Land Costs, Smart Growth and Housing Affordability

A new study from the Federal Reserve Bank by economists Morris A. Davis and Michael Palumbo finds that land makes up 50% of the value of residential property in large cities. This is up from about a third in 1982. The implications for Smart Growth and land use regulation are pretty dramatic. This results suggest land use regulations will have an even larger impact on housing prices and housing affordability in the future. Growth management policies primarily impact the ability of developers to access land for new residential (and commercial) development. As land makes up a bigger and bigger part of housing prices, small changes in the supply of land can have bigger absolute impacts on housing prices and affordability. Affordability will be tied more and more to public policy and less to construction costs. Moreover, most Smart Growth policies focus on increasing density. Higher densities are related to higher housing costs, mainly through the impact on land prices. Reason has two studies relevant to this discussion. One is on urban growth boundaries, and the other on statewide growth management laws.