiquitous in high-cost areas,” says the study.
For example, the study found that, when the time it takes to get a permit to build a subdivision of less than fifty homes doubles, “15 percent more of the housing stock becomes quite expensive.” This happens for two reasons. First, increasing the permit time adds to the developer’s costs. But cities that require more time probably also impose more requirements on homebuilders, such as design codes, impact fees, and other things that increase housing prices.
“If policy advocates are interested in reducing housing costs,” say the authors of the Harvard study, “they would do well to start with zoning reform. Building small numbers of subsidized housing units is likely to have a trivial impact on average housing prices.”
While smart-growth advocates give lip service to affordable housing, what they mean is subsidized housing for low-income people. Their policies drive up home prices for everyone, and the housing subsidies help only a few people.
For example, housing prices in San Jose are three to four times as great as in less-regulated cities such as Phoenix and Las Vegas, even though the latter communities are growing much faster than San Jose. The total current value of San Jose housing is about $150 billion, suggesting that roughly $100 billion of that value is the result of zoning and regulation. By comparison, San Jose has provided $180 million worth of housing subsidies to low- and moderate-income people in the last decade, which makes up less than 0.2 percent of the cost of regulation. These subsidies benefit just 2 percent of the households in San Jose and provide virtually no help to anyone else.
Many regions respond to rising housing prices by requiring that developers sell a portion of their new homes to low-income families at below-cost prices. As shown in a paper(48-kb pdf) by Portland real estate analyst Jerald Johnson and in a report (488-kb pdf) published by the Reason Foundation, such policies do more harm than good as they drive up the cost of housing for everyone not fortunate enough to buy one of the below-cost homes.
The other problem that growth management creates for housing is that it promotes bubbles. Smart growth and other growth-management rules lead to sharply rising housing prices, attracting speculators and making the housing market prone to booms and busts. Housing prices in many California regions that have long practiced growth management fell by as much as 25 percent in the early 1990s, leaving many families bankrupt and devastated. A paper on housing bubbles (1-mb rich text document) by economist Randal O’Toole shows that there is a strong correlation between growth management and housing bubbles.
See the References and Experts page for additional data sources and studies of the effects of smart growth on housing prices.
Growth management divides a community into haves and have-nots depending on whether they owned their homes when the policies were put into place. The haves enjoy equity gains and so they support the policies. In essence, planning allows homeowners to treat their housing markets as a cartel, limiting supply to boost the values of their own properties.
Of course, few of them see it this way. Instead, they are told that growth management will make their communities more livable. When the rules are passed, housing prices spike upwards. Everyone pats themselves on the back because the higher prices prove that they passed the rules just in time and that the rules have made their community so livable that people are willing to pay even more to live there. Any suggestion that the price spike is due to shortages created by the rules is strongly denied.
Land-use planning should not be used to deny the American dream to those who have not yet achieved it nor to artificially boost the wealth of those who have.