Land Prices and Regulation

Economic Geography, Jobs, and Regulations: The Value of Land and Housing Nils Kok Paavo Monkkonen John M. QuigleyMaastricht University University of Hong Kong UC Berkeley AREUEA Meetings, Denver January 2011

Land in housing productionValue of urban land is difficult to observe  Price of land is a basic indicator of the attractiveness of a specific site and the amenities available at that location.  Variations in price of land affect cost of housing and spatial variations in density of population.  Determinants of rural land values in the US are well documented (Alston, 1986; Goodwin, et al., 2003).  Urban land values inferred from transaction prices for housing, based on assumptions about production function (Davis and Heathcote, 2007; Davis and Palumbo, 2008).   Does not account for intra-metropolitan variation in land component  Observations on sales of urban land are scant…

…or are they?Manhattan: 90 transactions of vacant land per year, ‘99-’06Andrew Haughwout, et al, 2008

Value of land: determinants and consequencesEconomic geography, jobs, and regulations “What are the determinants of urban land prices in the San Francisco Bay Area and how does they affect house prices?”  First attempt to measure land prices and its determinants directly (Davis and Palumbo, 2008)  Aims to understand better the intra-metropolitan relation between topography, demographics, regulation, and land prices (Saiz, 2010)  The San Francisco Bay Area:   Substantial variation in economic geography   Proximity to jobs and economic conditions   Wide variations in topography – elevation, slope, earthquake risk   Exposed to different levels of public services   Infamous for restrictive pattern of land-use regulation

DataNine-county San Francisco Bay Area, 1990 – 20107,278 complete and geocoded land transactions, CoStar

Job access and land valueDistance and cumulative opportunity measureLocation relative to CBD: airline Employment access: jobs within distance to SF Ferry Building 45 minutes of travel time (Wachs and Kumagai, 1973)But: decentralization of Most jobs are in East Bay, but workplaces. Just 14 percent of some locations in central city jobs still in SF (2003) command higher prices.

Results (I): accessibility, use, and land prices

Results (II): topography, demography and pricesElements of economic geography have distinct influence   Indicators of land condition and proposed use included   Income growth instrumented by 1980-1990 income growth   API score instrumented by census tract demographic data in 1990

Regulation and land prices110 independent jurisdictions in Bay Area alone  Cities are often afforded great freedom to regulate land use   Wharton Regulation Index (Gyourko, et al., 2008)  California-specific regulation measures   Survey of Planning Director in each city (Glickfield and Levine, 1992)   Restrictiveness Index (e.g., building permits)   Hospitality Index (e.g., “fast-tracking”)   Survey of regulatory structure SF Bay Area (Quigley, et al., 2007)   Independent reviews and approvals required for building permit   Number of reviews municipal authorities required for zoning change   Estimate of average delay between request and decision (months)   Number of stakeholders involved in land-use decisions  Endogenous regulation measures instrumented by popular vote for:   California’s Prop 13 (substantial property tax rollback, 1978)   Ronald Reagan (national election against Jimmy Carter, 1980)

Results (III): regulation and land pricesStringency of regulation has powerful effect  If average delay were increased by one st.dev., or 8 months, land prices would be increased by 16 percent, ceteris paribus  Findings corroborate with many others, e.g., Glaeser and Gyourko (2003)

Land prices and house prices Transactions of single-family lots and single-family homes   Intra-metropolitan variation in the effects of economic geography, jobs, and regulation on land prices   The link between land prices and house prices (Davis and Palumbo, 2008): (1) V = p K + p L i k i l i where Vi is the sum of physical capital K i , and the land it is built on Li and stocks of capital and land are valued at current prices pk ,p l€   We obtain quarter year data on average transaction prices for single- € € € family homes in each of the 110 cities in the Bay Area, 1990 – 2010 (source: DataQuick) €   Data matched to 902 transactions of single-family lots in CoStar file

Land values as fraction of average house pricesThe importance of land is substantial and increasing  Land represents about 34 percent of the selling price, on average  Fraction varies between 31 percent (’90-’95) and 43 percent (‘05 –’10)  Davis and Palumbo (2008): 75 percent (1984) to 89 percent (2004) in the City of San Francisco

Price effects of changing economic conditionsCounterfactual estimates: Bay Area, SF, and suburban areas  Regressions are re-estimated under changed economic conditions  Estimate changes in house values using (predicted) land prices   “Move to flatland”: elevation and hilliness set to zero, fault lines one SD away   “Improve schools”: improve API scores by one SD   “Suburbanization of jobs”: equalize job density throughout region   “Reform regulation of land use”: reduce restrictiveness measures by one SD

Land prices, house prices, and capital costsSummaryComparison land price indexes Comparison of with other indexes  Transaction-based land index   Transaction-based land index  Inferred land price index (Davis   Case-Shiller house price index and Palumbo, 2008)   Construction cost index

Conclusions and implicationsImportant links among geography, regulation, and land prices  Land prices in urban areas are typically inferred from housing transactions, making assumptions about production function and capital costs.  This paper exploits a unique source of urban land transactions in the San Francisco Bay Area.  Intra-urban variations in topography, demographics and amenities are quite important determinants of land prices.  Restrictiveness of legal environment drives up value of land.  Both economic geography and regulation directly affect single-family house prices.

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