Check out the episode:
You can find the shownotes through this link.
Are you interested in how regulations influence housing affordability?
Our debate today works with the article titled The effect of housing supply regulation on housing affordability: A review from 2020, by Raven Molloy, published in Regional Science and Urban Economics journal.
This is a great preparation to our next interview with Keith Cooke in episode 434 talking about how housing capacity influences housing affordability.
Since we are investigating the future of cities, I thought it would be interesting to see how urban regulations and restrictions on housing capacity affects affordability. This article investigates how government land-use regulations contribute to the declining affordability of housing in the United States.
[intro music]
Welcome to today’s What is The Future For Cities podcast and its Research episode; my name is Fanni, and today we will introduce a research by summarising it. The episode really is just a short summary of the original investigation, and, in case it is interesting enough, I would encourage everyone to check out the whole documentation. This conversation was produced and generated with Notebook LM as two hosts dissecting the whole research.
[music]
Speaker 1: Imagine buying a new home, but before you even get the keys or before a single shovel even hits the dirt, you have to hand over eighty-four thousand dollars in hidden fees.
Speaker 2: That is a huge number.
Speaker 1: And it’s not for a better roof or a bigger yard. That is strictly the cost of government paperwork and regulatory compliance.
Speaker 2: It’s a staggering number when you frame it that way, and I think it perfectly sets up why we’re here today. We are looking at a housing landscape right now where, frankly, the sheer weight of cost is just crushing household budgets.
Speaker 1: Exactly. Just look at the historical shift here. Back in nineteen sixty, only about a quarter of renter households spent more than thirty percent of their income on rent.
Speaker 2: Right.
Speaker 1: But by twenty sixteen, that figure had surged to about half. And to be clear, this isn’t because we’re all suddenly living in sprawling estates with better amenities. The baseline prices are simply fundamentally higher.
Speaker 2: But the fundamental question is why, right? What is actually driving that price increase? And I think we have to ask if our standard ways of measuring this, quote-unquote, affordability crisis are even accurate.
Speaker 1: That’s the crux of it.
Speaker 2: So is local housing regulation, the zoning, the permits, the red tape, is that the primary driver because it physically restricts the supply of homes? Or is the relationship between those rules and actual affordability completely distorted by other factors?
Speaker 1: Things like household migration or wealthy towns protecting their borders?
Speaker 2: Yeah, exactly. And just the ways human beings adapt their consumption.
Speaker 1: I come down firmly on the side of supply. When you make it incredibly hard to build new houses, whether that’s through minimum lot sizes, height restrictions, or just endless permitting, you choke off the supply. Demand goes up, supply stays flat, and prices have to rise. It’s a direct causal crisis of our own making.
Speaker 2: And my perspective is that looking at average price increases and just declaring an affordability crisis is a massive oversimplification. I’d argue the causal link between regulation and a household’s true ability to afford a life in a city is deeply obscured by demographic sorting and local economic shifts. The simple metrics we use are, quite frankly, misleading us.
Speaker 1: Let’s dig into that mechanism then because the physical reality of building a home shows exactly how regulations artificially inflate costs. It is illegal to build an apartment building on roughly seventy-five percent of the residential land in most American cities.
Speaker 2: Yeah. The single family zoning is pervasive.
Speaker 1: Exactly. You are forced to build single family homes, often on large lots, and that restriction acts as a massive fixed cost. Going back to that eighty-four thousand dollar figure from a recent builder survey, that is twenty-four percent of the sales price of a new home just going to compliance.
Speaker 2: A quarter of the price.
Speaker 1: A quarter. When you look at the broader economic data, there is a massive undeniable positive correlation between these strict regulations and skyrocketing house values.
Speaker 2: I don’t dispute the correlation. Heavily regulated places generally do have higher average home prices, but correlation is doing a lot of heavy lifting there. We have a classic chicken and egg problem, what economists call endogeneity. So do strict zoning laws cause a city to become expensive, or do cities that are already incredibly wealthy, highly desirable, and packed with high-paying jobs naturally pass more zoning laws to protect their backyards? Strict regulations don’t just appear in a vacuum. They usually pop up in places that already have high demand.
Speaker 1: But even if wealthy areas are the ones passing these laws, the effect is exactly the same, right? They are pulling up the ladder. Higher average prices inevitably lead to lower affordability really no matter how you slice the demographic pie.
Speaker 2: I wouldn’t say no matter how you slice it.
Speaker 1: But look at the national dispersion of house values. Back in nineteen fifty, the most expensive cities in the country were about twice the national average in price. By the two thousands, they were four times the average. That doubling of the gap is driven by an inflexible supply of housing. Think of these regulations like a massive cover charge at a club. If a developer has to pay an $84,000 cover charge just to get the permits to build a single unit, they are mathematically incapable of building affordable starter homes.
Speaker 2: I see what you mean.
Speaker 1: So they are forced to only build luxury properties to make that cover charge worth the investment. The affordable units are either never built or older homes are torn down to make way for luxury mansions.
Speaker 2: Look, I hear the cover charge analogy, but it assumes that higher prices automatically force a household to spend a financially ruinous percentage of their income on housing. And when you actually look at the data on human behaviour, you find something fascinating. Households in highly regulated expensive areas don’t necessarily spend a significantly larger fraction of their income on rent compared to people in less regulated areas. Instead, they adapt.
Speaker 1: By squeezing into a tiny box?
Speaker 2: They simply consume less physical housing space. They live in smaller apartments. They happily trade square footage for access to a better job market or local economy.
Speaker 1: Wait, so the defence is that people are forced to cram into smaller spaces for the exact same amount of money? Standard affordability measures look at rent relative to income. If someone has to downsize from a three-bedroom to a studio apartment just to keep their rent at 30% of their income, they haven’t maintained their standard of living.
Speaker 2: That’s a fair point on living standards, but-
Speaker 1: They’ve lost immense value. Forcing people to consume less housing or, worse, forcing them to migrate away from productive cities altogether is a direct harm caused by these regulations. When the data shows that zoning rules prevent workers from moving to the most productive areas of the country, that is a macroeconomic failure. We are punishing low-income workers by making the cost of entry into our best labour markets prohibitively expensive.
Speaker 2: It is displacement, I agree, but that displacement fundamentally breaks the math we use to define affordability. We really have to look at the sorting effect here.
Speaker 1: The sorting effect?
Speaker 2: Imagine a town that passes a law banning all housing except million-dollar mansions. Naturally, the working class is forced out, and the only people left are millionaires. If you look at that town’s local economic data a few years later, housing looks affordable on paper.
Speaker 1: Because everyone living there makes a huge salary.
Speaker 2: Exactly. The math looks fine, but it’s a statistical illusion. When researchers compare zoning strictness to rental affordability across the country using the national income average, there is a strong negative correlation. Highly regulated places look very unaffordable.
Speaker 1: Which they are.
Speaker 2: But if you measure affordability using only the incomes of the people actually living in that local city, the correlation almost completely disappears. It goes from negative .56 to just negative 0.16.
Speaker 1: I see why you think that. But let me give you a different perspective. That statistical illusion doesn’t weaken the argument against regulation. It precisely proves my point.
Speaker 2: How does that prove the point?
Speaker 1: Because the only reason the correlation vanishes when you look at local incomes is because the poor have already been systematically exiled from those highly regulated areas. The local data is skewed because only the wealthy survived the purge, so to speak. But if a city zones out its entire working class and the remaining residents can technically afford their homes because they are all tech executives, that isn’t a quirk in the data. That is the ultimate catastrophic failure of affordability. You’ve essentially solved the affordability equation by eliminating the people who can’t afford it.
Speaker 2: That assumes the only outcome of regulation is exclusionary pricing. But standard affordability metrics also fail to capture the broader welfare landscape. If we are talking about the true cost of living, we have to look beyond the rent check. Regulations do more than just block housing. They shape the environment.
Speaker 1: I completely agree we need to look beyond the rent check, but doing so only strengthens the case against these rules. Because standard metrics completely miss the hidden costs of regulation, specifically the explosion in commuting costs. Because density controls and height restrictions legally cap how many people can live in the urban core, development is violently pushed outward. This artificially creates urban sprawl and drastically raises the total cost of living. The fraction of commuters forced to travel more than thirty minutes to work grew from twenty-eight percent in nineteen eighty to nearly forty percent recently. So not only are people paying a premium for the physical house, they are paying a massive unmeasured premium in time, gas, and transportation just to access their jobs.
Speaker 2: But have you considered that not all regulations cause sprawl? In fact, many land use regulations are specifically designed to contain it.
Speaker 1: Like what?
Speaker 2: Things like urban growth boundaries and strict permit caps. They often prevent cities from endlessly paving over the suburbs. Furthermore, we have to consider that regulations can provide a net welfare gain that raw price metrics entirely ignore.
Speaker 1: You mean like amenities?
Speaker 2: Exactly. Land use regulations preserve open green space, protect local environments, and maintain clean air. Those benefits are what economists call capitalized into the land values.
Speaker 1: Meaning the house price reflects the neighbourhood.
Speaker 2: That just means the high price tag has the value of the park, the clean air, and the safe streets baked right into it. If a regulation makes a city more liveable and greener, the price of housing will rise to reflect that new value. We cannot call a city unaffordable simply because its high prices reflect a high quality of life that people are willingly paying for.
Speaker 1: But who gets to enjoy that high quality of life? Only the people who can clear that eighty-four thousand dollar regulatory cover charge hidden in the purchase price.
Speaker 2: That’s looking at it purely from an entry fee perspective.
Speaker 1: Because the entry fee is the barrier. To summarize where I stand, the weight of the evidence shows that regulation artificially and severely restricts our housing supply. This isn’t just about preserving a local park or saving a historic building. We are talking about blanket density controls and labyrinthian permitting processes that dramatically raise prices.
Speaker 2: The prices go up.
Speaker 1: And they mathematically force developers to tear down lower-tier housing to build luxury units and systematically exile lower income workers from our most productive opportunity-rich regions. The affordability crisis is not an accident. It is a policy choice.
Speaker 2: And to summarize my perspective, while I entirely agree that regulation restricts housing supply, drawing a simplistic straight line from zoning laws to unaffordability misses the complex mechanics of how human beings in cities actually interact. The data is deeply clouded by the chicken and egg problem of local amenities, behavioural adaptations where households happily trade physical space for access, and massive demographic sorting that radically skews our statistical metrics. By focusing solely on average sticker prices, we are blinding ourselves to the nuances of urban economics.
Speaker 1: I do think we have reached a meaningful convergence on the foundational reality here, though. Regulation demonstrably alters housing markets and drives up average prices. There is no serious debate that restricting the supply of a necessary good increases its baseline cost.
Speaker 2: I completely agree with that. The rules raise the prices. Where we continue to fundamentally disagree is whether those simplistic traditional affordability metrics accurately capture the true welfare of the people living in these cities, especially once we account for how households move, adapt, and value their environments.
Speaker 1: It just highlights the incredible complexity of measuring human welfare. To truly understand the housing crisis, we really have to look past the average listing price on a real estate app and examine the intricate, often painful ways households are forced to adapt, commute, and survive within these heavily regulated metropolitan areas.
Speaker 2: Exactly. If we don’t look past the visible price tag, we will never understand the true cost.
Speaker 1: Which brings us back to that broken scale. If we keep using a simple price-to-income ratio to diagnose the health of our cities, are we actually treating the disease, or are we just entirely misreading the symptoms?
[music]
What is the future for cities podcast?
Episode and transcript generated with Descript assistance (affiliate link).
What is The Future for Cities? Podcast 
Leave a comment