Monday, March 10, 2008
Are restrictive land use laws the real culprit in the housing bubble dilemma? Yes, according to Randall O’Toole of the libertarian-minded Cato Institute. He argues that laws inflated the price of housing –- mostly by restricting the supply –- which then caused borrowers to have to seek out risky loans in order to pay for them, and which many now cannot pay back. He cites the research by Harvard’s Edward Glaeser and others that concluded that land use laws were the major culprit in the recent housing price inflation. This effect is most prominent along the coasts, where there typically are more progressive-minded laws to protect “open space,” etc.
I have written favorably a number of times about the studies by Glaeser, et al. But the housing bust makes me pause. A number of questions remain unanswered in my mind. If restrictive development laws were the dominant factor in causing prices to rise, why did we experience great inflation only from 1995-2005, and not before? If tough development laws are the major factor in causing high prices, why do we now have a bust (in the Tampa Bay area where I live, for example, prices are falling)? And how does this supply-oriented theory explain examples such as Las Vegas, where prices rose as fast as any place (and are now falling) and which is not famous for its restrictive laws (just the opposite, of course).
In sum, I think that we should concede that greatly increased demand -- facilitated by easier credit than we were accustomed to –- played large role in the housing bust and boom. This is not to say that restrictive land use laws don’t cause prices to rise. A University of Washington economist argues that they add an additional $200,000 to the price of a typical home in the Seattle area (presumably as opposed a completely free market, which would of course place subdivisions on top of Mt. Rainier). My speculation (the kind in the mind, not the kind with cash) is that a combination of both tough development laws and easy credit together explains what has happened …