Docstoc

Cheshire

Document Sample
Cheshire Powered By Docstoc
					The Economics of Land Use Regulation: Housing Prices, Urban Sprawl & Corruption
          XREAP Network Workshop: Barcelona 17th December 2007

   The Economic Analysis of Land
           Use Planning


                      Paul Cheshire
                      email p.cheshire@lse.ac.uk




                                                    December 2007
Land Market Regulation:
‘Planning’, ‘Zoning’, ‘Growth Boundaries’….
• Land is an environmental resource, a factor of production
  and – as space – a good giving direct welfare
• In general land use regulation only treats land as an
  ‘environmental resource’
• Land use planning a system of regulation via direct
  intervention
• Land a scarce resource but allocation only partially via
  markets - or not at all
• Think about some of the economic implications of this;
  estimate some of the effects in UK residential markets–
  serves as dreadful warning!
• Look also at gross costs in commercial markets
• And - can we use price information to improve economic
  efficiency of planning?
Why Regulate Land Markets?
•   Clear problems of market failure
•   Each plot of land specific location: lumpy and illiquid
•   Value – welfare/productivity – of all plots influenced by
    uses on neighbouring plots: lead smelting, bull breeding,
    agricultural chemicals, gardens….
    • So an intrinsic problem of externalities from
      interdependencies between neighbouring plots
    • ‘Public Goods’ –open space, rare habitats,
      beautiful scenery, mountains, sea shore etc
       • Coasian solutions impractical – transactions costs
       • Internalisation via Pigovian taxes?
•   ‘Solutions’ have come from design, architecture & civil
    engineering traditions – ‘planning’ ‘zoning’
•   Era of utopian visions, belief in central planning
•   (in UK part of post WWII socialist reconstruction – land
    use and economic planning)
Planning Restricts the Supply of What?
Legal, institutional context critical
     So - lots of good reasons for land use regulation -
     only interest if regulation restricts supply
     relative to demand – of…
         1. Space – land by locations & use category (e.g. –
            residential or retail); building heights
         2. Land+building bundles (often in US system)
         3. Development - by imposing costs e.g. delays,
            compliance, rent-seeking
 •   And demand for space as consumption good
     largely driven by real incomes – not household
     numbers
 •   Also demand for space as factor of production –
     so output & incomes?
May think Growth Boundaries New
but in UK a very long history…
• A proclamation of 1580 commanded the subjects of Queen
  Elizabeth I to:
• “desist and forebeare from any new buildings of any house
  or tenement within three miles of any of the gates” of the City
  of London “where no house hath been known”
• 3 mile Tudor Green Belt later extended to 7 miles but never
  fully enforced. State connived at avoidance of the law -
  increasingly preferred fines to knocking down all buildings
• In effect became transmuted into a green field development
  tax and another source of state revenue
• Then as now – stop hovels encroaching on royal palaces &
  burghers’ villas [suburbs-subhuman]
• Only repealed with London’s rebuilding post-1666 ‘Great Fire’
• Rational economic analysis and political economy….
The Costs & Benefits of British-style
Supply Restriction
• Planning creates amenities - local public goods
• Retains type 1) open space within cities (parks etc): this is
  valued: open space with public access
• Type 2) open space beyond growth boundary – ‘urban
  containment’ – Greenbelts: Open space but no public access
• Separates industrial, commercial residential uses: less
  industrial space within residential areas is valued
• But - constrains land as ‘pure-space-with-accessibility’ –
  ‘land’ in strict sense of classical urban economics
• Does not constrain supply of housing directly: indirectly via
  land availability
• Evaluation of net welfare effects of, say, relaxation requires:
• Valuing of loss of Type 1) & 2) open space
• Valuing lower land and house prices (& bigger houses &
  gardens). New German houses 44% bigger than British:
  Dutch 45% cheaper per m2
Welfare Costs of Containment?

 • Residential is main consumer of ‘urban’ land
 • Price of ‘pure land’ increased => costs of housing
   higher: consumers’ choices constrained; land
   substituted out of consumption - so higher
   densities.
   • Welfare gross cost is loss of income/other goods and
     sub optimal attribute bundle consumed
   • Net cost allows for loss of open space +other amenities
     created by planning consequent on relaxation of
     restriction
   • So to estimate need to know prices and structure of
     demand – contribution of attributes to welfare and rate of
     substitution between attributes
A Method for Estimation Net Welfare
Impacts (Cheshire & Sheppard, 2002)
1. Estimate the structure of hedonic prices for land and other attributes;
2. Using prices + household incomes - estimate demand system including
   land and planning produced amenities;
3. Use demand system to determine a utility level for each household in
   status quo;
4. Use utility level + observed incomes + household numbers + value of land
   at periphery to estimate share of land made available for residential
   consumption (equilibrium =>land supplied consumed);
5. To estimate gross benefits:
   For amenities i) use demand system to estimate (reservation) price that if
   no planning system; ii) for each household calculate income compensation
   needed to maintain observed utility when amenity price raised to
   reservation price – so household demand for amenity is zero
6. To estimate net benefits:
   i) Estimate change in land available for consumption associated with
   planning; ii) for given relaxation in land supply/reduction in amenities
   estimate new household utility levels & increase in land consumption iii)
   for each household calculate implied variation in income equivalent to new
   utility level.
Welfare Costs of Containment
   Net costs of Land Use Planning: Reading 1984

                                               Modest     Significant
                                               Relaxation Relaxation
   Average net cost of land use planning per 210.94       407.44
   household - £ p.a.
   S.D. across households                      376.68     335.40

   Net cost as per cent of income              2.01       3.89

   Capitalised land value at urban periphery   30 000     25 000

   Per cent increase in urbanised area         46.9       70.7
The Distribution of Planning
Benefits relative to Incomes
              30
                                           Industrial Land Use

              25
    Percent




                   Accessible Open Space

              20


              15
                                            Income Shares

              10
                     1           2            3            4     5
    Inaccessible Open Space                Quintile
Costs? Or Asset Values?
  • Costs are in terms of ‘income’ flows
  • But amenities capitalised into house prices
  • Houses including land are part of asset portfolio
  • As real and relative house prices rise over time with
    rising incomes and constrained land supply asset
    values become relatively more important
  • The longer growth is constrained the more difficult it is
    to relax constraints?
  • But the longer growth is constrained the more serious
    economic impacts become – including macroeconomic
    management & monetary policy
  • Fischel W. (2001): Barker, 2003; Barker II July 2006
How Have Net Welfare Costs Changed
Over Time?
• Housing – many characteristics
  • Physical + locational (including very important local
    amenities, public good & neighbourhood characteristics)
• Hedonic models => price of a ‘house’ – aggregate of
  each of its characteristics
  • So need to think of supply, demand & price of individual
    characteristics
  • Some attributes ‘industrially’ supplied e.g. central heat
  • Space – both internal & in gardens (& as public open
    space) – a characteristic for which there is an identifiable
    demand …& supply via planning
• But – empirically – locational attributes dominate
  value of ‘land-as-pure-space-with-accessibility’
  (concept implicit in monocentric trade-off model)
Getting a fix…
  • Exceedingly resource intensive to estimate net
    welfare costs
  • Can we get relatively clear evidence from more
    modest research effort?
  • If planning generates amenities and also
    restricts supply of space:
  • First question: What has happened to price
    of individual characteristics over time?
  • Have planning produced amenities or private
    space become relatively more valued?
Changes in Prices: Selected Attributes
Reading Housing Market, 1984-93
                                    1984      1993     % Change
            Income (pre-tax)
      from sample                  £13,694   £28,969     111.5

         Price Level (1987=100)     91.0      141.9       55.9

      Sample mean house price      £51,066   £94,990      86.0
         Reproducible attributes
      Central heating              £4,954    £5,997       21.1
      Bedrooms                     £2,599    £2,801       7.8
      Bathrooms + WC               £4,687    £6,229       32.9
           Planning amenities
      Less industrial land           £74      £224       202.7
      More open accessible land      £51      £227       345.1
      More closed unbuilt land1     £102       £60       - 41.2
           Space (price per m2)
      Garden Space :
         at centre                  £49.5    £152.3      207.9
         at periphery                £4.5     £22.9      404.9
         median distance            £12.8     £32.1      151.5
      Internal floorspace           £171      £425       148.5
So Real Price of Space Rises and...
 In Britain policy constrains the supply of space – not
    the supply of buildings+land
 1) Demand for space driven very much more by real
    incomes than household numbers…
    & this feeds through to house price changes
    (income elasticity of demand for space both in
    houses & gardens at sample mean, above 1.5
    Cheshire & Sheppard, 1998); &
 2) Since housing attributes can be substituted for
    each other (e.g. floors, terraced/detached, space,
    public open space, room size/design) –
     expect land prices to have risen more than
        house prices
Long Run Real Land & House Price
Indices(1975=100) from Cheshire & Sheppard 2004
                     Land Price Index        House Price Index                                 Note: House and Land data for w ar years are interpolated.

      400

      350

      300

      250

      200                                                                   Land Price Index


      150

      100

       50

        0




      20 .S
          92
          95
          98
          01
          04
          07
          10
          13
          16
          19
          22
          25
          28
          31
          34
          37
          40
          43
          46
          49
          52
          55
          58
          61
          64
          67
          70
          73
          76
          79
          82
          85
          88
          91
          94

      19 97
      20 .A


           .A
        01
        99


        02
        18
        18
        18
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
        19
    Housing land prices are from 3 sources: Vallis (1972) Estates Gazette – 1892 to 1969 England: Housing & Construction Statistics – 1963 to 1987
    England & Wales; and Property Market Report, Valuation Office – 1983 to 2002
    House Prices: ODPM: Table 502 Housing Market: House Prices from 1930. Table 502 Housing market: house prices from 1930, annual house
    price inflation, United Kingdom, from 1970 Table 502 Housing market: house prices from 1930, annual house price inflation, United Kingdom, from
    1970
…and since Supply of Land
Determined for Each Use…
 • We observe price discontinuities at zone boundaries
 • Supply of land for each urban use determined by fiat
   independently of price but sold on market
 • Agricultural land in wider London region
    • Maybe £10 000 per ha….
 • Housing land
       • Now more than £4 million per ha
 • Price of housing land twice that of industrial
 • But highest for offices & retail
 • => What about impacts of regulation on commercial
   real estate?
£   CBD Office use price gradient    Markets Get their Revenge
         Industrial use price gradient
                                             Designated Areas in 1947
                  Residential use price gradient

                            Cost of infrastructure
                            to convert agricultural land
                                             Recreational & agricultural use price
                                             gradient

                                                                            Distance
                                                                            to Centre
£

                                 Figure 1b: After Change in Demand
                                                   Inflexible Zones
                                            Price Discontinuities




                                                                             Distance
                                                                             to Centre
British Office Costs – take Birmingham
(Cheshire & Hilber, 2006)
 • Take Birmingham – medium sized city (2.5m), declining
   industrial economy, situated on flat plain
 • Construction costs for offices about 50% of costs in
   Manhattan – no surprise
 • What fundamentals determine costs of space? City size,
   income level, construction costs, growth, transport
   systems….
 • In Birmingham office space costs 44% more than
   Manhattan (2004)
 • That is some surprise: something must be going on
 • Land use planning constraints seem plausible candidate
 • Work on UK residential sector suggests land supply
   restrictions impose about 4% income equivalent net
   welfare loss
‘Regulatory Tax’ measure (Glaeser et al 2005)
no restrictions; high demand (L), low demand (B) cities

     price per m2
                                                     ACL
                                         MCB=MCL




                                                   ACB
     PL
                      Land Rent (L)            AVCB=AVCL
     PB
                    Land Rent (B)


                                                           building height
                                    hB   hL

Competitive development industry so in equilibrium P=AC=MC
A Developer’s Cost Curves with Height
Restrictions – The ‘Regulatory Tax’
    price per m2

                       height                         ACL
                     restriction        MCL



    PL
    PL
                                               AVCL
                RT

      no
   MC L
                                                              building height


  Abstracts from land costs but a ‘black box’?
         But if no height restriction?? Regulation via compliance costs??
Estimating the Regulatory Tax (RT)
• For 14 UK office locations: marginal costs of
  construction per m2 in hypothetical additional floor –
  estimated by Davis Langdon back to 1960 from actual
  projects: common spec (+ not used yet – standard office
  park boxes – investigate endogeneity issue).
• For Continental locations (+ Manhattan) Gardiner &
  Theobald Average Cost data, converted to ‘MC’ using
  ratio to Davis Langdon for common locations
• UK prices via CBRE: m2 prime rentals + yields from
  1973 (1960) converted to capital values using
  ‘Equivalent Yield Model’ allowing for voids, rent frees etc
  (see paper); + CBRE data on total Occupation Costs
  (2004 & 2005 only)
• For Continental prices - JLL rental & yield data from
  1990: used common locations to cross check
Summary Statistics:
Regulatory Tax – sensitivity to assumptions
                                                                                          Std.
  Variable: Ratio: Regulatory Tax / MCC                                Obs     Mean                  Min       Max
                                                                                          Dev.
  Specification:
  Based on prime rent (no adjustment)                                   480     3.70       2.92      0.13     22.06
  Prime rent partially adjusted for rent-free periods                   480     3.03       2.66     -0.05     19.81
  Prime rent fully adjusted for rent-free periods and
                                                                        480     2.64       2.37     -0.14     17.55
  vacancy rates (central estimate)
  Upper bound: Assume 10% premium for top floor plus
                                                                        480     3.88       3.10      0.15     23.95
  50% of fully adjusted total occupation cost markup
  Based on fully adjusted prime rent plus 10% premium for
                                                                        480     3.01       2.60     -0.05     19.41
  top floor
  Lower bound: As central estimate but assume 0.5
                                                                        480     2.37       2.15     -0.18     15.78
  percentage point higher yield
  Data Sources: CBRE (prime rent, yield and total occupation cost information), Davis Langdon (marginal construction
  cost information), IPD (national void rate index) and ODPM (regional vacancy rates).
Regulatory Tax: Mean values
     Office Market         Years with       Regulatory tax
                           Available    Mean 1973-2005* 2005
                             Data         or available
     City of London        ’61-’05            7.54*        3.34
     London West End       ’61-’05            6.80*        8.89
     Canary Wharf          ’98-’05            3.29         2.77
     London Hammersmith    ’91-’05            2.28         1.82
     Manchester            ’73-’05            1.58*        2.50
     Newcastle upon Tyne   ’65-’05            0.72*        1.19
     Croydon               ’65-’05            1.29*        0.98
     Edinburgh)            ’65-’05            2.18*        2.62
     Glasgow               ’65-’05            1.69*        2.05
     Maidenhead            ’84-’05            2.81         2.27
     Reading               ’65-’05            2.73*        1.61
     Bristol               ’73-’05            1.46*        1.96
     Birmingham            ’65-’05            1.86*        2.68
     Leeds                 ’73-’05            1.71*        2.17
                                   Figure 1: Regulatory Tax(Central Estimate)
                                             London Office Markets

                 18.00


                 16.00


                 14.00


                 12.00
Regulatory Tax




                 10.00


                  8.00


                  6.00


                  4.00


                  2.00


                  0.00
                     1960   1965    1970          1975         1980          1985      1990       1995      2000   2005
                                                                      Year

                                     City of London      London WE     Docklands    Hammersmith   Croyden
Comparisons with
Continental European Locations
                    City                               Estimated Regulatory Tax
                                                   1999          2005        Average
London West End                                    7.62          8.37          8.00*
London City                                        4.68          4.31          4.49*
Frankfurt                                          5.44          3.31           4.37
Stockholm                                          4.28          3.30           3.79
Milan                                              2.07          4.11           3.09
Paris: City                                        2.35          3.75           3.05
Barcelona                                          2.23          3.16           2.69
Amsterdam                                          2.12          1.92           2.02
Paris: La Defense                                  1.41          1.93           1.67
Brussels                                           0.52          0.84           0.68

Data from JonesLangLasalle and Gardiner Theobald adjusted to CBRE & Davis Langdon norms
*9.0 and 4.9 respectively using Davis Langdon & CBRE data
Explaining the Regulatory Tax
• Very high costs of land use planning in UK
• Planning policies controlled by residents - Homevoter
  hypothesis + benefits widespread & costs of
  development very local
• Except – helpfully in City of London + Docklands
• Planning authorities small (Districts, Boroughs)
• Strong negative fiscal incentive to allow any commercial
  development: reinforced post 1989 – Uniform Business
  Rate
• Except – helpfully – City of London: retained 15%
• For resident controlled only incentive - fear of
  unemployment?
• But RT cyclical: supply or demand? Include a ‘pure’
  demand measure – local employment in office sectors
Explaining the Regulatory Tax:
Hypotheses/questions
 1.   As unemployment rises, planning becomes less
      restrictive => i.e. supply side determine
 2.   Potential problem of identification hence direct
      demand measure
 2.   Elasticity of response to unemployment much stronger
      in Business compared to Resident-controlled LPAs – if
      found => then most convincing evidence
 3.   City of London becomes less restrictive relative to all
      other locations following Uniform Business Rate (UBR)
      - 1990
 4.   UBR to prevent leftist local governments damaging
      business with punitive property taxes to redistribute:
      but what impact on business costs indirectly via
      increased fiscal disincentive to permit development?
Results
• Gross costs of regulation for office space in UK seriously high
  cf US or most of Continental Europe
• High ‘generalised’ costs in London (location fixed effects)
• Sharp distinction business and resident controlled authorities in
  responsiveness to local economic conditions (unemployment)
• Including a direct measure of demand confirms results
• Strong impact of changing business property tax to national tax
  (UBR post 1989) outside City of London
• Done to mitigate taxes on business from leftist local
  governments
• But impact for medium sized firm - 200 employees in 1500m2?
• Total Business rates £47,819: estimated change in space costs
  £67 312 if mean: or £84 010 if West End! =>Market Revenge!
• More generally – reinforces view that RT is a useful measure of
  gross costs of regulation: ‘It works’
Using Price Discontinuities: Reading - Prices 1984
           Land Use                              £ 000’s acre @                        £ 000’s acre @ 2002
                                                 1984
           Office use
                                 Zone 1          7 964-13 2411                         15 748-26 183
                                 Zone 2          3 806-8 3701                          7 526-16 551
                                 Zone 3          2 621-5 1031
                                 Zone 4          602-1 3081                            1 190-2 586
           Retail
                               Zone 1a           28 779-34 1512                        56908-67 531
                               Zone 1b           24 467-27 8182                        48 382-55 008
                                Zone 2           12 807-15 7942                        25 325-31 231
                                Zone 3           9 786-12 4582                         19 351-24 635
                                Zone 4           8 941                                 17 680
                                Zone 5           3 020-3 9272                          5 972-7 765
                                Zone 6           2 876                                 5 688
                                Zone 7           2 539                                 5 021
           Industrial
                                 Zone 1 400*                                           791
                                 Zone 2 500*                                           989
                                 Zone 3 450*                                           890
           Residential
            Edge of urban area 120-205                                                 237-405
           Source: Cheshire, P. and S. Sheppard The Economic Consequences of the British Land Use Planning System:
           a Pilot Study, Final Report to ESRC 1986
       *Estimated variance  5% 1 Range of observations
       2
        Range of estimates varying with exact location and floor plan size/access/permitted structure type
These Price Premia Provide
Market Signals
• Price premia for developable land vary between uses,
  locations & over time indicating relative supply
  constraint
• Introduce as ‘material consideration’ into planning
  decision-making
• If the price premium in any location for any use over the
  adjoining use(s) exceeds some ‘threshold’
       • =>Presumption that planning permission will be
         granted
• Unless ‘amenities’ generated by the land in current use
  exceed the value of the premium
• Would release large areas of intensive, low amenity
  agricultural land…but – another paper
Conclusions
•   Distortions and perverse incentives that arise
    variable – but endemic
•   Scope for & how to introduce price information varies with
    systems of land use regulation
•   In UK introduction of price information could generate a
    flexible signal & systematically reduce supply constraints
•   Without action price distortions get worse: but politically
    easier to start restricting than to stop
•   Rising incomes more than population growth given
    evidence on income elasticity of demand for space in
    space constrained UK
•   Very high recent rate of build & land conversion in Spain:
    + (maybe) lack of safeguard for high amenity areas
•   BUT simple restriction + containment not the answer.
•   The UK a warning for Spain….?
References
 Barker, K. (2003) Review of Housing Supply: Securing our Future Housing Needs: Interim
       Report – Analysis, London: HMSO.
 Barker, K. (2004) Review of Housing Supply: Final Report - Recommendations, London:
       HMSO.
 Barker, K. (2006a) Barker Review of Land Use Planning; Interim Report - Analysis, London:
       HMSO.
 Barker, K. (2006b) Barker Review of Land Use Planning; Final Report - Recommendations,
       London: HMSO.
 Cheshire, P.C. and C. Hilber, (2006) 'Office Space Supply Restrictions in Britain: the political
       economy of market revenge’, Research Papers in Environmental and Spatial Analysis,
       No 117, Department of Geography and Environment, London School of Economics,
       2006, 46 pages.
 Cheshire, P.C. and S. Sheppard (1998) Estimating the demand for housing, land and
       neighbourhood characteristics, Oxford Bulletin of Economics and Statistics, 60, 3, 357-
       82.
 Cheshire, P.C., and S. Sheppard (2002) 'Welfare Economics of Land Use Regulation', Journal
       of Urban Economics, 52, 242-69.
 Cheshire, P.C. and S. Sheppard, (2004) ‘Land Markets and Land Market Regulation: progress
       towards understanding’, Regional Science and Urban Economics, 34, 6, 619-637.
 Cheshire, P.C. and S. Sheppard (2005) ‘The Introduction of Price Signals into Land Use
       Planning Decision-making: a proposal’, Urban Studies, 42 (4), 647-663.
 Glaeser, E.L., J. Gyourko and R.E. Saks (2005) ‘Why is Manhattan so Expensive? Regulation
       and the Rise in Housing Prices’, Journal of Law and Economics, 48 (2), 331-369.
 Fischel, W. A. (2001) The Home Voter Hypothesis: How Home Values Influence Local
       Government Taxation, School Finance, and Land-Use Policies, Cambs, Mass: Harvard
       University Press.
Residential Land Prices: An indicator of Foregone
Agglomeration Economies

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:9/10/2012
language:English
pages:34