Measuring Housing Markets

So we had a cautionary tale on the effects of zoning in Restrictia. But not all zoning is equal! Even in the Restrictia example, zoning’s constraints didn’t actually matter until the city became dense enough to make denser construction types more profitable. If zoning allowed everything up to 8 story buildings, it would be a long time before it would matter for residential buildings in most cities.

But how do you know whether your city’s zoning codes are having an effect? We want a metric that tells us specifically: is our zoning driving up the price of housing? We believe that we have just such a measure: land value per unit. But before we get there, let’s walk through some other housing metrics and understand why they don’t really convey what we want.

Average cost of shelter

The price of renting or buying a home is perhaps the most salient metric for an individual homebuyer. But as important as it is, it is devilishly difficult to disentangle to what extent home prices are high because a city is doing things right or because it’s doing things wrong. Are prices high because the city is so great that lots of people want to be there and are willing to pay for it? Because the city’s economy is doing so well that lots of people are able to afford housing? Or are they high because the city’s regulations are driving up the costs of construction or land? Because there are so many reasons why prices can be high, this metric doesn’t provide a very clear signal to policymakers.

There is another, somewhat odder, problem with this metric: at the individual level, we understand very well that “cheap housing” isn’t the end-all, be-all. All the time, people choose more expensive housing that has more of the features they need over less expensive housing that has fewer features. If a market as a whole moves toward including more things in the cost of rent or housing, this could be read as “affordability going down” instead of “people choosing the more expensive but better options.”

Income to rent ratios

One way that people have attempted to make shelter costs more relevant is by comparing the ratio between incomes and shelter costs. What percentage of people’s incomes are they spending on rent? Typically this is presented as something like “the percentage of people spending at least 30% of their income on housing” along with “the percentage of people spending at least 50% of their income on housing.” This metric may well say something very important about the extent to which housing is on the minds of a city’s residents. But it can mislead policymakers in a very important way: it only measures against the incomes of a city’s current residents, not those people who can’t even afford to buy in. A suburb so exclusive that only the richest can afford to live there is probably not very rent-burdened but it may still rely on the labor of non-residents driving there to perform service work because they can’t even afford to live there. A big city with high housing costs and great economic opportunity may have a large share of rent-burdened residents — economic migrants who are investing in themselves by choosing to live in an expensive city where they can start a career or get training in a high-paying job.

Housing + Transportation

Another attempt at improving on the average cost of shelter as a metric is the “H+T” index, which adds in the cost of transportation to the costs of housing. This is good as people’s transportation expenses are often dictated by their housing choices, so they need to be evaluated together. But whether expressed as a ratio with income or as raw dollars, the metric suffers all the same problems as the two above.

Land Value Per Acre

Land value per acre is another interesting measure, because by abstracting away the cost of construction, it can get at some of the issues that are exclusively affected by zoning. A homeowner choosing to invest $100K in refurbishing their home may add $100K to the value of the structure, but this is largely irrelevant to the question of zoning’s effects on prices. But the $100K invested in an updated open-concept kitchen does nothing to the cost of the land underneath it.

The price of land does suffer some similar problems to the average price of rent, though: it’s unclear whether it’s high because it is conveying true value, or whether it’s high because cartel-like constraints are driving up costs. Indeed, the price of land can vary greatly from one place to another, even without zoning.

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