Professors Sandy and Yandell teach economics at the School of Business Administration, University of San Diego.
A fundamental freedom in the United States is the ability to travel, and to move and live wherever an individual finds the greatest opportunities. However, this freedom is increasingly coming under attack. Although no policies exist that directly regulate movement, more subtle restrictions are emerging. Potential entrants to many regions face limits in the form of housing shortages brought about by residential growth controls.
The argument in support of growth controls is that rapid population growth reduces the “quality of life” of existing residents. Members of existing communities often fear change, and want to protect themselves from the risks of new development. New residents require new homes that lead to changes in the character of an existing community. Growth control proponents argue that unregulated growth is the cause of crowding at beaches, parks, and public facilities. Unregulated growth is also blamed for traffic congestion, reduced air and water quality, the loss of open space, and the destruction of the natural environment.
The proposed solution is to place a moratorium on residential building permits as though houses were the fundamental cause of all growth-related problems. In extreme cases a municipality may even set a legal population limit, forbidding entry by law. The shortcomings and inefficiencies of such growth controls are numerous.
The fundamental flaw in the argument for growth control is the perception that housing growth causes a regional expansion. In fact, the reverse is true. A strong regional economy attracts new residents. New homes are built by developers in response to this increase in demand. Restrictions on building during an expansion will result in a deliberate shortage of housing and will do nothing to solve regional problems.
Policies that reduce the housing supply simply do not address the quality of life concerns that are purported to be the major issues. Growth controls are offered as a blanket solution for such diverse issues as traffic, inadequate sewage facilities, overcrowding of all types, the deterioration of air quality, and the loss of open spaces. In fact, growth controls can increase all of these problems if development shifts out from the controlled area.
Traffic provides a good illustration. Can anyone deny that traffic congestion results from the improper management of our highways? If roads were operated in private competitive markets, drivers would pay some price for the service. This price would reflect the demand for road use so that it would be highest during prime driving times. The prices would give drivers and firms the incentive to spread driving out across the day, reducing traffic congestion.
Rather than focusing directly on the traffic problem with incentives, however, many metropolitan areas are proposing growth controls as the solution. When a city restricts housing development it causes developers to build on unregulated land on the urban fringe. New home buyers have no choice but to move farther from the central business district. The result is longer dally commutes and a loss of open space. The intent is to reduce traffic. The result is just the opposite—more traffic and the attendant increase in air pollution.
Controls Lead to Higher Prices
Of course, growth controls have a more obvious consequence: higher housing costs and rents. The more severe and broad the controls, the higher the prices. Building restrictions limit the supply of homes without reducing demand, increasing competition for available houses. Higher prices reduce the ability of low- and middle-income families to afford a home. Renters find that rents rise as housing prices climb, and that a larger percent of income must be paid for housing. It becomes more difficult for renters to acquire a down payment, and upward mobility suffers.
Those who own more than one house, on the other hand, will gain. They will receive both capital gains and higher rental income from their investment property. Those with only one house may gain depending on the details of the growth control policy. For example, many such policies define environmentally sensitive areas as off-limits to future construction. Owning a house adjacent to such an area will result in above-normal appreciation.
For other families who own only one house the net result of a growth control policy is not clear. There will be an increase in capital gains, but this may not translate to an increase in a family’s standard of living. All houses in the region will increase in value, so capital gains will always be tied up in housing, even if the family moves within the city. The only way to cash out the capital gains is to move out of the region.
Renters, who as a group contain a large proportion of poor, young, and minority families, clearly are made worse off, so growth control policies are regressive. Further, these policies are at least somewhat discriminatory given the demographic characteristics of renters.
It is ironic that growth controls are increasing in popularity when one considers that a major goal of all prosperous countries is to provide adequate and affordable housing for its citizens. A variety of policies have been enacted in the United States to support this goal. Housing subsidies for the poor and elderly, FHA and VA mortgage subsidy programs, and the tax deductibility of mortgage interest are all designed to promote home ownership. Growth control policies are in direct conflict with these goals, since they increase prices and preclude many from home ownership and upward mobility.
The state of housing in many socialist countries is dismal. It is not unusual to wait five years for the chance to rent a single room in a government housing project. Parents in many Eastern bloc nations will place the name of a newborn child on the official state housing waiting list so that the child will have a chance of obtaining a small apartment when he or she grows up and marries. Housing is regulated by the state, and families often must share small units in crowded housing complexes.
Rent control serves as an analogy in the United States. Trying to rent in controlled areas is a difficult task. It inevitably includes long waiting lists (and occasionally kickbacks or other non-price allocation methods). The controlled rent makes investment in apartments unattractive, so the quality and availability of rental units decline. The lesson is obvious: controlling housing markets yields serious and detrimental consequences.
Despite this, housing markets in the U.S. are already highly regulated. Zoning regulations and building codes restrict the quantity and quality of housing. Environmental impact reports and planning studies require years of review before some developments are authorized, and substantially increase the cost of building. Even so, the market has had some flexibility to respond to the demands of consumers about the types and locations of housing that are preferred. Willing buyers and sellers have been allowed to make mutually beneficial exchanges. The result is an increase in freedom and well-being.
Growth controls change all that. Developers are simply not allowed to respond to the desires of consumers. Instead, local bureaucrats determine every aspect of new developments, in-eluding who can build, what can be built, when it can be built, and what facilities must be included in the development.
Housing markets play a major role in the U.S. economy, and the past success of the U.S. housing market is striking. New residential construction expenditure represents nearly five percent of Gross National Product, and over four percent of the labor force is employed in residential construction. In 1985, about 64 percent of American households owned their own home. Growth controls threaten this success.
Controls also reduce the freedom of people to move and live where they hope to find the greatest opportunities. A simple example shows this clearly. Consider the declining cities in the Northeast or Midwest from which people are exiting in large numbers. This outward migration has significant negative economic consequences. Local economies are stagnating and the tax base is eroding. These cities would be better off if businesses and residents were not leaving. Should they mandate that no one may leave so that the remaining residents can maintain their quality of life? This is obviously absurd, and would be seen as a blatant attack on personal freedom and civil liberties. Yet growth control is really the same thing.
Another example can be used to show that growth controls are not in the best interests of society collectively. Suppose all people are initially suspended in time with no location. All families will be randomly assigned a residence location. If we initially had no location, would we ever agree to growth controls? The answer is clearly no. We could get assigned to an undesirable area and be unable to move to our preferred location.
Simply put, the political process that institutes growth controls excludes the desires of all potential entrants. The final policy is an “us against them” state where the “us” are current homeowners and the “them” consists of everyone else.
When people in a region are asked to vote on growth control policies they must consider obvious trade-offs. Foremost is the question of how much freedom they are willing to give up to obtain capital gains on their residences.
Existing homeowners may feel that they can shift all costs resulting from a building freeze to renters and potential entrants to the housing market. To the extent that current owners will not encounter the higher housing prices, they are correct. Other costs do exist, however. The house to which they aspire, for example, may never be built. Residents may become less mobile and find moving within the city difficult, in addition, the local economy may suffer. Higher housing costs can reduce the willingness of firms to locate in the area. Future employment opportunities fall as a result.
Developers and landowners have their property rights denied when control of building is passed to government. Landowners will no longer be able to determine the most efficient use of their land, and the market-determined timing of development is altered.
When property rights axe given up they may never be recaptured. A government bureaucracy must be put into place to administer the controls, and will exercise all rights concerning development. Politically, a return to the prior state of a freer housing market is unlikely for several reasons. Everyone who owned a home prior to the controls has the incentive to maintain the controls to protect his capital gains. Everyone who purchases after the controls has a vested interest in continuing them. Local politicians will not give up their expanded role in housing. In short, once adopted, growth controls are very unlikely to be repealed.
It is clear that appointed or elected officials will have neither the necessary information nor the incentives to effectively and efficiently control development. The results are economic inefficiency, the creation of deliberate shortages of housing, more control over individual rights, and no guarantees that the negative aspects of growth will ever be addressed. The personal costs and economic costs of growth controls may prove to be exceedingly high.
Bernard J. Frieden, “The New Regulation Comes to Suburbia,” The Public Interest, Spring 1979, pp. 15-27.
Richard F. Muth, “National Housing Policy,” in The United States in the 1980′s, ed. by Peter Duignan and Alvin Rabushka (Stanford, Calif.: Hoover Institution Press, 1980), pp. 343-366.
Jonathan Sandy, “City Deserves a Fate Better Than Growth Controls,” San Diego Business Journal, June 13, 1988.
Lawrence Smith, Kenneth Rosen, and George Fallis. “Recent Developments in Economic Models of Housing Markets,” Journal of Economic Literature. March 1988, p. 30.
Dirk Yandell, ed., San Diego’s Future Directions? (San Diego, Calif.: San Diego Union-Tribune/University of San Diego, 1987).