Out of Control Policy Blog

Housing Prices and Regulation: Econ 101 Still Applies

We constantly talk about how land use regulations drive up the costs of new housing, and it is always nice to welcome a new addition to the body of evidence for this fact. From the venerable tandem of Harvard's Edward L. Glaeser and Wharton's Joseph Gyourko (along with Raven Saks), we get a new analysis of housing prices and regulation in Manhattan. Here's the abstract:

    In Manhattan and elsewhere, housing prices have soared over the 1990s. Although rising incomes, lower interest rates, and other factors can explain the demand side of this increase, some sluggishness in the supply of apartment buildings also is needed to account for these high and rising prices. In a market dominated by high rises, the marginal cost of supplying more housing is the cost of adding an extra floor to any new building. Home building is a highly competitive industry with almost no natural barriers to entry, and yet prices in Manhattan currently appear to be more than twice their supply costs. We argue that land use restrictions are the natural explanation for this gap. We also present evidence that regulation is constraining the supply of housing in a number of other housing markets across the country. In these areas, increases in demand have not led to more housing units, but to higher prices.

And here's an abstract of one of their previous studies showing that land regulation increases housing prices.

(hat tip: Peter Gordon)

Leonard Gilroy is Director of Government Reform


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