Transcript Document

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