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The Economics of Land Use Regulation: Housing Prices, Urban Sprawl & Corruption XREAP Network Workshop: Barcelona 17th December 2007 The Economic Analysis of Land Use Planning Paul Cheshire email [email protected] December 2007 Land Market Regulation: ‘Planning’, ‘Zoning’, ‘Growth Boundaries’…. • Land is an environmental resource, a factor of production and – as space – a good giving direct welfare • In general land use regulation only treats land as an ‘environmental resource’ • Land use planning a system of regulation via direct intervention • Land a scarce resource but allocation only partially via markets - or not at all • Think about some of the economic implications of this; estimate some of the effects in UK residential markets– serves as dreadful warning! • Look also at gross costs in commercial markets • And - can we use price information to improve economic efficiency of planning? Why Regulate Land Markets? • • • Clear problems of market failure Each plot of land specific location: lumpy and illiquid Value – welfare/productivity – of all plots influenced by uses on neighbouring plots: lead smelting, bull breeding, agricultural chemicals, gardens…. • So an intrinsic problem of externalities from interdependencies between neighbouring plots • ‘Public Goods’ –open space, rare habitats, beautiful scenery, mountains, sea shore etc • Coasian solutions impractical – transactions costs • Internalisation via Pigovian taxes? • • • ‘Solutions’ have come from design, architecture & civil engineering traditions – ‘planning’ ‘zoning’ Era of utopian visions, belief in central planning (in UK part of post WWII socialist reconstruction – land use and economic planning) Planning Restricts the Supply of What? Legal, institutional context critical So - lots of good reasons for land use regulation only interest if regulation restricts supply relative to demand – of… 1. Space – land by locations & use category (e.g. – residential or retail); building heights 2. Land+building bundles (often in US system) 3. Development - by imposing costs e.g. delays, compliance, rent-seeking • • And demand for space as consumption good largely driven by real incomes – not household numbers Also demand for space as factor of production – so output & incomes? May think Growth Boundaries New but in UK a very long history… • A proclamation of 1580 commanded the subjects of Queen Elizabeth I to: • “desist and forebeare from any new buildings of any house or tenement within three miles of any of the gates” of the City of London “where no house hath been known” • 3 mile Tudor Green Belt later extended to 7 miles but never fully enforced. State connived at avoidance of the law increasingly preferred fines to knocking down all buildings • In effect became transmuted into a green field development tax and another source of state revenue • Then as now – stop hovels encroaching on royal palaces & burghers’ villas [suburbs-subhuman] • Only repealed with London’s rebuilding post-1666 ‘Great Fire’ • Rational economic analysis and political economy…. The Costs & Benefits of British-style Supply Restriction • Planning creates amenities - local public goods • Retains type 1) open space within cities (parks etc): this is valued: open space with public access • Type 2) open space beyond growth boundary – ‘urban containment’ – Greenbelts: Open space but no public access • Separates industrial, commercial residential uses: less industrial space within residential areas is valued • But - constrains land as ‘pure-space-with-accessibility’ – ‘land’ in strict sense of classical urban economics • Does not constrain supply of housing directly: indirectly via land availability • Evaluation of net welfare effects of, say, relaxation requires: • Valuing of loss of Type 1) & 2) open space • Valuing lower land and house prices (& bigger houses & gardens). New German houses 44% bigger than British: Dutch 45% cheaper per m2 Welfare Costs of Containment? • Residential is main consumer of ‘urban’ land • Price of ‘pure land’ increased => costs of housing higher: consumers’ choices constrained; land substituted out of consumption - so higher densities. • Welfare gross cost is loss of income/other goods and sub optimal attribute bundle consumed • Net cost allows for loss of open space +other amenities created by planning consequent on relaxation of restriction • So to estimate need to know prices and structure of demand – contribution of attributes to welfare and rate of substitution between attributes A Method for Estimation Net Welfare Impacts (Cheshire & Sheppard, 2002) 1. Estimate the structure of hedonic prices for land and other attributes; 2. Using prices + household incomes - estimate demand system including land and planning produced amenities; 3. Use demand system to determine a utility level for each household in status quo; 4. Use utility level + observed incomes + household numbers + value of land at periphery to estimate share of land made available for residential consumption (equilibrium =>land supplied consumed); 5. To estimate gross benefits: For amenities i) use demand system to estimate (reservation) price that if no planning system; ii) for each household calculate income compensation needed to maintain observed utility when amenity price raised to reservation price – so household demand for amenity is zero 6. To estimate net benefits: i) Estimate change in land available for consumption associated with planning; ii) for given relaxation in land supply/reduction in amenities estimate new household utility levels & increase in land consumption iii) for each household calculate implied variation in income equivalent to new utility level. Welfare Costs of Containment Net costs of Land Use Planning: Reading 1984 Modest Significant Relaxation Relaxation Average net cost of land use planning per 210.94 household - £ p.a. 407.44 S.D. across households 376.68 335.40 Net cost as per cent of income 2.01 3.89 Capitalised land value at urban periphery 30 000 25 000 Per cent increase in urbanised area 46.9 70.7 The Distribution of Planning Benefits relative to Incomes 30 Industrial Land Use Percent 25 Accessible Open Space 20 15 Income Shares 10 1 Inaccessible Open Space 2 3 Quintile 4 5 Costs? Or Asset Values? • • • • Costs are in terms of ‘income’ flows But amenities capitalised into house prices Houses including land are part of asset portfolio As real and relative house prices rise over time with rising incomes and constrained land supply asset values become relatively more important • The longer growth is constrained the more difficult it is to relax constraints? • But the longer growth is constrained the more serious economic impacts become – including macroeconomic management & monetary policy • Fischel W. (2001): Barker, 2003; Barker II July 2006 How Have Net Welfare Costs Changed Over Time? • Housing – many characteristics • Physical + locational (including very important local amenities, public good & neighbourhood characteristics) • Hedonic models => price of a ‘house’ – aggregate of each of its characteristics • So need to think of supply, demand & price of individual characteristics • Some attributes ‘industrially’ supplied e.g. central heat • Space – both internal & in gardens (& as public open space) – a characteristic for which there is an identifiable demand …& supply via planning • But – empirically – locational attributes dominate value of ‘land-as-pure-space-with-accessibility’ (concept implicit in monocentric trade-off model) Getting a fix… • Exceedingly resource intensive to estimate net welfare costs • Can we get relatively clear evidence from more modest research effort? • If planning generates amenities and also restricts supply of space: • First question: What has happened to price of individual characteristics over time? • Have planning produced amenities or private space become relatively more valued? Changes in Prices: Selected Attributes Reading Housing Market, 1984-93 Income (pre-tax) from sample Price Level (1987=100) Sample mean house price Reproducible attributes Central heating Bedrooms Bathrooms + WC Planning amenities Less industrial land More open accessible land More closed unbuilt land1 Space (price per m2) Garden Space : at centre at periphery median distance Internal floorspace 1984 1993 % Change £13,694 £28,969 111.5 91.0 141.9 55.9 £51,066 £94,990 86.0 £4,954 £2,599 £4,687 £5,997 £2,801 £6,229 21.1 7.8 32.9 £74 £51 £102 £224 £227 £60 202.7 345.1 - 41.2 £49.5 £4.5 £12.8 £171 £152.3 £22.9 £32.1 £425 207.9 404.9 151.5 148.5 So Real Price of Space Rises and... In Britain policy constrains the supply of space – not the supply of buildings+land 1) Demand for space driven very much more by real incomes than household numbers… & this feeds through to house price changes (income elasticity of demand for space both in houses & gardens at sample mean, above 1.5 Cheshire & Sheppard, 1998); & 2) Since housing attributes can be substituted for each other (e.g. floors, terraced/detached, space, public open space, room size/design) – expect land prices to have risen more than house prices Long Run Real Land & House Price Indices(1975=100) from Cheshire & Sheppard 2004 Land Price Index Note: House and Land data for w ar years are interpolated. House Price Index 400 350 300 250 200 Land Price Index 150 100 50 18 92 18 95 18 98 19 01 19 04 19 07 19 10 19 13 19 16 19 19 19 22 19 25 19 28 19 31 19 34 19 37 19 40 19 43 19 46 19 49 19 52 19 55 19 58 19 61 19 64 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 19 94 19 19 97 99 20 .A 01 20 .S 02 .A 0 Housing land prices are from 3 sources: Vallis (1972) Estates Gazette – 1892 to 1969 England: Housing & Construction Statistics – 1963 to 1987 England & Wales; and Property Market Report, Valuation Office – 1983 to 2002 House Prices: ODPM: Table 502 Housing Market: House Prices from 1930. Table 502 Housing market: house prices from 1930, annual house price inflation, United Kingdom, from 1970 Table 502 Housing market: house prices from 1930, annual house price inflation, United Kingdom, from 1970 …and since Supply of Land Determined for Each Use… • We observe price discontinuities at zone boundaries • Supply of land for each urban use determined by fiat independently of price but sold on market • Agricultural land in wider London region • Maybe £10 000 per ha…. • Housing land • Now more than £4 million per ha • Price of housing land twice that of industrial • But highest for offices & retail • => What about impacts of regulation on commercial real estate? £ CBD Office use price gradient Markets Get their Revenge Industrial use price gradient Designated Areas in 1947 Residential use price gradient Cost of infrastructure to convert agricultural land Recreational & agricultural use price gradient Distance to Centre £ Figure 1b: After Change in Demand Inflexible Zones Price Discontinuities Distance to Centre British Office Costs – take Birmingham (Cheshire & Hilber, 2006) • Take Birmingham – medium sized city (2.5m), declining industrial economy, situated on flat plain • Construction costs for offices about 50% of costs in Manhattan – no surprise • What fundamentals determine costs of space? City size, income level, construction costs, growth, transport systems…. • In Birmingham office space costs 44% more than Manhattan (2004) • That is some surprise: something must be going on • Land use planning constraints seem plausible candidate • Work on UK residential sector suggests land supply restrictions impose about 4% income equivalent net welfare loss ‘Regulatory Tax’ measure (Glaeser et al 2005) no restrictions; high demand (L), low demand (B) cities price per m2 MCB=MCL ACB PL Land Rent (L) PB ACL AVCB=AVCL Land Rent (B) building height hB hL Competitive development industry so in equilibrium P=AC=MC A Developer’s Cost Curves with Height Restrictions – The ‘Regulatory Tax’ price per m2 height restriction ACL MCL PL PL RT AVCL MCLno building height Abstracts from land costs but a ‘black box’? But if no height restriction?? Regulation via compliance costs?? Estimating the Regulatory Tax (RT) • For 14 UK office locations: marginal costs of construction per m2 in hypothetical additional floor – estimated by Davis Langdon back to 1960 from actual projects: common spec (+ not used yet – standard office park boxes – investigate endogeneity issue). • For Continental locations (+ Manhattan) Gardiner & Theobald Average Cost data, converted to ‘MC’ using ratio to Davis Langdon for common locations • UK prices via CBRE: m2 prime rentals + yields from 1973 (1960) converted to capital values using ‘Equivalent Yield Model’ allowing for voids, rent frees etc (see paper); + CBRE data on total Occupation Costs (2004 & 2005 only) • For Continental prices - JLL rental & yield data from 1990: used common locations to cross check Summary Statistics: Regulatory Tax – sensitivity to assumptions Obs Mean Std. Dev. Min Max Based on prime rent (no adjustment) 480 3.70 2.92 0.13 22.06 Prime rent partially adjusted for rent-free periods 480 3.03 2.66 -0.05 19.81 Prime rent fully adjusted for rent-free periods and vacancy rates (central estimate) 480 2.64 2.37 -0.14 17.55 Upper bound: Assume 10% premium for top floor plus 50% of fully adjusted total occupation cost markup 480 3.88 3.10 0.15 23.95 Based on fully adjusted prime rent plus 10% premium for top floor 480 3.01 2.60 -0.05 19.41 Lower bound: As central estimate but assume 0.5 percentage point higher yield 480 2.37 2.15 -0.18 15.78 Variable: Ratio: Regulatory Tax / MCC Specification: Data Sources: CBRE (prime rent, yield and total occupation cost information), Davis Langdon (marginal construction cost information), IPD (national void rate index) and ODPM (regional vacancy rates). Regulatory Tax: Mean values Office Market Years with Available Data City of London London West End Canary Wharf London Hammersmith Manchester Newcastle upon Tyne Croydon Edinburgh) Glasgow Maidenhead Reading Bristol Birmingham Leeds ’61-’05 ’61-’05 ’98-’05 ’91-’05 ’73-’05 ’65-’05 ’65-’05 ’65-’05 ’65-’05 ’84-’05 ’65-’05 ’73-’05 ’65-’05 ’73-’05 Regulatory tax Mean 1973-2005* 2005 or available 7.54* 3.34 6.80* 8.89 3.29 2.77 2.28 1.82 1.58* 2.50 0.72* 1.19 1.29* 0.98 2.18* 2.62 1.69* 2.05 2.81 2.27 2.73* 1.61 1.46* 1.96 1.86* 2.68 1.71* 2.17 Figure 1: Regulatory Tax(Central Estimate) London Office Markets 18.00 16.00 14.00 Regulatory Tax 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1960 1965 1970 1975 1980 1985 1990 1995 Year City of London London WE Docklands Hammersmith Croyden 2000 2005 Comparisons with Continental European Locations City London West End London City Frankfurt Stockholm Milan Paris: City Barcelona Amsterdam Paris: La Defense Brussels Estimated Regulatory Tax 1999 2005 Average 7.62 8.37 8.00* 4.68 4.31 4.49* 5.44 3.31 4.37 4.28 3.30 3.79 2.07 4.11 3.09 2.35 3.75 3.05 2.23 3.16 2.69 2.12 1.92 2.02 1.41 1.93 1.67 0.52 0.84 0.68 Data from JonesLangLasalle and Gardiner Theobald adjusted to CBRE & Davis Langdon norms *9.0 and 4.9 respectively using Davis Langdon & CBRE data Explaining the Regulatory Tax • Very high costs of land use planning in UK • Planning policies controlled by residents - Homevoter hypothesis + benefits widespread & costs of development very local • Except – helpfully in City of London + Docklands • Planning authorities small (Districts, Boroughs) • Strong negative fiscal incentive to allow any commercial development: reinforced post 1989 – Uniform Business Rate • Except – helpfully – City of London: retained 15% • For resident controlled only incentive - fear of unemployment? • But RT cyclical: supply or demand? Include a ‘pure’ demand measure – local employment in office sectors Explaining the Regulatory Tax: Hypotheses/questions 1. 2. 2. 3. 4. As unemployment rises, planning becomes less restrictive => i.e. supply side determine Potential problem of identification hence direct demand measure Elasticity of response to unemployment much stronger in Business compared to Resident-controlled LPAs – if found => then most convincing evidence City of London becomes less restrictive relative to all other locations following Uniform Business Rate (UBR) - 1990 UBR to prevent leftist local governments damaging business with punitive property taxes to redistribute: but what impact on business costs indirectly via increased fiscal disincentive to permit development? Results • Gross costs of regulation for office space in UK seriously high cf US or most of Continental Europe • High ‘generalised’ costs in London (location fixed effects) • Sharp distinction business and resident controlled authorities in responsiveness to local economic conditions (unemployment) • Including a direct measure of demand confirms results • Strong impact of changing business property tax to national tax (UBR post 1989) outside City of London • Done to mitigate taxes on business from leftist local governments • But impact for medium sized firm - 200 employees in 1500m2? • Total Business rates £47,819: estimated change in space costs £67 312 if mean: or £84 010 if West End! =>Market Revenge! • More generally – reinforces view that RT is a useful measure of gross costs of regulation: ‘It works’ Using Price Discontinuities: Reading - Prices 1984 Land Use £ 000’s acre @ 1984 £ 000’s acre @ 2002 7 964-13 2411 3 806-8 3701 2 621-5 1031 602-1 3081 15 748-26 183 7 526-16 551 28 779-34 1512 24 467-27 8182 12 807-15 7942 9 786-12 4582 8 941 3 020-3 9272 2 876 2 539 56908-67 531 48 382-55 008 25 325-31 231 19 351-24 635 17 680 5 972-7 765 5 688 5 021 Office use Zone 1 Zone 2 Zone 3 Zone 4 1 190-2 586 Retail Zone 1a Zone 1b Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 Industrial Zone 1 400* Zone 2 500* Zone 3 450* Residential Edge of urban area 120-205 791 989 890 237-405 Source: Cheshire, P. and S. Sheppard The Economic Consequences of the British Land Use Planning System: a Pilot Study, Final Report to ESRC 1986 *Estimated variance 5% 1 Range of observations Range of estimates varying with exact location and floor plan size/access/permitted structure type 2 These Price Premia Provide Market Signals • Price premia for developable land vary between uses, locations & over time indicating relative supply constraint • Introduce as ‘material consideration’ into planning decision-making • If the price premium in any location for any use over the adjoining use(s) exceeds some ‘threshold’ • =>Presumption that planning permission will be granted • Unless ‘amenities’ generated by the land in current use exceed the value of the premium • Would release large areas of intensive, low amenity agricultural land…but – another paper Conclusions • Distortions and perverse incentives that arise variable – but endemic • Scope for & how to introduce price information varies with systems of land use regulation In UK introduction of price information could generate a flexible signal & systematically reduce supply constraints Without action price distortions get worse: but politically easier to start restricting than to stop Rising incomes more than population growth given evidence on income elasticity of demand for space in space constrained UK Very high recent rate of build & land conversion in Spain: + (maybe) lack of safeguard for high amenity areas BUT simple restriction + containment not the answer. The UK a warning for Spain….? • • • • • • References Barker, K. (2003) Review of Housing Supply: Securing our Future Housing Needs: Interim Report – Analysis, London: HMSO. Barker, K. (2004) Review of Housing Supply: Final Report - Recommendations, London: HMSO. Barker, K. (2006a) Barker Review of Land Use Planning; Interim Report - Analysis, London: HMSO. Barker, K. (2006b) Barker Review of Land Use Planning; Final Report - Recommendations, London: HMSO. Cheshire, P.C. and C. Hilber, (2006) 'Office Space Supply Restrictions in Britain: the political economy of market revenge’, Research Papers in Environmental and Spatial Analysis, No 117, Department of Geography and Environment, London School of Economics, 2006, 46 pages. Cheshire, P.C. and S. Sheppard (1998) Estimating the demand for housing, land and neighbourhood characteristics, Oxford Bulletin of Economics and Statistics, 60, 3, 35782. Cheshire, P.C., and S. Sheppard (2002) 'Welfare Economics of Land Use Regulation', Journal of Urban Economics, 52, 242-69. Cheshire, P.C. and S. Sheppard, (2004) ‘Land Markets and Land Market Regulation: progress towards understanding’, Regional Science and Urban Economics, 34, 6, 619-637. Cheshire, P.C. and S. Sheppard (2005) ‘The Introduction of Price Signals into Land Use Planning Decision-making: a proposal’, Urban Studies, 42 (4), 647-663. Glaeser, E.L., J. Gyourko and R.E. Saks (2005) ‘Why is Manhattan so Expensive? Regulation and the Rise in Housing Prices’, Journal of Law and Economics, 48 (2), 331-369. Fischel, W. A. (2001) The Home Voter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies, Cambs, Mass: Harvard University Press. Residential Land Prices: An indicator of Foregone Agglomeration Economies