The Economist Newspaper Takes On a Review of Global Land Use Regulations
By Mike Thelen
The Economist Newspaper this month features an interesting review of land use laws in the context of the changing global economy.
The issue is not overall scarcity [of real property], but scarcity in specific places—the cities responsible for a disproportionate amount of the world’s output. The high price of land in these places is in part an unavoidable concomitant of success. But it is also the product of distortions that cost the world dear. One estimate suggests that since the 1960s such distortions have reduced America’s GDP by more than 13%.
In this piece, the Newspaper suggests a recent perversion of land use regulations -- a relatively young field of the law -- has gone unchecked:
Zoning codes were conceived as a way to balance the social good of a growing, productive city and the private costs that growth sometimes imposes. But land-use rules have evolved into something more pernicious: a mechanism through which landowners are handed both unwarranted wind falls and the means to prevent others from exercising control over their property. Even small steps to restore a healthier balance between private and public good would yield handsome returns.
Regulatory limits on the height and density of buildings constrain supply and inflate prices. A recent analysis by academics at the London School of Economics estimates that land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%. Most of the enormous value captured by landowners exists because it is well-nigh impossible to build new offices to compete those profits away.
The Newspaper then suggests two approaches to better effectuate the purest intention and highest and best purpose of land use regulations:
Policymakers should focus on two things.
First, they should ensure that city-planning decisions are made from the top down. When decisions are taken at local level, land-use rules tend to be stricter. Individual districts receive fewer of the benefits of a larger metropolitan population (jobs and taxes) than their costs (blocked views and congested streets). Moving housing-supply decisions to city level should mean that due weight is put on the benefits of growth. Any restrictions on building won by one district should be offset by increases elsewhere, so the city as a whole keeps to its development budget.
Second, governments should impose higher taxes on the value of land. In most rich countries,land-value taxes account for a small share of total revenues. Land taxes are efficient. They are difficult to dodge; you cannot stuff land into a bank-vault in Luxembourg. Whereas a high tax on property can discourage investment, a high tax on land creates an incentive to develop unused sites.Land-value taxes can also help cater for newcomers. New infrastructure raises the value of nearby land, automatically feeding through into revenues—which helps to pay for the improvements.
The result of these changes, the Newspaper concludes, is more and more broad-based economic opportunity:
The costs of this misfiring property market are huge, mainly because of their effects on individuals.... Lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion. It is difficult to think of many other policies that would yield anything like that.
If regulatory limits on building heights and density were relaxed, fewer plots of land would be needed to satisfy a given level of demand. That would reduce the rents collected by landowners, since any uptick in demand could quickly be met by new development. Just as soaring agricultural productivity led to a decline in the relative economic power of rural landowners in the 19th and 20th centuries, the relaxation of strict limits on development would lead to a decline in property wealth relative to the economy as a whole. More of the gains of economic activity would flow to workers and investors.
We don't highlight the analysis for any reason other than to point out that land use laws will be at the fore of local, State, National and Global economic development.
Mike Thelen practices in Womble, Carlyle's Real Estate Litigation and Land Use practice group. He regularly represents a wide variety of clients, from local governments to businesses, in land use and real estate development litigations and transactions in state and federal venues throughout North Carolina.