The effect of residential land use regulations on urban welfare. J. Vernon Henderson. Brown University May 2007

Transcription

1 The effect of residential land use regulations on urban welfare J. Vernon Henderson Brown University May 2007

2 Introduction Two types of regulatory environments: Formal sector housing market: Developed country literature Zoning and land use separation Density controls Minimum: lot size, set-backs, floor space. Maximum: floor-area ratio, height, no. of dwelling units. Approval/permitting processes Infrastructure provision (private vs. public)

3 Introduction (continued) Informal sector housing market: Developing countries formal sector regs. lead to development of unregulated informal/ illegal sector Too high housing standards Legal/political environment permits informal sector Lack of land title, resale rights affects housing demand, quality of life Under-serviced (public/private) Status of slums

4 Outline of presentation Review literature on formal sector: Effect of regulations on: Housing costs, housing prices, housing supply Exclusion: e.g., lower income migrants Deficiencies in the literature Framework for informal sector Development of informal sector: strategic response by cities to migration pressure Effect on housing quality Public services (sewer, water, roads) Preliminary suggestive findings Brazil (2000)

5 Theory literature: Two reasons to regulate 1. Externalities (positive welfare effects?) Obnoxious uses (zoning) Congestion (density regs.) Quality issues Infrastructure (free ride on public sector) construction quality (information asymmetry) Issues Presumption: overdone/misused Crudeness (uniform height--mumbai) Cost of permitting & enforcement

6 Two reasons to regulate (continued) 2. Exclusion (welfare effects?) Regulate size (special amenity cities) Force others to inferior alternatives. Free entry too big; regulated too small Exclude low income Tiebout sorting Welfare effects: Consumption clubs (good?) Low income lose (relative to no sorting) Financially school quality Peer group effects

7 Exclusionary regulation: Formal sector Methods of exclusion: Restrict number of units to be developed creates price premium Make housing very costly Overall (permitting; development fees) vs. for low income Force over-consumption min. lot size, floor space, set-backs

8 Empirical Literature: Effects of formal sector regulations Glaeser, Gyourko, Saks; Malpezzi and Mayo USA (Notice data requirements: Prices, costs) Rise in housing prices vs. construction costs Due to regulation: Table Response of supply to price Strong, positive supply elasticity until 1980 By 2000, elasticity overall is zero Uneven price rises across cities superstar cities (CA and east coast): high price rise; no growth; more rich folks Price rise: artificial (regulation) vs. natural scarcity? Graph

9 Table 1. Housing prices versus construction costs [gap: land costs] Percent Increase in Mean Real Housing Prices (316 metro areas) % change over decade Mean up 70%; standard deviation up 250% Percent Increase in Mean Construction Costs (per sq. ft.: single story modest house: 177 market areas) % change over decade 17.7% Source: Glaeser, Gyourko, and Saks (2005a).

10 Gyourko et al. Superstar cities

11 Effects of regulations on prices: Direct calculations Manhattan: (Glaeser, Gyourko, Saks) Height restrictions Value of added floor vs. construction cost: 2 fold difference in 2000; modest in 1985 Malaysia in 1980 s (Malpezzi, Mayo; Bertaud, Sheppard): Excessive set-back & road requirements Add to land cost (valued by high, not low people) Only 40% of land saleable 65% norm for high density If 55% could be saleable, ratio of profitability of low vs. middle income developments rises from.85 to 1.15 After studies: regs. loosened

12 Effects of regulations on prices: Econometric evidence Inelastic supply: restricted inputs; permitting price B A Elastic supply Demand 0 Demand 1 Number of houses *Bldg. permits *Price equation.

13 Econometric evidence Regulation indices (vs. specific regs.) Malpezzi & Wharton index: Reg. outcomes Time to permit, fraction approvals, land available relative to demand Capture outcomes from regulation and demand (endogenous) Numbers of state regulations E.g. Wetland, coastal management impact Quigley & Raphael: count of local regs. Open space, density, height, # of permits, etc.

14 Econometric evidence: findings Supply elasticities lower in more regulated communities [prices higher] Quigley & Raphael count of regs; price endogenous supply elasticity vs. shift; price change Short run vs. long run (Mayer and Somerville) Regulation endogenous Spillovers/general equilibrium price effects (Pollakowski and Wachter) Lower supply response & higher price response to (exogenous) demand shocks in more regulated (Glaeser, Gyourko, Saks)

15 Deficiencies in econometric literature Generic response: low vs. high income Regs. (lot size, set backs) may affect low income but not middle income people in same community Exclusionary regs: affect price in high income community; spillover to other communities? Regulation treated as exogenous (vs. M & S) Political economy (San Francisco) Biased estimates of causal effects: impose regs. in response to demand shock: part of price rise is from the shock per se. Informal sector (where low income live)

16 Formal sector restrictions the informal sector Huge informal sectors in developing world Deficient public services from the city Isolated : non-integration into civil society Low quality housing; insecurity of ownership Example: China s urban villages (for migrants) Rural enclaves within city or on outskirts No city schooling; water, sewerage; isolated Intent: discourage in-migration; encourage any migration to be round-trip Double divide : urban-rural & urban-urban inequality

17 Cheap Shot Complication of hukou system

18 Conceptualizing the informal sector: The choice facing initial residents Political economy : Residents choice: Pre-existing in favored cities E.g. public services in national capital region Drive migrants to informal vs. accommodate in formal Regulate formal sector so too costly Perspectives: Scale economies: Whether in formal or informal sector: migrants contribute to scale and growth Inverted-U: real income vs. total employment

19 The choice for initial residents Public service perspective If formal sector, migrants get city services Sewer & water connections, side streets Cross-subsidy in taxes (if migrants poor) If in informal sector Costly private provision if in informal Pay city taxes anyways (sales, VAT, wage) Gain if force migrants to informal sector Discourage in-migration poor housing and service conditions; pay taxes City saves money Don t pay for migrant services; get their taxes

20 The choice for initial residents When accommodate? Unexhausted scale economies Induce more in-migration: open up formal sector Ease housing restrictions; supply services subsidize in-migration positive production externalities In-migration limited if forced to informal sector Health externalities (spillovers) Pride in city development ex post: changing politics

21 Plus reasons not to admit -Fiscal subsidy -Discrimination -Get taxes anyways Figure 2. Informal sector

22 Brazil, 2000 Brazil in the 1970 & 1980 s Favelas, corticos; loteamentos 1978 nat. regs: 125 sq m., 5 m. frontage Now ZEIS; 1978 regs. relatively less restrictive; public services to all How define informal sector? (in national study) Census data (no prices, building permits, etc.) Title: poorly defined Slum area (sub-normal agglomeration) Service levels (Dowall): fully serviced or not? central water and sewer, electricity

23 Brazil: Three Issues 1. Super-star municipios (447 urban municipios) USA: Price vs. population growth Slow growing; high price rise Concentration of high income Brazil figure No housing price numbers pop growth vs. high income

24 Share: Local pop. in top 10% income nationally rich large slow Percent pop growth

25 Brazil: Three Issues 2. Low quality services for migrants Overall Low income migrants vs. other low income Migrants in areas with more restrictive zoning (modest effect) Endogenous zoning: impose in response to in-migration pressure Would have been even more in-migration to those cities absent regs.

26 Table 2. Housing and public service profiles All urban household Migrant household Non-migrants: bottom 20% of h.h. income Migrants: bottom 20% of h.h. income % owner -occupied % 58.5 % owner occupied with land title % households fully served % owner-occupied fully served % renters fully served % households in counties where min. lot size >125 sq m Migrants: moved into municipio in last 10 years

27 Brazil: Three Issues 3. Response to economic shocks: service levels for migrants Growth shocks: market potential of city Industrial composition: national shocks on city industrial base Richer, bigger communities What can afford (liberal agenda): Income and scale Both bigger and richer: exclude Table

28 Shock effect on % served: By 3+ years avg. schooling, population effect negative & gets more negative as pop. rises Shock effect on % served: By 3m pop, schooling effect negative

29 Conclusions Research on developing countries Data issues Research interest informal versus formal sector analysis Effect of land use regs. on the poor May differ from overall effects Political economy: Favored communities exclude low income and migrants Force to informal sector with poor public services Differ over time (Brazil versus China today)