It is no secret that major urban centers across the United States are experiencing steep increases in housing prices. While economic growth has fueled an increased demand for housing, wages have simply not been able to catch up to rents.
Naturally, politicians come swooping in to the rescue with a cornucopia of interventionist policy proposals — subsidies, rent controls, etc. — to solve the current housing affordability crisis in urban areas. California, which is no stranger to housing-affordability problems, recently saw Governor Jerry Brown (D) sign a package of housing-affordability bills into law that include more state funding for below-market-rate housing and cash incentives for local governments to create high-density housing districts next to public transit.
Simply put, these measures are Band-Aids at best, and have the potential to create a whole new set of unintended consequences in the housing market.
The real issue at hand in these discussions involves housing supply. Housing supply has simply not been able to keep up with the unprecedented demand for housing in large urban centers. Sadly, most policymakers and pundits overlook this elephant in the room.
The present supply dilemma can largely be attributed to onerous zoning regulations which effectively reduce the overall supply of housing units in the market. This article will take a closer look at the impact of zoning regulations on housing affordability and what must be done to ensure a dynamic, yet affordable housing market for all consumers.
Understanding Zoning Regulations
To get a better grasp of the current housing affordability dilemma, one must first understand what zoning regulations entail. Zoning regulations are a type of land-use regulation that are under the purview of city or county ordinances. Through zoning ordinances, local governments determine how property is used within their confines. These laws limit the commercial use of land in order to segregate commercial venues from residential neighborhoods. Additionally, zoning laws may also set regulatory standards for buildings and the land area surrounding them, which may include such as size, dimension, and scale limitations. These standards are established with the aim of promoting urban growth in a reasonable and sustainable fashion.
Needless to say, the zoning approval process is no simple matter. Developers and builders must jump through substantial bureaucratic hoops for planning commissions to finally approve their projects. Over the past few decades, the number of zoning regulations has increased in major cities across the country, and they have become a regulatory fixture that all developers must face when planning out their projects.
The Negative Economic Effects of Zoning
Historically speaking, comprehensive zoning laws did not come until existence until the 20th century. Prior to the comprehensive-zoning era, property rights were still respected and the courts mediated disputes between landowners. However, the arrival of the modern automobile completely changed the game.
Los Angeles paved the way for comprehensive zoning by passing the first large-scale zoning ordinance in 1908, with the intent of separating industrial zones from residential zones. Soon, countless cities across the nation followed Los Angeles’s lead and implemented zoning laws of their own.
At first glance, zoning regulations make sense: they allow cities to control neighborhood traffic, contain pollution, and preserve home values. However, as time has passed, the scope of zoning laws has expanded beyond their original objective. Modern zoning laws now dictate aesthetic standards for creating visually pleasing urban environments, while also aiming to protect the environment.
Although the intentions of these zoning measures are noble, their diverse objectives not only conflict with each other, they create a set of unintended consequences that harm consumers.
The harsh reality is that modern zoning ordinances have now morphed into a multi-layered regulatory boondoggle. Thanks to the wide scope of these laws, city planning bureaucrats have considerable power in the approval process of housing developments. This delays or even outright bans the construction of certain housing units, thus reducing the overall supply of housing.
Excessive zoning laws are at the root of the supply problem, which in turn has created housing affordability crises in major cities across the country. When local governments arbitrarily impose land-use restrictions that separate commercial areas from residential areas, it results in a decrease of the housing supply. Consequently, the decreased housing supply leads to price increases in housing — a stark reflection of the perverse effects of zoning restrictions.
These observations are not just confined to the theoretical realm of economics. In her piece, Zoning, Land-Use Planning, and Housing Affordability, Cato Institute Scholar Vanessa Brown-Calder illustrates how increased zoning regulation is associated with the rise of real average home prices in 36 states. Generally speaking, the states that increased land-use regulations the most tend to have higher housing prices.
Socially Destructive Effects of Zoning
More than just byzantine economic figures and numbers, onerous zoning regulations also have questionable effects on social cohesion. In the Death and Life of American Cities, Jane Jacobs famously coined the planning term “Eyes on the street,” where the presence of people in mixed-use areas could keep criminals at bay and prevent them from committing crimes at will. The major challenge in creating such a dynamic is that current zoning codes throughout the nation hinder the development of such a mixed-use environment.
What can be gathered from Jacobs’ analysis is that stable urban areas emerge from voluntary human action, not so much top-down central planning. In trying to design cities by fiat, planning bureaucrats inadvertently create a host of unintended consequences — high crime and increased housing costs — that hurt the very people they intend to help.
Current Solutions: Half Measures at Best
Sadly, current debates on housing policy mostly focus on various interventionist strategies, as opposed to private solutions, to tame housing costs. Common proposals include rent controls and subsidized housing, which on the surface seem reasonable, but are rife with unintended consequences. On one hand, rent controls function just like any other price control, where artificially low prices lead consumers to demand more of a good (housing in this case) than producers are willing to supply. When housing demand exceeds supply, housing shortages emerge, which is a common occurrence in cities that implement rent control.
On the other hand, subsidized-housing policies miss the mark by effectively subsidizing the dwellers and not the dwellings. As a result, the number of families looking to occupy subsidized units increases instead of the number of housing units being built.
When it comes to economic interventionism, the law of unintended consequences reigns supreme.
Give the Free Market a Chance
The solution to the current housing affordability crisis is increasing housing supply by allowing markets to meet the demand. To achieve that, policymakers should have all liberalization measures on the table — above all, zoning deregulation.
There is a natural tendency to believe that deregulating zoning will lead to a chaotic environment rife with chaos, crime, and decay. But this was simply not the case throughout most of US history. Even to this day, cities like Houston serve as standard bearers for lax zoning policies as a viable strategy for urban development. Such a liberalized zoning and entrepreneurial environment has served Houston well, as it has turned into one of the most affordable and prosperous metro areas in the nation.
Housing policy should be focused on consumers, not on satisfying the whims of politically entrenched developers or housing bureaucrats. It should involve policies that strike at the root of the problem — lackadaisical housing supply — and not hack at the branches by implementing more of the same policies that created the current supply crisis in the first place.
Housing is not a right, but consumers deserve better when it comes to housing variety in the marketplace. And the best way to do that is by hacking away at cumbersome regulations like zoning ordinances.
Image: Los Angeles by Nancy Dushkin.