Saturday, July 30, 2005

Why housing is so expensive

Slate has a nice summary of work by Ed Glaeser (Harvard) and Joe Gyourko (of U-Penn) on an alternative reason why housing prices are high, growing, and so variable from city to city.

The great mystery is on the supply side. Instead of the traditional formula "housing price equals land price + construction costs + reasonable profit," we seem to be seeing something more like "housing price equals land price + constructions costs plus reasonable profit + mystery component." And, most interestingly, the mystery component varies a lot from city to city.

The answer is zoning regulations, as measured by time it takes to get a permit for all those environmental impact and fire safety and other red tape necessary for new construction projects.

Glaeser & Gyorko's paper includes some of the data behind their analysis and just eye-balling it I see that Seattle appears to be tightening up and coming to resemble cities like San Francisco more than more affordable places like Dallas. Between 1989 and 1999, Seattle went from 72 to 90 by one measure, where Dallas went from 58 to 52. Anaheim (96 to 96), Boston (87 to 86), and San Francisco (98 to 97) were more stable.

[via Marginal Revolution]

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