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Last Updated: November 25, 2008


Highly regulated housing markets with many zoning laws, tend to have higher house prices than non-regulated areas.

Expect home values to rise, where public opinion feels strongly that the quality of the built environment should be protected by regulation.

Why is Manhattan so expensive?
Regulation and the rise in house prices. Edward Glaeser, Joseph Gyourko, and Raven Saks, November 2003

House prices soared in Manhattan and other cities during the 1990s. They rose more than the national average.

  • In recent years, average Manhattan condominium sale prices have exceeded US$600/sq ft.
  • Yet construction costs in Manhattan, including land costs, are less than US$300/sq ft.

Why, asks Glaeser? Why haven't low building costs elicited new supply, forcing apartment prices down?

The answer: Regulation. Residents are very supportive of zoning laws, and use them to discourage new apartment construction. One could argue that aesthetics plays a role. But Glaeser argues that this is an illusion. Dwelling values, not aesthetics, he argues, are the prime reason that so much zoning legislation gets passed. Home-owners are (in effect) collectively conspiring to support regulations to discourage new apartment buildings, to push up the value of their property.

How does he figure this out? Well for commercial buildings, the ratio of price to construction costs is low. In fact, in Manhattan. commercial building values have often fallen below replacement costs. In 20 years, this never happened for apartment buildings. Why? regulations and zoning laws weight less heavily on commercial buildings.

Don’t commercial building owners lobby effectively, as home owners do? They would surely like to, but difference is that Manhattan's apartment owners are voters. They live in Manhattan. As residents, as voters, they have the political ‘clout’ to influence zoning laws and regulations (and to raise the value of the homes they own).

They are much less interested in raising the values of the offices they work in, because they do not own them. And commercial building owners lack political ‘clout’. There are less of them, and they often don’t live or vote in Manhattan. The effect of their political weakness shows in the relatively low prices of commercial buildings, and their weak regulation.

Moral of the story: expect home values to rise, where public opinion feels strongly that the quality of the built environment should be protected by regulation.





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