Delays are not all due to Land Use Regs

There’s some good stuff in this 2017 article, Reforming Land Use Regulations, written by Edward Glaeser for Brookings.

First, there is the concept of Minimum Profitable Construction Cost.

But the regulatory approach on housing should compare housing prices to the Minimum Profitable Construction Cost, or MPPC. An unfettered construction market won’t magically reduce the price of purchasing lumber or plumbing. The best price outcome possible, without subsidies, is that prices hew more closely to the physical cost of building.

Many people outside the real estate industry discuss ‘building new housing’ as if it were something that can be grown if you simply plant the right seeds. Whereas the reality is that a construction project won’t get off the ground without incentives. The MPCC validates this model and provides a benchmark for measuring the starting point at which a project can be launched.

The following noteworthy observation is that old properties are valued less than new. Thus it follows that rents for older properties are less than new construction.

We then compare these construction costs with the distribution of self-assessed housing values in the American Housing Survey. The distribution of price to MPPC ratios shows a nation of extremes.  Fully, 40 percent of the American Housing Survey homes are valued at 75 percent or less of their Minimum Profitable Production Cost. 

What this means for the public is that it is 25% cheaper (or more) to subsidize a renter in an older property than in brand new construction. Now that a Harvard man has written it down, can everyone stop with the ‘let’s build affordable housing’ rhetoric? New is never the least expensive option.

In reference to the 2008-2011 downturn, Glaeser remarks.

Our painful housing bust eliminated some of the affordability problem in our most expensive areas, but that problem has returned.

So, housing prices go up and down. Yet it seems that the topic of housing is always making the intellectual rounds when prices are on the rise —why? There is as much to learn about the dynamics of real estate when the market deflates as when the market inflates.

Here is a most underinvestigated observation.

 Getting the right national policy requires comparing the social costs of building in one location versus the costs of building elsewhere. 

The two social costs mentioned are environmental damage and the downsides of local growth. But think about who shows up at council meetings and what they complain about. Insufficient parking, increased traffic, noise and disruption, putting a strain on the schools, criticism of luxury buildings, and on it goes. The social aspect of this is extensive and profound. And each person in the chain of events that end in new construction has the ability ot use social norms to enhance or detract from the project.

Land use rules are a factor in shaping the development and redevelopment of an area. But there is so much more.