Econtalk transcript: Housing and Regulation
An excerpt from EconTalk on an issue I
am passionate about.
I started transcribing around 54 minutes in.
Scott Sumner:
So there's this perception that housing was really overbuilt... during the housing boom. And you know that's certainly true in some locations. But the data doesn't really tend to support that. Rents have been rising, actually fairly rapidly in recent decades... faster than people's incomes in many cases. And people that invest in rental apartments have done very very well in recent years. And one of the reasons for that is that there's a lot of restrictions on building now, so building since 2008 has been at very low levels, and yet the population continues to grow. So people are going more and more into rental units, they're having difficulty getting mortgages.
So that part of the real estate sector, rental units, is doing very well, and rents are rising and in many of the most prosperous parts of the country, you can actually argue that there's too little housing because of regulations that make it difficult to build, and so that pushes up prices and rents in those areas. So again we have a market that's kind of complex and I think the story that people focused on a few years ago was the over building in a few locations, but nation-wide you could argue that we actually aren't building enough housing, and as a result, the costs are going up, which means the returns to land lords in New York City and California and so on are actually very high right now.
Russ Roberts:
And home owners generally, right?
Scott:
Yeah, they get an implicit, you know, rent on the... And they may profit if the price of their home goes up in those areas.
Russ:
Which they have dramatically, in many of them. And ... you raise a great point, which is the restriction on supply part of this story. It depresses me greatly when people say things like, "We need to build some low-income housing in such and such a city" or "We need to have more opportunities for the middle class to have comfortable places to live." Well, in New York, in any city, again take the two places that, I'll take the three that I have some acquaintance with, New York, Washington and California. These are three places where it's very expensive to live if you're a young person starting out in your life and you'd like to either own a house, or just rent an apartment. And the question is why, because it wasn't always? And people say things like, "Well, California has great weather". Well, it had great weather in 1962. "New York's a great city". It was a great city in 1960. It had some issues, yes. But why is it that as these places have grown in their attractiveness, the mix of housing has, I suspect, moved greatly toward the high-end. And, uh, that I think is due to regulation. And it's a terrible result, and capitalism or markets get blamed. "The market doesn't produce low income housing, middle-income housing, it only produces high-end." Well there's a reason for that, there's a reason it's so profitable.
Scott:
I think a lot of people on the left don't fully realize how much of some of the issues they worry about is actually driven by regulation. One is inequality. And I'm working on an article on that topic right now. But also this investment question we were looking at may be part of it as well. And it's just a lot harder to get approval for all sorts of building projects. One is you know the housing, as we've been talking about.
But even things that people on the left tend to favor, you know, government projects, like high speed rail. In Massachusetts they fought endlessly to build a wind farm off the cost. Well these days these get tied up in the courts forever, and it's very hard to get a project actually built. A major, like, infrastructure project of that sort.
Because of the increasing complexity of regulation, land restrictions, environmental rules and so-on, it's just harder for us to have the sort of economy we had in the 1960s where we just build highways and housing developments all across the country whenever there was a demand for it in a certain location. And you know, there are costs of that. One is there's less investment in the economy. I would argue it worsens inequality in a number of ways as well. It's hurting renters right now, relative to home-owners. But that's something I think people on the left don't fully recognize when they think about the effects of regulation. They don't think about the connection with inequality. ...
Russ:
I was just in Israel for two weeks. They have security issues of course, but on the domestic side the thing people are most worried about is the price of food and housing. There have been protests in the street. Netanyahu almost lost this last election because of his failure to do anything about it. He's made lots of pledges, he's going to fix it. But the reason that there's a food and housing crisis in Israel is pretty straight forward. There's a lot of barriers to importing food and to creating retailing in food, so food's really expensive. There are cartels, literally, in some parts of food supply that keep the food price high, and growing. And that's, that's easily fixed if you wanted to, but politically it may be very difficult.
And with housing, the government owns a lot of the housing, a lot of the land in Israel. And to the extent that it doesn't, it makes it hard to use it privately. So, recently I was talking to a guy who's building a house. He said it's going to take 3 and a half years. When I told that story to someone else, he laughed, he said "Oh, he thinks it's going to take three and half years. Now, when it takes maybe half a decade to build a house, you're pretty confident that rental prices are going to be pretty high in a growing economy. Which is your point. And one way to quantify that would be to try to see how much longer it takes to build a house in Israel today than say ten or twenty years ago. I don't know if it's changed. It may have gotten a little bit shorter, but in the face of growing demand, it may be off set by that.
And similarly in the United States, when we talk about regulation in real estate, which is enormous in major urban areas, I'd like to see some measures: how long does it take? How many bureaucracies do you have to go through? We're still much better than Israel, but I'd say we're probably still in the ball-park. Maybe it's not the three and half year thing to build a house, but I assume if you wanted to start a real estate development in New York, it's a major political investment. And as you say, that rewards high-end, large firms. And if you're going to have to incur a large fixed cost, you're probably going to build on the higher-end. So I assume that's a part of the problem. That's a story, I'd like to see some evidence.
Scott:
Yeah, there's actually quite a bit of evidence that the cost is large. One piece is that in places like Los Angeles, if you have say a ten thousand square foot piece of land that is zoned for 2 units rather than 1 unit, it's worth vastly more money in the market place. And so that gives you a pretty good estimate of what that particular zoning rule, if it is only zoned for one unit, it tells you that zoning rule is costing quite a bit of money. In the hundreds of thousands.
Russ:
... Real estate, and the cost of renting, or the return to home owners who already own homes. And their ability to use the political process to protect those investments seems to me to be a really big problem, that doesn't get enough attention.
I started transcribing around 54 minutes in.
Scott Sumner:
So there's this perception that housing was really overbuilt... during the housing boom. And you know that's certainly true in some locations. But the data doesn't really tend to support that. Rents have been rising, actually fairly rapidly in recent decades... faster than people's incomes in many cases. And people that invest in rental apartments have done very very well in recent years. And one of the reasons for that is that there's a lot of restrictions on building now, so building since 2008 has been at very low levels, and yet the population continues to grow. So people are going more and more into rental units, they're having difficulty getting mortgages.
So that part of the real estate sector, rental units, is doing very well, and rents are rising and in many of the most prosperous parts of the country, you can actually argue that there's too little housing because of regulations that make it difficult to build, and so that pushes up prices and rents in those areas. So again we have a market that's kind of complex and I think the story that people focused on a few years ago was the over building in a few locations, but nation-wide you could argue that we actually aren't building enough housing, and as a result, the costs are going up, which means the returns to land lords in New York City and California and so on are actually very high right now.
Russ Roberts:
And home owners generally, right?
Scott:
Yeah, they get an implicit, you know, rent on the... And they may profit if the price of their home goes up in those areas.
Russ:
Which they have dramatically, in many of them. And ... you raise a great point, which is the restriction on supply part of this story. It depresses me greatly when people say things like, "We need to build some low-income housing in such and such a city" or "We need to have more opportunities for the middle class to have comfortable places to live." Well, in New York, in any city, again take the two places that, I'll take the three that I have some acquaintance with, New York, Washington and California. These are three places where it's very expensive to live if you're a young person starting out in your life and you'd like to either own a house, or just rent an apartment. And the question is why, because it wasn't always? And people say things like, "Well, California has great weather". Well, it had great weather in 1962. "New York's a great city". It was a great city in 1960. It had some issues, yes. But why is it that as these places have grown in their attractiveness, the mix of housing has, I suspect, moved greatly toward the high-end. And, uh, that I think is due to regulation. And it's a terrible result, and capitalism or markets get blamed. "The market doesn't produce low income housing, middle-income housing, it only produces high-end." Well there's a reason for that, there's a reason it's so profitable.
Scott:
I think a lot of people on the left don't fully realize how much of some of the issues they worry about is actually driven by regulation. One is inequality. And I'm working on an article on that topic right now. But also this investment question we were looking at may be part of it as well. And it's just a lot harder to get approval for all sorts of building projects. One is you know the housing, as we've been talking about.
But even things that people on the left tend to favor, you know, government projects, like high speed rail. In Massachusetts they fought endlessly to build a wind farm off the cost. Well these days these get tied up in the courts forever, and it's very hard to get a project actually built. A major, like, infrastructure project of that sort.
Because of the increasing complexity of regulation, land restrictions, environmental rules and so-on, it's just harder for us to have the sort of economy we had in the 1960s where we just build highways and housing developments all across the country whenever there was a demand for it in a certain location. And you know, there are costs of that. One is there's less investment in the economy. I would argue it worsens inequality in a number of ways as well. It's hurting renters right now, relative to home-owners. But that's something I think people on the left don't fully recognize when they think about the effects of regulation. They don't think about the connection with inequality. ...
Russ:
I was just in Israel for two weeks. They have security issues of course, but on the domestic side the thing people are most worried about is the price of food and housing. There have been protests in the street. Netanyahu almost lost this last election because of his failure to do anything about it. He's made lots of pledges, he's going to fix it. But the reason that there's a food and housing crisis in Israel is pretty straight forward. There's a lot of barriers to importing food and to creating retailing in food, so food's really expensive. There are cartels, literally, in some parts of food supply that keep the food price high, and growing. And that's, that's easily fixed if you wanted to, but politically it may be very difficult.
And with housing, the government owns a lot of the housing, a lot of the land in Israel. And to the extent that it doesn't, it makes it hard to use it privately. So, recently I was talking to a guy who's building a house. He said it's going to take 3 and a half years. When I told that story to someone else, he laughed, he said "Oh, he thinks it's going to take three and half years. Now, when it takes maybe half a decade to build a house, you're pretty confident that rental prices are going to be pretty high in a growing economy. Which is your point. And one way to quantify that would be to try to see how much longer it takes to build a house in Israel today than say ten or twenty years ago. I don't know if it's changed. It may have gotten a little bit shorter, but in the face of growing demand, it may be off set by that.
And similarly in the United States, when we talk about regulation in real estate, which is enormous in major urban areas, I'd like to see some measures: how long does it take? How many bureaucracies do you have to go through? We're still much better than Israel, but I'd say we're probably still in the ball-park. Maybe it's not the three and half year thing to build a house, but I assume if you wanted to start a real estate development in New York, it's a major political investment. And as you say, that rewards high-end, large firms. And if you're going to have to incur a large fixed cost, you're probably going to build on the higher-end. So I assume that's a part of the problem. That's a story, I'd like to see some evidence.
Scott:
Yeah, there's actually quite a bit of evidence that the cost is large. One piece is that in places like Los Angeles, if you have say a ten thousand square foot piece of land that is zoned for 2 units rather than 1 unit, it's worth vastly more money in the market place. And so that gives you a pretty good estimate of what that particular zoning rule, if it is only zoned for one unit, it tells you that zoning rule is costing quite a bit of money. In the hundreds of thousands.
Russ:
... Real estate, and the cost of renting, or the return to home owners who already own homes. And their ability to use the political process to protect those investments seems to me to be a really big problem, that doesn't get enough attention.