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How to Make Housing More Affordable

Summary:
Many people believe that the main reason housing is expensive in coastal California is that land is so scarce. As the saying goes, “They’re not making any more land.” That view is plausible. It’s also incorrect. Two economists who study US housing are Ed Glaeser of Harvard University and Joseph Gyourko of the Wharton School. Some years ago, they did a study that used a clever method of separating the effects of scarce land from the effects of restrictions on building. They looked at houses that were comparable in size, amenities, and location but that differed in one main respect: one had much more land than the other. If scarcity of land were the crucial factor, then a house with much more land should sell for a much higher price. But that’s not what they found.

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How to Make Housing More Affordable

Many people believe that the main reason housing is expensive in coastal California is that land is so scarce. As the saying goes, “They’re not making any more land.” That view is plausible. It’s also incorrect.

Two economists who study US housing are Ed Glaeser of Harvard University and Joseph Gyourko of the Wharton School. Some years ago, they did a study that used a clever method of separating the effects of scarce land from the effects of restrictions on building. They looked at houses that were comparable in size, amenities, and location but that differed in one main respect: one had much more land than the other. If scarcity of land were the crucial factor, then a house with much more land should sell for a much higher price. But that’s not what they found. Instead, a house with a quarter acre of additional land sold for only about $10,000 to $20,000 more. But, they found, a quarter‐​acre empty lot on which building was permitted often sold for over ten times that amount. That means that the key driver in high house prices is not scarcity of land but scarcity of building permits.

This is from David R. Henderson, “How to Make Housing More Affordable,” Defining Ideas, September 23, 2021.

And:

In the past two months, moreover, the California legislature has moved quickly to reduce even further state and local restrictions on building. Last week, fresh from defeating the recall election against him, Governor Gavin Newsom signed Senate Bill 9, a bill that abolishes single-family zoning. The bill allows homeowners to subdivide their lots and/or to convert homes to duplexes. A homeowner could conceivably split a lot into two lots and allow a duplex on each lot, effectively increasing the number of housing units by 300 percent.

It’s difficult to know how much new housing will result. One limit is that SB 9 exempts single-family lots in historic districts, fire hazard zones, and rural areas. Still, that would seem to leave lots of lots (pun intended) in which homeowners can add housing units. Slate reporter Henry Grabar, who is skeptical about how many new units will be built, writes, “On millions of parcels, the possible revenues from a duplex just aren’t high enough to justify the investment.” But Grabar also points out that governments in California grant permits for only a measly 100,000 units per year. If even 500,000 homeowners decided to build an additional unit each year, that would increase by 500 percent the annual number of new units built.

I also go after the “more mansions don’t help the middle class” argument and the “we can get more housing with price controls” argument.

Read the whole thing.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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