Urban Containment (Smart Growth): Consequences for the Economy

Recently published research by Brian N. Jansen and Edwin S. Mills represents notable addition to the already rich academic literature that associates more stringent land use regulation with higher house prices. The analysis is unusually comprehensive and its conclusions indicate greater consequences than is usually cited. Mills is Professor Emeritus of Real Estate and Finance at Northwestern University and is renowned for his contributions to urban economics over more than five decades. Their conclusion that stringent land use regulation was a principal cause of the housing bubble and bust is broadly similar to mine, as contained in the National Center for Policy Analysis report The Housing Crash and Smart Growth.

The Research

The comprehensiveness of the research is indicated by the fact that it covers all of the 268 metropolitan areas in the United States for which complete data was available. Jensen and Mills analyzed house cost trends using the broad based Wharton Land Use Regulatory Index (WRLURI) as described by Gyourko, Saiz and Summers (Note). The focus was on the trend of house prices leading up to 2006, which was the approximate point at which the peak of the housing bubble was reached. Their econometric analysis showed that “stringent land use controls raise house prices.”

They also found that more stringent land use controls were associated with greater house price losses following the peak.

“The strong conclusion of this paper is that stringent residential land use controls were a primary cause of the massive house price inflation from about 1992 two 2006 and possibly of the deflation that started in 2007.”

This is not surprising, since the artificial elevation of prices by stringent land use regulation could expected to set the market up for a greater fall in any bust. Overall, this finding is consistent with the work of others (such as in Glaeser and Gyourko) who have associated more stringent land use controls with greater house price instability (price volatility).

Consistency with Economic Principle & Previous Research

The Jansen and Mills findings reiterate those of a large body of research. Economists Richard Green and Stephen Malpezzi summarized the issue a decade ago:

“When the supply of any commodity is restricted, the commodity’s price rises. To the extent that land – use, building codes, housing finance, or any other type of regulation is binding, it will worsen housing affordability.”

It is not often recognized that this relationship is acknowledged by proponents of more stringent land use policies. A Brookings Institution team led by University of Utah Professor Arthur C. Nelson indicated that “If … policies serve to restrict land supplies, then housing price increases are expected.” Any other effect would be the equivalent of “sun rising in the West” economics.”

Whether the more stringent land use regulations are blunt tools like the urban growth boundaries of Vancouver, Sydney, Portland or the San Francisco Bay Area or the large lot suburban lots that have rendered Boston’s urban densities nearly as low as Atlanta, artificial limits on land for development lead to higher house prices, other things being equal.

This will come as no surprise to those familiar with the work of Dartmouth economist William Fischel who attributed California’s high house prices to stringent land use regulation. He noted that until around 1970, California house prices had been nearly the same, relative to incomes as the rest of the nation, before more stringent land use regulation began. Now house prices in coastal California markets are double those in liberally regulated markets, measured by the median multiple (median house price divided by median household income). California regulations typically involve severe constraints on land development on and beyond the urban fringe and high development impact fees.

Stringent Land Use Regulation: Hobbling the Economy (and Worse)

Jansen and Mills squarely place blame for the Great Financial Crisis on stringent land use controls.

“Indeed, it is difficult to imagine another plausible cause of the 2008–2009 financial crisis. Popular accounts simply refer to a speculative housing price bubble. But productivity growth in housing construction is faster than in the economy as a whole and the US has an aggressive and competitive housing construction sector. In the absence of excessive controls, housing construction would quickly deflate a speculative housing price bubble.”

This issue was not only suggested in the NCPA research indicated above, but was also cited by members of the congressionally established United States Financial Crisis Inquiry Commission. The Commission’s report noted that much larger housing bubbles occurred in the so-called “sand states” of California, Florida, Arizona and Nevada. Three of the 10 members issued a minority opinion citing land use controls as one of causes of the housing bubble (which is widely considered to have sparked the Great Financial Crisis). The major metropolitan areas in the “sand states” all had stringent land use restrictions that severely limited land available for urban development.

“Land use restrictions. In some areas, local zoning rules and other land use restrictions, as well as natural barriers to building, made it hard to build new houses to meet increased demand resulting from population growth. When supply is constrained and demand increases, prices go up.”

Their expectation that the absence of excessive controls would have defused the housing bubble (“In the absence of excessive controls, housing construction would quickly deflate a speculative housing price bubble”) is supported by the experience of metropolitan areas with liberal land use regulation. Overall, the median multiple remained near or below 3.0 in liberally regulated markets. This standard has typified affordable markets since World War II, as well as California markets to the early 1970s and Portland to 1995. The retention of housing affordability is especially significant in Atlanta, Dallas-Fort Worth and Houston, experienced some of the largest rates of domestic in-migration during the bubble. This is in contrast to the more stringently regulated high cost markets of coastal California, which experienced huge out-migration during the same period.

Jensen and Mills also considered the impact on metropolitan economies, and concluded that:

“…stringent land use controls raise house prices, and high house prices lower population, real incomes and employment.”

The Imperative for Job Creation and Economic Growth

All of this is particularly important because housing is the most expensive element of household budgets, and unlike transportation and most consumer goods, is extremely sensitive to varying local and regional public policies. Where households have to pay more for housing, they have less discretionary income and necessarily have a lower standard of living. This is deleterious to virtually all households and is especially burdensome on lower income households.

Many young adults are “doubling up” with their parents, deferring their own independence, facing huge student loan debts and inadequate employment prospects in what may become the Great Malaise. Middle class households face income stagnation. Taxpayers in many jurisdictions face unprecedented burdens in funding unsustainable government employee pension benefits. Only job creation and economic growth can solve these problems. The last thing the economy needs is stringent land use policies that reduce employment, economic growth and per capita real incomes.

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Note: J. Gyourko,, Saiz, J., & Summers, A. (2008). “A new measure of the local regulatory environment for housing markets.” Urban Studies, 45(4), 693–729.

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This article is adapted from The Consequences of Urban Containment published in newgeography.com

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