Because prices of existing homes rise when new construction is constrained, existing residents have a strong incentive to manipulate political and regulatory processes to limit new construction.
In recent years, Manhattan condominiums have been selling for about $600 a square foot, more than double the cost of "building up," that is, adding additional floors to new Manhattan apartment buildings. In Why is Manhattan So Expensive? Regulation and the Rise in House Prices (NBER Working Paper No. 10124), coauthors Edward Glaeser, Joseph Gyourko, and Raven Saks conclude that the piecemeal regulation of new construction has reallocated property rights from landowners to existing residents, public commissions, and ad hoc collections of vocal, well-funded, opponents. The successful use of the regulatory process to block new construction has thus imposed a regulatory tax on homeowners.
When landowners were generally free to develop their property, increases in housing prices stimulated the construction of new units. From 1955-69, relatively modest increases in the price of housing were associated with increases in the supply of building permits in the following year. This association continued to hold, although less strongly, in the 1970s. By the 1980s and 1990s, though, changes in price were not correlated with changes in permits, despite rising per capita income.
Because prices of existing homes rise when new construction is constrained, existing residents have a strong incentive to manipulate political and regulatory processes to limit new construction. In Manhattan, the authors estimate these activities increase apartment prices by an amount equal to a regulatory tax of about $7,382 per apartment per year, or about 50 percent of housing costs for these condo owners. For 23 percent of their sample, the additional burden exceeds $10,000 a year. In their view, the current "poorly defined, widely diffused property rights help us to understand why sensible mechanisms have not come about where developers efficiently compensate existing homeowners for any losses due to new construction."
The next question is whether the regulatory tax reflects the social costs, congestion, wage effects, increased demand for city services, and the destruction of views and other amenities, generally thought to be imposed by new construction. After discussing the probable costs imposed by each of these factors, the authors conclude that "there is no negative externality (or combination of externalities) remotely large enough to justify the current gap between prices and production costs of condominiums in Manhattan...it is hard to escape the conclusion that regulatory constraints on building in Manhattan are far too restrictive."
Because housing in other boroughs is far more reasonable than in Manhattan, the authors calculate that New York City's overall regulatory tax was 12 percent of a house's value in 1999. The San Francisco, San Jose, Oakland, and Los Angeles markets, all in California, which is "well-known as the epicenter of the restrictions on new construction," had regulatory tax ratios ranging from 32 percent to 50 percent of a house's value. Washington DC, Newport News, and Boston had regulatory taxes of about 20 percent. These markets were the exception. Over half of the housing markets examined by the authors imposed minimal regulatory taxes on homes. Taxes on homeowners in Chicago were 6 percent. In Cincinnati, Birmingham, Minneapolis, Tampa, Houston, Philadelphia, and Providence, homeowners paid no regulatory tax at all.
-- Linda Gorman