Big burdens from growth management.

• Author: O'Toole, Randal
• Position: Economics

MEDIAN FAMILY incomes in Raleigh, N.C., almost are identical to those in Seattle, Wash., but a family purchasing a house in Seattle would have to pay more than twice as much as for a similar home in Raleigh. The additional cost almost entirely is due to a form of restrictive land-use regulation known as growth-management planning. As practiced in about a dozen states and a number of other urban regions, growth management puts the American dream of homeownership out of reach for many young and low-income families and was a major cause of the housing bubble that helped plunge the nation into recession.

The additional cost of housing in regions that use growth management can be called the planning tax. In many parts of the country, this tax averages hundreds of thousands of dollars per home. Growth management attempts to control either the rate of a city's or region's population growth or the location of that growth. Either way, it limits the ability of homebuilders to meet the demand for new housing. Thanks to growth management, someone buying a four-bedroom, two-and-one-haft bath home would have to spend more than $1,100,000 in San Jose, Calif., which has practiced growth management since 1970, and more than $550,000 in Seattle, which has practiced growth management since 1985. That same house would cost less than $250,000 in Raleigh and other cities that have no growth management, such as Houston (Tex.), Kansas City (Mo.), and Louisville (Ky.).

[ILLUSTRATION OMITTED]

The most popular form of growth management today is called smart growth, which uses urban-growth boundaries and other tools to restrict development beyond the urban fringe and instead promote high-density development in the cities. Such restrictions drive up land prices and particularly increase the cost of the type of housing that most people prefer: single-family homes with a yard. When new home prices rise, the cost of existing homes follow as homesellers see that other homes are getting more expensive. This means that any policy that makes new homes more expensive--whether it is growth boundaries, impact fees, or a lengthy permitting process--will make all housing less affordable.

Although American cities have been planning and zoning since before 1920, growth management only began in the 1960s, when a few cities and states adopted policies aimed at restricting the rate of growth or controlling where growth would take place. Boulder, Colo., for instance, limits the number of building permits that can be issued each year and purchases land outside the city limits to prevent developers from building at the urban fringe. In 1961, Hawaii passed a statewide growth-management law requiring all cities to write such plans. Oregon followed in 1973. California passed a law in 1963 that gave cities control over the rural areas in each county; this unintentionally became the state's growth-management act.

The most telling fact about the recent housing bubble is that it did not occur everywhere. As economist Paul Krugman notes, prices rose most in what he calls "the zoned zone," regions where land-use restrictions "made it hard to build new houses." In the rest of the country, prices rose not much faster than the rate of inflation. In fact, all but one of the states that saw rapid home price increases have state growth-management laws or local government restrictions on housing supply. The one exception, Nevada, is 90% owned by the Federal government. Prior to 2000, the state's growth was enabled by Federal land sales but, when such sales slowed, homebuilders in Las Vegas and Reno literally ran out of private land. So Nevada's growth management effectively resulted from Federal--rather than state or local--policies.

At the same time, all but one of the states that have...