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Philo's avatar

Interesting piece, thanks.

One thing that I think people sometimes have trouble with intuitively is that a "permission slip" system renders every other input meaningless when it comes to housing supply (assuming demand outstrips supply). The permission slip is the binding constraint, and nothing else matters. If you made it so that buildings were constructed with a wave of a magic wand, with no input cost, housing supply would still be a function of the number of permission slips issued each year, and the value of this technological advance would be fully captured by the people that own undeveloped/underdeveloped land + permission slips.

In practice, the other players in the game don't let the landowners capture all of the spoils from the permission slip system -- the union extracts a certain wage, the government imposes taxes (including stuff like inclusionary zoning, which functions as a tax), the consultants and lawyers impose rules so that they get a cut.

When people then do a bottom-up analysis of the cost of a home, it looks like all of the costs are really high and therefore the problem is multi-faceted, but the costs themselves are a function of the permission slip system. For example, the value of "land" (as you note, really land + permission slip) is by definition a residual calculation, the difference between the cost of building and the value of the finished asset. If you lower the cost of the other inputs, the cost of "land" will go up to fill the difference. But in real life, the other inputs are almost certainly also distorted by the process above.

We don't really encounter quota systems in the wild very much, so we never have the chance to develop very good intuitions around them. We are used to lower costs leading to lower prices to the consumer, but we don't usually consciously think about the transmission mechanism (competing firms lower prices to maintain share so that the consumer eventually captures all the benefits). The quota system disables the usual transmission mechanism.

I think this is also why people intuitively reject the idea that solving something as complex as the housing crisis is something as simple as zoning reform. But, the quota system is the bottleneck, and the *only* way to improve a system is to fix the bottleneck. That is, by definition, what a bottleneck is! It's like saying you can't fix a complicated supercomputer by simply plugging it in.

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David R.'s avatar

Sorry for spamming but I think there’s also a very fundamental flaw in the way that we consider land prices in this: the entire sample is biased to the point of uselessness by the selection effects of where *new* *single-family* housing is built.

If (even quite dense) SFH were being built in quantity deep within major metros that figure would be wildly different. But in addition to making in-fill development within cities very difficult, we’ve also made development of green space within existing suburbs very difficult.

So the entire sample is deeply skewed towards exurban land development, which elides the depths of the problem: not just what it costs to get houses built, but the impact on where and to what extent they *don't* get built.

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