housing price equals land price + constructions costs plus reasonable profit + mystery component
Dustin on 07 29, 2005
[photopress:fire.jpg,thumb,alignright]Slate commentator Steven E. Landsburg ran a great article today with an economists view of high housing prices… I’m very fond of his equation:
- housing price equals land price + constructions costs plus reasonable profit + mystery component
From an economist point of view, the housing prices seem unreasonable unless you try to quantify the “mystery component” that causes the value of some locations to be so much greater than others… Steven thinks he’s found this mystery component in the “permitting and zoning process”.
When you buy a house, you’re not just paying for the land and construction costs; you’re also paying for a building permit and other costs of compliance. You’ve got to get the permits, pass the zoning and historic preservation boards, ace the environmental impact statement, win over the neighborhood commission, etc.
Instead of blaming a housing price bubble, “it’s ever-expanding zoning laws that get in the way. If you want to lower prices, that’s the bubble you’ve got to burst.”
I really like this view of things as it gives an interesting insight to the high price of homes in desirable cities. However, it begs for a follow up question that is beyond the scope of an economist. If we could, would we want to change zoning laws to keep the price of homes down?
In reality, these zoning laws are quite useful in helping to attract the right kind of development that keeps many of these urban neighborhoods “livable”. The result is higher prices for homes in desirable urban cities like San Francisco (and to a lesser extent Seattle). Is that so bad?
If you’re interested in some more on this topic, City Comforts had an related discussion of how new development are not causing the high prices in Seattle.
About the Author: Dustin Luther
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