As urban cores become more populated, the need for more buildings—more housing, more offices, more everything—increases. In many cities, it’s not so easy to simply increase construction, thanks to zoning codes that regulate how high buildings can be, whether land can be used as commercial space, and what types of properties can be erected where.
But these laws aren’t only a nuisance to developers, they’re also making inequality worse. That’s the argument of the economist and chairman of the Council of Economic Advisers Jason Furman, which he made during a recent speech at an event hosted by the Urban Institute and CoreLogic.
In order to calculate the impact of land-use restrictions on the final price of housing, researchers compare the sale price of a structure with the actual cost of constructing it (which includes labor and material). The difference between the two is what a buyer is paying for the land, and that cost is higher in places where laws governing land use and zoning are stricter. The growing gap between what land would cost if there were no regulations inhibiting development within a city, and what it costs in reality is an example of an economic rent, a premium that is paid due to an item’s scarcity, rather than because the item has actually increased in quality or productivity. Though the amount of land in any city is of course fixed, if developers can build as high as they’d like, or wherever free land is available, space would seem somewhat less scarce. But zoning regulations help create artificial scarcity, and the price of land skyrockets as a result.
According to Furman, the growth of economic rents extracted due to of land-use regulations has been significant. In the 1990s final sale prices were on average about 33 percent higher than construction costs. By 2013, that gap had grown to 56 percent. Which means that across the country, Americans are paying more and more for essentially the same plots of land.