Living in the San Francisco Bay Area since 1968 I now feel that I am an expert on how to make housing unaffordable. The following is based on a piece written by Randy O’Toole of the Cato Institute. The entire piece is at http://object.cato.org/sites/cato.org/files/pubs/pdf/pa802.pdf
O’Toole refers to the problem as “Growth-Management Laws” but I would use the expression Urban Planning. The thinking behind urban planning is that government agencies need to restrain the rights of land owners for some common good. The common boogeymen at present is called “urban sprawl.”
The purpose of urban planning is to protect the environment and the public welfare. If you have never been to San Francisco you probably have no idea just how much unused private land there is to the south and the north of the city. Interstate 280 runs down the middle of the peninsula and from just south of San Francisco to San Jose there is almost no developed land. In total of the 5 counties making up the immediate San Francisco-Oakland Metropolitan area 34% is urbanized, 20% is public land, and 45% is undeveloped private land. It is that 45% of private land which remains so because of urban planning.
Whatever the reasons for urban planning may be we should judge this by the results. Following is the average cost of a 2,200 sq. ft. 4-bedroom home in some U.S. cities (data from Coldwell-Banker)
San Francisco $1,360,189
Boulder, CO $1,044,656
Los Angeles $816,354
The first 4 have growth management laws. The last 4 do not.
Not only is housing significantly less affordable in growth management cities but there are at least 2 other undesirable side-effects. 1) High prices cause greater price volatility because they restrict supply. This restriction on supply elasticity (supply is elastic when increased price leads to increased supply) serves only to drive prices up to bubble levels and we saw in 2008 what happens as a consequence of bubbles in housing prices. Urban planning causes supply inelasticity and prevents normal market forces from correcting the problem of high prices.
Bubbles in real estate are much more dangerous that, say, equity bubbles because most real estate is purchased with borrowed money. A bursting real estate bubble can take the banking system with it. 2) Growth management has a disparate effect on minorities. From 2000-210 The San Francisco-Oakland Area lost 14.2% of its black population. L.A. lost 11.4%. Honolulu lost 3.6%. Phoenix gained 59%. Dallas-Ft. Worth gained 32.6%. Atlanta gained 42%.
Again, essentially all of the above is from Randy O’Toole’s piece here.