The role of regulation in affecting housing supply and prices: Part of the solution, part of the problem, or both?

UCLA Lake Arrowhead Symposium, 2007

Marlon G. BoarnetProfessor of Planning, Policy, and Design

University of California, Irvine

Preliminary Draft: Do not distribute or cite without permission of the author.

Median Home Sales Price, California and U.S., 1968-2006

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$100,000

$200,000

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$400,000

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$600,000

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California Median

U.S. Median

Source: California Assoc of Realtors and National Assoc of Realtors

California Population Growth and Building Permits, 1980-2006• Pop growth = 13,662,000 • Building Permits = 4,372,221• Pop growth / Building Permits = 3.12

• Avg CA Household Size, 2006 = 2.93

• Implied 26-year building permit shortage = 290,578

• Percent undersupply = 6.23%

Median Home Price, U.S. and Lower Priced California Regions

$0$50,000

$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000

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's U.S. median homeprice

High Desert medianhome price

Riv/San Bern medianhome price

Sacramento medianhome price

Source: California and National Association of Realtors

Review

• Over past four decades, California median home price has gone from 1.15 U.S. median home price to 2.51 U.S. median home price

• Annual percent appreciation, 1968-2006:– California: 8.72%– U.S.: 6.52%

• Increase in house prices has been statewide• Is land use regulation part of the cause?

Why Important?

• Housing is primary means of wealth creation for most Americans

• California is a trendsetter for U.S.• Land use (building, housing, associated services)

constitutes approximately 19% of GDP in 2006• For comparison, health care was 12% of GDP in

2006• Land use is heavily regulated, but uniquely

overlooked

The Emerging Deregulation Consensus

• “economic” viewpoint – loosen land use regulations

• Planning argument – land use regulations interfere with individual choice

• Both views, land use regulation is an alien entity

Supply and Demand 101

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Why Regulate Land Use?

Three traditional views of the purpose of land use regulation– Planning/regulatory viewpoint

– Economic viewpoint

– Normative/aesthetic viewpoint

A Closer Look at Justifications for Land Use Regulation

• Managing externalities or common pool resources (incompatible land uses, traffic, noise, pollution)

• Coordination Function / City Building• Externality management is overweighted,

coordination function is underappreciated• Need for planning to create choices that

market would not otherwise create

Example: Irvine Business Complex and Mixed Use Living in Orange County

• Dating from 1970s, exclusively business, office, light industrial

• As of 2000, over 150,000 jobs• Approximately 2,760 acres• Early 1990s plan to allow mixed-use and residential

development• As of mid-2006, 13,203 residential units approved, in

construction, or in permitting process in IBC• Implies a residential IBC population larger than the

entire City of Irvine in 1971.

Irvine Street Santa Monica San FranciscoBlocks Street Blocks Street Blocks

Existing Street Network

Conceptual Street Network

Source: Irvine Business Complex Mixed Use Community Draft VisionCity of Irvine, May 3, 2005

Prioritizing Land Use Regulatory Functions

• Lower Order Land Use Regulatory Functions: Managing common resource pool externalities

• Higher Order Land Use Regulatory Functions: Coordination, City Building, Creating choices that would not otherwise exist

• In California, 1970s onward, lower order functions elevated to priority over and eventual exclusion of higher order functions

Moving the Pendulum Back

• Land use regulation is dominated by economic view

• Need to return to normative/aesthetic view as a basis for land use regulation

• An inherently political problem – an exercise in democratic governance – whose norms?– Land use reg as vibrant direct democracy?

– Land use reg as an immature governance structure?

Elements of an Institutional Land Use Regulatory Framework

Problem 1: Reduce the scale of land use regulation.

• Need for diversity of city and neighborhood types to match diversity of citizen preferences

• Municipalities are too large• Land use regulation at the scale of 10,000 to

20,000 persons

Elements of an Institutional Land Use Regulatory Framework

Problem 2: Restrict ability of locales and citizens outside of a community to elevate lower order planning function over higher order planning function.

• Neighboring jurisdictions or individuals cannot claim harm from actions that interfere with common resource pool.

• Full ability to bargain over harm (traffic, air quality, and the like) within small neighborhoods, no ability to claim harm across neighborhoods.

Elements of an Institutional Land Use Regulatory Framework

Problem 3: Higher level caretaking of common resource pool.

• Strong regional provision of (and financing for) infrastructure.

• Strong oversight and regulation of externalities (e.g. state regulation of air and water quality).

Implication: A Changing View of Regionalism

• Empowerment of local land use plans, at an atomized scale

• Region adapts to the local

Will this reduce house prices?

• Well …. Land use regulation is part of the problem of house price appreciation, and part of the solution.

• Rethinking of “Why regulate land use” is needed.

• Reforms should lead to loosening of land supply.