Regulation increases the cost of housing

Manhattan housing is dreadfully expensive because regulations constrain supply, according to a paper from the National Bureau of Economic Research (NBER).

The authors argue that piecemeal regulation of new construction permits has allowed public commissions, existing residents and other opponents to block new development. Throughout the 1950s to the 1970s, relatively modest increases in the price of housing were associated with increases in the supply of building permits in the following year. By the 1980s and 1990s, however, supply became constrained as regulatory impediments grew. Eventually, changes in price were not correlated with changes in permits, despite rising per capita income.

The result has been more expensive housing in Manhattan:

  • The regulatory burden adds about $7,382 per apartment per year, or about 50 percent, to these condominium owners' housing costs.

  • For 23 percent of those surveyed, the additional burden exceeds $10,000 per year.

    This regulatory tax adds to average housing prices in Manhattan and is even higher in other cities:

  • Compared to other New York City boroughs, the regulatory tax added 12 percent to housing prices in Manhattan.

  • Regulatory burdens added 32 to 50 percent to the price of a house in San Francisco, San Jose, Oakland and Los Angeles.

  • Washington, D.C. and Boston had burdens of 20 percent.

  • In contrast, Houston, Philadelphia and Tampa had no regulatory taxes.

    The authors cannot find any explanation to justify the current gap between prices and production costs. They conclude that the regulatory constraints on building in Manhattan are far too restrictive.

    Source: Linda Gorman, Why is Manhattan Housing So Expensive? NBER Digest, March 2004; based upon, Edward Glaeser, Joseph Gyourko and Raven Saks, Why is Manhattan Housing So Expensive? Regulation and the Rise in House Prices, National Bureau of Economic Research, Working Paper No. 10124, November 2003.

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    FMF Policy Bulletin\22 June 2004
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