NYC's Housing Hangover
November 17, 2003
by Edward Glaeser & Joseph Gyourko
MANHATTAN housing prices don't have to be obscene. Worse yet, much of the problem is self-inflicted.
Most people assume that having to pay thousands a month to live in a shoebox is just a side effect of population density. But prices aren't high just because lots of people want to live in the "City That Never Sleeps" - at least half of this Manhattan housing sticker-shock is a product of the city's Kafka-esque regulatory environment.
City government makes it too hard to start new projects and nearly impossible to build tall buildings that could bring thousands of new units to market.
How did Manhattan get this expensive, and what can be done about it? The usual explanations - high land costs, limited land, high construction costs - don't cut it. Much of today's high real estate prices are directly due to government zoning, regulation and other procedures that limit the supply of housing. In fact, we estimate that at least 50 percent of the average condo price, and 48 percent of the average co-op price, is caused by government over regulation.
Call it the "zoning tax" - not a fee you pay to the government, but a cost that regulation imposes on every new apartment.
How do we know this? High prices reflect both high demand and restricted supply. Demand for Manhattan homes is doing fine (so far). Greatly reduced crime and a thriving financial sector continue to make the city an attractive place to live.
But housing isn't a zero-sum game. Manhattan can accommodate new demand, improve its tax base and keep housing prices low - provided that it encourages new home building. Take, for example, Las Vegas. Demand has boomed for Las Vegas, yet real prices for homes have barely risen because the local government doesn't stop builders from meeting that demand.
Not so in Manhattan. Over the 1990s, the net rise in the number of housing units in Manhattan was less than 2 percent of the existing stock-basically, supply was stagnant. Over that same period, Clark County (Las Vegas' home) doubled its housing stock.
Housing in Manhattan wasn't always so hard to come by. Where just 21,000 new units were permitted in Manhattan in the '90s, 1960 alone saw 13,000.
How do we know that high housing prices are caused by government regulation? In a study just published by the Manhattan Institute, we compare the cost of adding one more story to an apartment project to the prices condos and co-ops commanded over the last two decades.
We found that the cost of adding units by "building up" is not more than $200 per square foot. Yet a Manhattan condo now goes for more than three times that price.
Normally, such huge profit margins would attract competitors, who then drive prices down closer to production costs. Think about the airline industry, where Jet Blue and Southwest are cutting airfares or computers, where Dell and others are slashing the cost of new machines.
Competition in real estate should produce the same effect - and it does in most of America, where new housing prices closely track production costs.
But in the heart of America's capitalist economy, Manhattan, a vast maze of government regulations, zoning rules, potential lawsuits and community activists join to prevent real competition from ever emerging.
What to do? First off, policymakers need to take a hard look at New York's zoning code. The city's economic profile has changed dramatically in the last 40 years, yet land set aside for manufacturing in 1961 has yet to be rezoned for residential use. Rezoning is an easy way to bring thousands of new units to market very quickly.
The city's Uniform Land Use Review Procedure and state-mandated environmental reviews also create many expensive delays and kill some projects outright. These reviews are so convoluted that new housing construction in the city is limited to a few politically connected developers who game the system for their own benefit. Streamlining these procedures will level the playing field, eliminate corruption, and encourage more competition - driving prices down.
And above all else, the city has to drop the ideological pretense that affordable housing is only possible through extensive regulation. Our study of Manhattan, the city's most heavily regulated housing market, reveals the opposite case: Over-regulation chokes off middle-class access to more affordable Manhattan housing - which in turn spurs more calls for government regulation.
This vicious cycle won't end until policymakers realize that free-market housing policies are the solution to New York's problems, not the cause of it.
Edward Glaeser is a professor of Economics at Harvard University. Joseph Gyourko is a professor of Real Estate and Finance at the Wharton School, University of Pennsylvania. Their study, "Why Is Manhattan So Expensive," is available at http://www.manhattan-institute.org/html/cr_39.htm.
©2003 New York Post