Housing in successful cities like San Francisco is expensive because people want to move there, which drives up prices. But there's also another reason: a lack of housing supply. Between 1980 and 2000, the city added only 2,000 new units a year, according to a city report—far below the 5,000 new units it would have needed to stay in line with national price increases.
And San Francisco is not alone. Across the country, land-use regulations are hampering new development and reducing the range of people who can afford to move in. Increasingly, booming cities are just for well-paid professionals and 1%-types, say economists. Average and low-earners can no longer afford to move in because what they earn won't cover the rent.
"We’ve switched from a world where everybody educated and uneducated was moving from poorer parts of the country to the richer parts of the country to a world where the higher-educated people move to San Francisco and lower-educated people move to Vegas," Daniel Shoag, a Harvard University professor of public policy, told the New York Times recently.
Research by Shoag and others shows that zoning restrictions are a factor in growing income inequality and reduced social mobility. While in the past, poorer and younger people might have moved to places like New York in search of a better life, these days that's less of an option: there's nothing cheap enough to rent or buy.
Restrictions on development in successful cities like New York, San Francisco, and San Jose could be having a big dampening effect on overall economic growth. One study by Chang-Tai Hsieh, at the University of Chicago and Enrico Moretti, at the University of California, Berkeley, found that lowering regulatory constraints in those cities to the median national level could boost national GDP by a staggering 9.7%.
The White House Council of Economic Advisers has argued that cities should be loosening restrictions on development as a way to reduce inequality. "States with a more constrained supply of housing—including from tighter land use regulations—have experienced a substantial decline in the speed of income convergence, and they have had hardly any convergence at all over the last 20 years," argues Jason Furman, chairman of the CEA, in a recent post. "This is consistent with the fact that only high-income workers are able to afford to relocate to high-productivity cities that have tight land-use regulations, which reinforces existing inequality."
Furman says zoning has its place, but frequently just serves the interests of land-owners who want to maintain property values. Pressure to "conserve" and "protect" neighborhoods sound public-spirited, but are actually examples of what economists call "rent-seeking behavior." That's when insiders gum up the free-running of markets—in this case, restricting development—for their own ends.
"True, certain land-use restrictions can serve legitimate, welfare-enhancing purposes," Furman writes. "But when they are excessive and primarily geared toward protecting the interests of current landowners—including their property values—they decrease housing affordability, hamper mobility, and reduce nationwide productivity and growth."
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