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Thoughts on Factors Surrounding Housing Markets Around The World – Part 1

From Sydney to San Francisco to Hong Kong to Amsterdam to possibly your hometown, housing affordability remains a pertinent political issue that has raged for years if not decades. Median income to house price ratios continue to be incredibly high in many major cities, further widening the rift between the poor and the rich as housing supply diminishes. From the existence of microapartments with absurdly high prices per square metre to severe housing issues for students and foreign labour, to lower rates of home ownership for the younger generation, it is plain to see that signs of a housing crisis are visible everywhere. In one particular case, first year students were even forced to sleep in tents! Amsterdam’s own situation has created a market where the threat of being scammed is extremely common and the gemeente (local municipality) has trouble keeping it under control.

Thankfully, one currently sees fewer of these issues in developing countries. However, as these countries catch up in terms of urbanisation compared to the rest of the developed world, affordable housing will start to become more and more of an issue in those cases as well. Smaller towns and cities will also become affected as these crises spread around the world. This is therefore an issue that will affect everyone whether positively or negatively, and as such, I would like to bring this up in a series of articles addressing the similarities between housing markets around the world. This is not intended to be an in-depth analysis in any way, shape or form – I leave that to experienced academics – but rather, I want to get people to start thinking about the major issues beyond the surface level, and how they can relate it to their local situation (if any). Such comparisons involve the rental market, Airbnb factor, stagnant wage growth, inputs costs to housing, wealth inequality across countries, cultural spheres and regions. Fiscal and monetary policy may also play a role. There are a myriad of factors that might affect housing affordability – I will choose to address the impact of zoning laws here, and will explore the effect of other potential variables in later articles.

What are zoning laws anyway? Zoning laws are in place in most countries around the world, and determine how the local city council, municipality, county – whatever you wish to call it – uses property space. Without zoning laws, you get things like houses built right next to factories next to shopping malls, creating what would be a bit less than ideal situation (unless you enjoy living literally next to your workplace building). It also encourages urban sprawl if buildings are placed incessantly without laws governing them; with seemingly limitless space, buildings and infrastructure will be placed willy-nilly and seem to go on forever, creating possible long run sustainability issues (as well as just being straight up wasteful). In a nutshell, the goal of zoning laws is to keep places look aesthetically pleasing and adhere to any safety requirements.

Zoning laws, in addition to being a bureaucratic nightmare, also set regulations for the size of allotted apartments and houses. Regulations that end up encouraging too many single homes for families and not focus on e.g. couples, singles, or shared living in a market where all of the above types of residents coexist in reality will create excess demand and too little supply of needed buildings. This is apparent if you look at metropolitan areas, where arguably more people will fall into the latter category of singles or house sharers than families with children. Thus, zoning laws should ideally be flexible to cater to the needs of the local population as measured by official surveys. For example, if demographic surveys show that there are more singles one should consider changing zoning laws to allow for more single apartments to be built. This greatly benefits low and middle-class households.

Zoning laws that are too restrictive lead to a decrease in new properties built and consequently to lower housing supply. For example, according to the Reserve Bank of Australia restrictive zoning laws drove prices up to 40% of their original value since the late 1990s, particularly in large cities such as Sydney and Melbourne. Zoning restrictions related to ‘minimum lot sizes and maximum building heights’ were to blame here, adding up close to half a million Australian dollars (€270.000) to individual house prices at their peak. In effect, this creates a ‘shadow price of government permission’ that may also lead to regulatory capture problems if policymakers themselves own a large number of properties… Improperly applied zoning and land use regulations can also have a negative impact on a community in terms of ethnic and/or socio-economic segregation, or geographic mobility and economic growth. In fact, the aforementioned zoning laws that  drive up house prices may disproportionately burden low to middle income earners and conversely favour existing high-income earners, particularly those who lend  their properties.

Another American study shows that regulatory costs in large markets contribute to as much as one quarter to a half of the total cost of housing. Substantial amounts of red tape due to overly strict land use restrictions may also lower housing supply in this manner if people are too discouraged to build. If this is the case, interest group pressure and deregulation may ease the burden of red tape, particularly if it focuses on improving the welfare of buyers and renters. Going back to the above example on a lack of living space for non-families, one could change the incentives for land use regulations to encourage people to create more apartments, small townhouse blocks, or other types of properties that allow for more clustered living than a single so-called ‘traditional’ family home. However, any change will come at a cost to existing homeowners and renters, and will naturally fight back against any changes. Given the entrenched interests at stake for zoning changes, any policy reform on this front will require highly skillful stakeholder engagement.

Zoning laws and their effect on the housing market are not a well-understood issue by many, but if more communities and policy advisors build up evidence to show that they do indeed matter for housing prices – a politically charged topic over metropolitan cities around the globe – then it will be easier to construct proper policies regarding zoning.  Whether useful outcomes can be created from said policies is another matter entirely…


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