Though median capital-city housing prices have declined a bit in the last few months, Australia’s capital cities continue to be among the world’s most expensive. One key factor boosting prices is zoning.

Zoning regulations are credited with improving urban life by separating noxious, noisy industrial businesses from bucolic neighbourhoods. Has that benefit come at too high a price? Is zoning also to blame in cities that have an affordability crisis?

A number of researchers have studied the issue. In the report Urban Structure and Housing Prices: Some Evidence from Australian Cities by Mariano Kulish, Anthony Richards and Christian Gillitzer, the authors used a statistical model to examine the effect of density restrictions on a large city.

Height restrictions, for example, constrain housing supply, which results in higher prices.

“The zoning restrictions force building height close to the CBD to be lower, but building height in the middle and outer suburbs is higher than it would otherwise be to accommodate the people forced out from close to the CBD,” the authors state.

The price of housing rises at all distances from the CBD “because the supply of well-located housing has been reduced.”

Reserve Bank of Australia governor Glenn Stevens has also weighed in, telling a parliamentary committee that “an increase in state government zoning regulations is a significant factor driving up the cost of housing.”

Alan Moran, writing for the Institute of Public Affairs, declared flatly that “the reason for Australia's high prices is extreme zoning measures, which prevent new housing developments.”

Moran compared median income levels to median housing costs among Australian and US cities. In Dallas, Texas, and Atlanta, Georgia, for example, the median house required 2.7 and 2.1 times the median annual income, respectively. Sydney and Melbourne, in contrast, required nine times and eight times the median income, respectively.

Construction costs are not to blame, Moran noted.

“While our land preparation and house building industries are as cheap as anywhere in the world, the planning and zoning stranglehold on land releases pushes up prices to astronomical levels,” he said.

Affordability is not the only concern; zoning has also been implicated in dragging down economic growth and economic mobility. All these problems, it appears, are linked.

According to Jason Furman, chairman of President Barack Obama’s Council of Economic Advisors, “restricted supply leads to higher prices and less affordability.”

In addition, Furman noted, increased housing costs can prevent people from moving to areas with better-paying jobs, which creates a drag on productivity.

“Barriers to geographic mobility reduce the productive use of our resources and entrench economic inequality,” he said.

In addition to increasing housing costs by restricting supply, Furman noted, zoning can also prevent the development of affordable, multi-family housing needed to alleviate intense upward pressure on housing costs.

“Multi-family housing units are the form of housing supply that is most often the target of regulation, thus restricting the potential for sustained long-run growth in this category,” he stated.

Absent zoning regulations that restrict supply and type of housing, market forces can be expected to deliver what the market demands. Zoning can skew that balance and, Furman says, can “undermine the market forces that would otherwise determine how much housing to build, where to build, and what type to build, leading to a mismatch between the types of housing that households want, what they can afford, and what is available to buy or rent.”

Other research supports Furman’s claim. A report by economists Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California at Berkeley concluded that the US urban housing shortage contributes to lowering the US aggregate gross domestic product by 13.5 per cent. Looking at high-productivity cities like San Francisco, New York City, and San Jose, California, the authors posited that “lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%.”

Can zoning be eliminated, or at least loosened? The city of Detroit, the poster-child for struggling industrial cities past their prime, is starting a program aimed at nurturing small-businesses. The “Pink Zoning Detroit” program refers to the intent to lessen the red tape that’s typical in planning and zoning today.

Process inefficiencies, outdated ordinances, and rigid code interpretations often strangle the most creative place-making projects, resulting in urban environments that fall far short of their potential,” according to the program’s website.

The Pink Zoning program is requesting project ideas from qualified teams of planning and design professionals. The teams will submit their ideas for creative placemaking projects, with three teams chosen to work with the city’s planning department.

  • While all of this research is interesting, I suspect much of it is motivated by the libertarian, free market fundamentalist impulse still so rampant within the economics profession. On the face of it the remeoval of zoning laws will lead to bedlam in our cities.

  • Whilst it is correct to say that restrictive planning policies are part of the problem in terms of housing affordability, any ideas that zoning should be abandoned entirely are ludicrous. To abandon zoning completely and make it a free-for-all would more than likely see developers just plonking up anything and everything irrespective of aspects such as local neighborhood character, overshadowing and adequacy of local infrastructure to cope.

    That said, we do have to do zoning better. I can't speak for anywhere else, but certainly in Melbourne, overly restrictive application of residential zones in the middle suburbs is a major problem. Whilst planners all around recognise that we need much greater mixes of medium density housing in middle ring suburbs, we have municipalities like Boroondara in the city's inner to middle east which is home to several universities and in which almost all residents are within 750 meters of a transport link or activity centre yet the council has applied the most restrictive possible residential zone to three quarters of the municipality. Yet in the relatively nearby municipality of Knox – which is nowhere near as well serviced from a transport perspective – the most restrictive forms of zoning are not applied at all. Certainly, this indicates that we do have to be much smarter in the way we go about our planning and zoning.

  • Dallas (and most Texan municipalities) do have planning and building rules; but OUTSIDE the city limits of many Texan towns there are often NO building regulations. So insurance companies have their own criteria, which become the default conditions – often to a minimum standard, but not necessarily the same as the local municipality. Which accounts for why both caravans/ trailers & shacks for poor folks and, at the other end of the spectrum, enormous mansions, are built just outside the city limits.
    The middle class live INSIDE the city limits, and they also pay the school taxes, the road taxes, the water and sewerage taxes, city taxes, the hospital taxes……. and have houses built to local building regulations and planning zone requirements.
    It is never as simple as free marketeers and developers in favour of unfettered development would have us believe.

    • Great points, Margaret. Thanks for adding to the discussion. There is always a challenging balancing act between over regulation and under regulation. Zoning and building codes seem to seem to be a favorite whipping post. Another issue is the NIMBY tendencies of existing home owners, which I can understand, but have a substantial impact on what gets built.

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