The Planning Penalty Download PDF File (66 pages)
How Smart Growth Makes Housing Unaffordable
May 12, 2006
by Randal OToole
Smart growth and other forms of growth-management planning create artificial housing shortages that impose significant burdens on low-income families and first-time home-buyers. This paper examines several sources of housing data to determine the specific effects of growth-management planning on housing prices.
Data examined include:
- Median family income and median value of owner-occupied homes by metropolitan area from the 1960 through 2000 censuses (the data actually apply to the year before each census, i.e., 1959, 1969, etc.);
- Median family income by metropolitan area estimated by the Department of Housing and Urban Development for 2005;
- Home price indices calculated for each metropolitan area by the Department of Commerce.
For each census year, housing affordability in each metropolitan area is estimated by calculating the number of years a median-income family devoting 25 percent of its income would need to pay off a mortgage equal to 90 percent of the value of a median-value home at mortgage interest rates prevailing at the time of the census. The same calculation is made for 2005 by updating the 1999 median home values using the Department of Commerce home price index. Mortgages that can be paid off in less than twenty years are judged affordable; twenty to thirty years is marginally affordable; and more than thirty years is unaffordable.
Comparing the results with the dates that cities or metropolitan areas begin doing growth-management planning reveals a remarkably consistent pattern. In most regions that have not done growth-management planning, long-term, inﬂation-adjusted housing prices grow at only about 1 percent per year. But prices almost invariably start growing much faster soon after regions begin growth-management planning.
In 1959 and 1969, almost every metropolitan area outside of Hawaii had affordable housing. Cities in California and the New York metropolitan area began experimenting with growth-management planning in the early 1970s, and by 1979 these cities were unaffordable. As more cities and regions began such planning, they too became unaffordable: the Boston area in the 1980s, the Denver area in the 1990s, and Florida cities in the early 2000s.
Housing prices have dramatically increased in the past six or seven years, but this increase has not been uniform across the nation. In general, regions with growth-management planning have seen prices increase by 4 to 14 percent per year. Regions without such planning have seen prices increase by only 1 to 3 percent per year.
Factors other than planning, such as a genuine shortage of private land available for development, appear to be responsible for high housing prices in only a handful of areas. In more than 110 metropolitan areas, higher home prices are the penalty paid by people who live in regions that use smart-growth planning.
This paper estimates this planning penalty in each metropolitan area by comparing the ratio of the median home value to the median family income in each metropolitan area with a standard ratio calculated to represent what housing costs would be without restrictive planning. For the census years, the standard ratio is the median ratio for all metropolitan areas. For 2005, the standard ratio assumes that, without growth-management planning, housing prices would have increased by 2.5 percent per year since 1999.
In a few areas that have recently adopted smart-growth plans, such as Jacksonville, Florida and Charleston, South Carolina, the planning penalty may still be under $10,000 per median-value home. But for most areas it is much more. The penalties in Boulder, Colorado and the San Francisco Bay Area, which pioneered this type of planning in the 1970s, exceed $500,000 per home. The penalty exceeds $100,000 per home in ﬁfty metropolitan areas and ranges from $25,000 to $100,000 in ﬁfty more.
More than 30 percent of the total value of homes in this country is attributable to prices inﬂated by planning-induced housing shortages. In 2005, homebuyers nationwide paid an estimated $275 billion more for homes because of restrictive planning. This does not count the added costs to renters or purchasers of commercial, industrial, or retail land.
Randal O'Toole is a Research Fellow at the Independent Institute, Senior Fellow at the Cato Institute, and Director of the American Dream Coalition.