New Index Measures Land and Regulatory Cost Impacts on Housing

Wendell Cox has developed a new index of the regulatory burden on land and housing costs for metropolitan areas. Construction costs have historically accounted for about 80 percent of the price of housing, with the remainder (the residual) attributed to land and regulatory costs. The Demographia Residential Land & Regulation Index: 2010 attempts to capture the effects of regulation implicit in housing markets where construction costs are lower (and land/regulatory costs are higher) as a portion of total costs.

Since land-use regulations most often influence the availability of land, and regulatory costs are not part of normal construction costs, urban areas and cities with more restrictive regulations will have a higher proportion (more than 20 percent) of their housing price reflected in these effects.

I am generally skeptical of these kinds of indexes because I lot of the nuance of regulation is lost in trying to aggregate these effects on a metropolitan level. Nevertheless, I think these attempts are useful in moving the debate forward and thinking about the implications of land-use regulation. Moreover, I like the idea that Wendell has started with eleven metropolitan areas rather than looking at a much larger set. This at least permits the ability to consider the individual characteristics of these metro areas.

The metro areas included in the study are:

  • Atlanta (less restrictive)
  • Dallas-Fort Worth (less restrictive)
  • Houston (less restrictive)
  • Indianapolis (less restrictive)
  • Minneapolis-St. Paul (more restrictive)
  • Portland, Oregon (more restrictive)
  • Raleigh-Durham (less restrictive)
  • St. Louis (less restrictive)
  • San Diego (more restrictive)
  • Seattle (more restrictive)
  • Washington, DC-Baltimore (more restrictive)

An index of 1.0 indicates that construction costs are at or near the historical average of 80 percent of average home value. The report finds: “The metropolitan markets with more restrictive regulation have an average Demographia Residential Land & Regulation Cost Index of 5.9 for detached housing, while the metropolitan markets with less restrictive regulation average 1.0.”