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Lower property values? That’s the point.

Summary:
In a recent post on zoning, some commenters pointed out that new housing development can lower the property values of existing homeowners. That’s true, indeed the whole point of new development is to make housing more affordable for those who do not have a home in the area where they’d like to live. If one argues that we should use regulation to maintain property values, that’s sort of like saying that we should use regulation to prevent millennials from living in cities where their parent live, or that we should use regulation to make it harder for homeless people to find housing. Perhaps some people are mixing up pecuniary and technical externalities. A technical externality is something like air pollution, where one person’s activity physically damages another

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In a recent post on zoning, some commenters pointed out that new housing development can lower the property values of existing homeowners. That’s true, indeed the whole point of new development is to make housing more affordable for those who do not have a home in the area where they’d like to live.

If one argues that we should use regulation to maintain property values, that’s sort of like saying that we should use regulation to prevent millennials from living in cities where their parent live, or that we should use regulation to make it harder for homeless people to find housing.

Perhaps some people are mixing up pecuniary and technical externalities. A technical externality is something like air pollution, where one person’s activity physically damages another person. It may represent market failure.  A pecuniary (monetary) externality is like when a Chevron gas station opens up next to an existing Exxon station. It adds competition and thus reduces the monetary value of the Exxon station owner’s business.  It does not represent market failure.

Every property is like a small business. Owner-occupied businesses are producing housing services for the owner, whereas rental property sells the service to someone else. Having a regulation that restricts new development is no different from have a regulation that bans new restaurants or gas stations, in order to protect incumbent businesses.

It is theoretically possible that new housing construction could produce negative technical externalities, such as underpriced traffic congestion. But as a practical matter, dense infill development is good for the environment, which is why the smarter environmentalists favor the “YIMBY” position.

If you don’t allow high rise apartment buildings along transit lines in LA or Silicon Valley, the alternative is more suburbans sprawl in places like Riverside and San Bernardino counties, which is even worse for the environment. And if people move from California to Texas, that’s even worse (in terms of carbon emission.)

Zoning should not be used to prevent housing construction.  If zoning is to be used at all, it should only be for technical externalities, such as preventing a polluting steel mill from opening up next to a residential neighborhood.  Based on the experience of Houston, I’m not convinced that we need any zoning laws.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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