Government Land-Use Interventions: An Economic Analysis by J.K. Brueckner

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Madeline Greene
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1 Government Land-Use Interventions: An Economic Analysis by J.K. Brueckner The notion that government land-use interventions can be counterproductive has been an ongoing theme of World Bank research. Negative effects can emerge despite the best intentions of government officials. Problem is that urban real-estate markets are complex systems, so that interventions can have unintended effects.

2 Paper does the following: Enumerates various types of interventions. Provides a simple theoretical economic analysis of their effects. Surveys empirical evidence on these effects. Discusses motivations behind the interventions.

3 Types of interventions Urban growth boundaries (UGBs) Examples are Korea (studied by Bank), UK, some US cities. Building height (FAR) limits Best developing-country example is India (studied by Bank), used also in developed world. Cost-increasing regulations Piecemeal regulations that increase the cost of providing housing (set-back requirements, streeth width rules, etc.). Used worldwide; Bank study of Malaysia is noteworthy.

4 Direct bureaucratic control of land-use decisions Well-known example of impact is Moscow s inverted density contour (documented in Bank research). Happens also in China s cities. Racially based interventions Main example is South African black townships, which reversed normal location pattern (studied by Bank).

5 Economics analysis of effects Urban growth boundaries: Restrict supply of urban land. Result is higher housing prices (on a per-square foot basis), smaller dwellings, taller buildings.

6 $ $ r ugb p ugb r a r p x ugb x * x x Fig. 1a Fig. 1b Figure 1: Urban growth boundary 29

7 FAR limits By forcing buildings to be shorter, these limits again restrict the supply of housing. So housing prices rise, and dwellings shrink. The city also spreads out, and building heights actually rise in areas where the FAR limit is not binding.

8 FAR $ FAR limit p ugb H H far p x # x x Fig. 2a Fig. 2c Figure 2: FAR limit

9 Cost-increasing regulations By raising production cost, such regulations raise housing prices and reduce housing consumption. May lead to more-compact cities.

10 Direct bureaucratic control of land-use decisions In Russian case, planners built high-rise residential areas on the periphery of Moscow. Put large numbers of households far from jobs in the center. Reduced standard of living relative to alternate approach of redeveloping center at high density.

11 Figure 6: Population density in Moscow (source: Bertaud and Renaud (1997))

12 In China, similar bureaucratic control of land-use exists despite market reforms. Bureaucratic decisions can lead to wrong land-use intensities and inappropriate distribution of populations within cities.

13 Racially based intervention South African intervention put blacks far from center in remote townships. They gained from cheaper housing but paid much higher commuting cost, for a net loss. Whites did not get lower prices but benefited from shorter commutes, consequences of reduced competition for land. Welfare reduced overall. Like in Russia, area far from center had higher density than the center itself, an inefficient outcome.

14 $ $ r b r w-apart r a r w r b-apart black white x * x white black x * x Fig. 5a Fig. 5b Figure 5: Land-use intervention under apartheid 33

15 Figure 6: Population density in Moscow (source: Bertaud and Renaud (1997)) Figure 7: Population density in Johannesburg (source: Bertaud and Malpezzi (2003)) 34

16 China has similar high-density areas on urban fringe, where illegal migrants live in informal housing. A consequence of housing policies that deny formal dwellings to migrants lacking official residence status.

17 Evidence on effects of interventions Simulations suggest that a stringent UGB generates can generate a large welfare loss for consumers (equal to 7% of income in a realistic case). FAR limit generates a welfare loss equal to increase in commuting cost for person living at (now more-distant) edge of city. Loss calculated to be roughly 2 4% of income in case of Bangalore, India

18 Empirical studies, mainly based on U.S. data, often take the approach of counting the number of types of land-use regulations in force in a city, available from surveys of governments. A measure of housing prices is then regressed on this count variable, along with other covariates, and effect is typically positive. So evidence shows that proliferation of land-use regulations raises house prices.

19 Another approach is to investigate connection between new supply of housing (permits, starts) and a regulatory index. Results show negative connection. Yet another approach is to estimate housing supply function, and relate the elasticity of supply to stringency of regulation. Inverse relationship found.

20 Motivations for land-use interventions UGBs UGBs could be justified in a case where open land around the city generates amenity benefits. Higher housing prices might then be worth the environmental gain from open-space preservation.

21 But if few people care about open space, while government is controlled by environmentalists, then UGBs will yield a social loss. Less benign view of UGBs is that they serve to generate capital gains for homeowners by restricting housing supply.

22 FAR limits Sometimes motivated by aesthetics (Washington, D.C., Paris). In India, subjective disklike of density seems to be present. But FAR limits are also prompted by fear of inadequate urban infrastructure. Better to make required investment than to distort land use.

23 Cost-increasing regulations Designed to increase housing habitability in well-meaning fashion. But are the benefits worth the cost? If so, then private market could be trusted to provided the regulated features on its own, obviating the need for intervention.

24 Caveat Foregoing discussion not meant to criticize all forms of land-use intervention. Zoning laws help to isolate offending land-uses. FAR limits that help to guide development rather than severely constrain it can be useful. UGBs whose goal is to discourage scattered development rather than to restrict land supply may be helpful.

25 Land-use interventions and business productivity New economic geography stresses the importance of agglomeration economies, which depend on business density. Interventions that restrict densities, both for residential and business land-use, may prevent capture of some agglomeration benefits.

26 Lessons learned Government land-use interventions can generate many unintended effects that reduce social welfare. Economic analysis can help identify these effects, so that policymakers are able to make fully informed decisions.

Cities for development

Cities for development Tony Venables, Oxford & IGC 2.7 bn new urban dwellers by 2050 -- 1.4 mn per week India: 200k per week 2001-11 The cities that are constructed will be long-lived. Need to be places