Government Land-Use Interventions: An Economic Analysis
by J.K. Brueckner
The notion that government land-use interventions can be
counterproductive has been an ongoing theme of World Bank
research.
Negative effects can emerge despite the best intentions of government officials.
Problem is that urban real-estate markets are complex systems,
so that interventions can have unintended effects.
Paper does the following:
• Enumerates various types of interventions.
• Provides a simple theoretical economic analysis of their
effects.
• Surveys empirical evidence on these effects.
• Discusses motivations behind the interventions.
Types of interventions
• Urban growth boundaries (UGBs)
Examples are Korea (studied by Bank), UK, some US
cities.
• Building height (FAR) limits
Best developing-country example is India (studied by
Bank), used also in developed world.
• Cost-increasing regulations
Piecemeal regulations that increase the cost of providing
housing (set-back requirements, streeth width rules, etc.).
Used worldwide; Bank study of Malaysia is noteworthy.
• Direct bureaucratic control of land-use decisions
Well-known example of impact is Moscow’s inverted
density contour (documented in Bank research).
Happens also in China’s cities.
• Racially based interventions
Main example is South African black townships, which
reversed normal location pattern (studied by Bank).
Economics analysis of effects
Urban growth boundaries:
Restrict supply of urban land.
Result is higher housing prices (on a per-square foot basis),
smaller dwellings, taller buildings.
$
$
pugb
rugb
ra
p
r
xugb
x*
x
Fig. 1a
x
Fig. 1b
Figure 1: Urban growth boundary
29
FAR limits
By forcing buildings to be shorter, these limits again restrict
the supply of housing.
So housing prices rise, and dwellings shrink.
The city also spreads out, and building heights actually rise in
areas where the FAR limit is not binding.
FAR
$
FAR
limit
pugb
Hfar
p
H
x#
x
Fig. 2a
x
Fig. 2c
Figure 2: FAR limit
Cost-increasing regulations
By raising production cost, such regulations raise housing prices
and reduce housing consumption.
May lead to more-compact cities.
Direct bureaucratic control of land-use decisions
In Russian case, planners built high-rise residential areas on
the periphery of Moscow.
Put large numbers of households far from jobs in the center.
Reduced standard of living relative to alternate approach of
redeveloping center at high density.
Figure 6: Population density in Moscow
(source: Bertaud and Renaud (1997))
In China, similar bureaucratic control of land-use exists despite
market reforms.
Bureaucratic decisions can lead to wrong land-use intensities
and inappropriate distribution of populations within cities.
Racially based intervention
South African intervention put blacks far from center in remote
townships.
They gained from cheaper housing but paid much higher commuting cost, for a net loss.
Whites did not get lower prices but benefited from shorter commutes, consequences of reduced competition for land.
Welfare reduced overall. Like in Russia, area far from center
had higher density than the center itself, an inefficient outcome.
$
$
rb
rw-apart
ra
rw
black
white
x*
rb-apart
x
black x*
white
Fig. 5a
Fig. 5b
Figure 5: Land-use intervention under apartheid
33
x
Figure 6: Population density in Moscow
(source: Bertaud and Renaud (1997))
Figure 7: Population density in Johannesburg
(source: Bertaud and Malpezzi (2003))
34
China has similar high-density areas on urban fringe, where
illegal migrants live in informal housing.
A consequence of housing policies that deny formal dwellings
to migrants lacking official residence status.
Evidence on effects of interventions
Simulations suggest that a stringent UGB generates can generate a large welfare loss for consumers (equal to 7% of income
in a realistic case).
FAR limit generates a welfare loss equal to increase in commuting cost for person living at (now more-distant) edge of
city.
Loss calculated to be roughly 2–4% of income in case of Bangalore, India
Empirical studies, mainly based on U.S. data, often take the
approach of counting the number of types of land-use regulations in force in a city, available from surveys of governments.
A measure of housing prices is then regressed on this count
variable, along with other covariates, and effect is typically
positive.
So evidence shows that proliferation of land-use regulations
raises house prices.
Another approach is to investigate connection between new
supply of housing (permits, starts) and a regulatory index.
Results show negative connection.
Yet another approach is to estimate housing supply function,
and relate the elasticity of supply to stringency of regulation.
Inverse relationship found.
Motivations for land-use interventions
UGBs
UGBs could be justified in a case where open land around the
city generates amenity benefits.
Higher housing prices might then be worth the environmental
gain from open-space preservation.
But if few people care about open space, while government is
controlled by environmentalists, then UGBs will yield a social
loss.
Less benign view of UGBs is that they serve to generate capital
gains for homeowners by restricting housing supply.
FAR limits
Sometimes motivated by aesthetics (Washington, D.C., Paris).
In India, subjective disklike of density seems to be present.
But FAR limits are also prompted by fear of inadequate urban
infrastructure.
Better to make required investment than to distort land use.
Cost-increasing regulations
Designed to increase housing habitability in well-meaning fashion.
But are the benefits worth the cost?
If so, then private market could be trusted to provided the regulated features on its own, obviating the need for intervention.
Caveat
Foregoing discussion not meant to criticize all forms of land-use
intervention.
Zoning laws help to isolate offending land-uses.
FAR limits that help to guide development rather than severely
constrain it can be useful.
UGBs whose goal is to discourage scattered development rather
than to restrict land supply may be helpful.
Land-use interventions and business productivity
New economic geography stresses the importance of agglomeration economies, which depend on business density.
Interventions that restrict densities, both for residential and
business land-use, may prevent capture of some agglomeration
benefits.
Lessons learned
Government land-use interventions can generate many unintended effects that reduce social welfare.
Economic analysis can help identify these effects, so that policymakers are able to make fully informed decisions.