Do zoning laws cause the real-estate bubble?

How the dismal science applies to your life.
July 29 2005 6:40 AM

Is Housing Too Expensive? Blame the Government

Maybe zoning laws are causing the real-estate bubble.

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When you buy a house, you're not just paying for the land and construction costs; you're also paying for a building permit and other costs of compliance. You've got to get the permits, pass the zoning and historic preservation boards, ace the environmental impact statement, win over the neighborhood commission, etc. If Glaeser and Gyourko are right, that's the mystery component right there.

It's hard to test this theory directly, because it's hard to get good measures of compliance costs in various cities. But Glaeser and Gyourko did the next best thing: They measured a part of the compliance costs, namely the average length of time for a permit to be granted.

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If the theory is correct, that length of time should be a good but imperfect predictor of the mystery component in housing prices. The data largely support this theory. About half of all cities are rated 2 (on a scale of 1 to 5) in terms of how long it takes to get a permit; these are, without exception, the cities with the lowest mystery component in housing prices. Cities rated 3, 4, and 5 all have higher mystery components. (A bit disconcertingly, so do the three cities—Minneapolis, Chicago, and Anaheim—that are rated 1. Peculiar as these exceptions are, there are at least only three of them, and we should expect some anomalies given that Glaeser and Gyourko's measure of zoning costs is rather crude.) You can talk all you want about crazed speculators and bubbles in housing prices, but you still have to explain why competitive forces don't bring prices right back down. According to Glaeser and Gyourko, it's ever-expanding zoning laws that get in the way. If you want to lower prices, that's the bubble you've got to burst.

Steven E. Landsburg is the author, most recently, ofMore Sex Is Safer Sex: The Unconventional Wisdom of Economics. You can e-mail him at armchair@landsburg.com.

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