Restrictive Land Use Regulations Make Housing Expensive

The 12th Annual Demographia International Housing Affordability Survey reveals a fact which housing policy experts have always known: housing is the most affordable in metropolitan areas in the world where land-use regulations are the least restrictive. For the same reason, housing is the least affordable in metropolitan areas where land use regulations are strict. The survey, which has done the study on affordable housing in nine countries, did not analyses Indian and Chinese cities because reliable data were not available. But, there is much Indian metropolises can learn from the results.

What are the main takeaways?

In many metropolitan areas in the world, housing prices have risen relative to income levels. The major reason is land use restrictions that stipulate what to build, where to build and how to build. The study proposes that unless there is strong evidence that building in the city centre, periphery or in any urban area has harsh consequences that outweigh the benefits, governments and urban local authorities should not constrain building activities.  This is a lesson many Indian cities like Mumbai, Kolkata, Bengaluru and Delhi have much to learn from. Even though such land-use regulations have harsh consequences in metropolises across the world, they are especially harmful in Indian cities where transportation is costly, population density is unusually high and income levels are low. Harvard economist Edward Glaeser once wrote:“We must never forget that any time we say 'no' to a new building, whether in the city centre or on the edge, we are saying 'no' to families that want to experience the magic of urban life. We also ensure that every other family that lives in the city is paying more for their own homes.”

Housing prices are a major source of income inequality. This is because high housing prices can restrict mobility. High housing prices in a city like Mumbai would either force people to restrict their floor space consumption or force them to pay more or move out of the city. This prevents intercity migration. As people in cities earn far more than people who live in rural areas for doing the same job, this can be a source of income inequality.

Population density need not raise housing prices. Hong Kong has the most expensive housing among the metropolitan areas surveyed. Hong Kong is densely populated, but this does not imply that density makes housing expensive. According to the study, Singapore is not a particularly expensive city, though it is the third- densest country in the world. Australia is the least densely populated major country in the world, but Australian cities like Sydney, Vancouver and Melbourne are among the most expensive metropolitan areas in the world. High taxes, transaction costs and finance and establishment costs are high in Australia. This has made not just housing but also land acquisition for building infrastructure expensive. This is true of all major Indian cities, too.

Housing affordability has more to do with land-use regulations than with geographical constraints. Some Indian cities like Mumbai are constrained by geography because many parts of the city are covered by water. This is true of Hong Kong, too. However, even in such cities, housing would have been much cheaper and floor space consumption would have been many folds higher with better land-use regulations. This is, however, not true of many Australian cities where housing is expensive. Housing in London is expensive, but it is not a land-constrained city. New York is a more land constrained city, but housing here is cheaper than in many Australian cities or even London, relative to income levels.