Are Homeowners the Largest Government Rent-Seekers?

I read an interesting article in the NY Times, via Marginal Revolution, interviewing the CEO of homebuilder Toll Brothers about housing prices.  His assertion was:

"In Britain you pay seven times your annual income for a home; in the U.S. you
pay three and a half." The British get 330 square feet, per person, in their
homes; in the U.S., we get 750 square feet. Not only does Toll say he believes
the next generation of buyers will be paying twice as much of their annual
incomes; in terms of space, he also seems to think they're going to get only
half as much. "And that average, million-dollar insane home in the burbs? It's
going to be $4 million."

I don't necessarily buy this whole story.  For one, Mr. Toll has business reasons for taking a public position that prices will keep rising - after all, his customers buy his product in part as an investment, and would be leery about paying current prices if they thought prices might fall in the future.  Second, as I have talked about a number of times with petroleum, when prices of any product start to rise, observers always tend to underestimate market and technology responses that might bring supply more into balance.

However, the one exception I did make in my oil price posts was that government supply restrictions, both on lands that can be explored for oil as well as things like refinery permitting, may indeed put structural upward pressure on prices.  And in fact, this is where Mr. Toll puts the blame for high housing prices as well:

Toll agrees with Glaeser et
al.
that the key force driving up prices is zoning and growth regulations. 
In New Jersey it now takes Toll Brothers up to two million dollars in legal fees
and ten years in time to get the permits necessary to build.

Which got me thinking that home owners (of which I am one) may be the worst rent-seekers of all.  Most people are already familiar with the very large tax breaks for home buyers, in the form of the mortgage interest tax deduction, that is not available to people who rent or to people who borrow for purposes other than home purchase.  However, it may be that a much larger implicit subsidy to home-owners is the government restrictions on new home supply.  By restricting supply, the government is keeping prices up for current home-owners and restricting new entrants who might compete with our homes in the resale market.

  • Max Lybbert

    I have a hard time buying the Toll Brothers' argument. It's pretty easy for Americans to escape bad zoning restrictions by moving all over the country. If a place restricts supply (like CA did), then people move elsewhere (like what happened in CA, especially in cities like Los Angeles and San Diego).

    I don't believe Europeans are as mobile as Americans. Not that they *can't* be, just that they *aren't*.

  • markm

    Max: When Americans move, they usually go where the best job offer is. Too often, that's somewhere that even the suburbs are overpopulated, overregulated, and overpriced. They should discount those high salary offers by the local housing prices and other cost of living and quality of life factors, but I don't think most people do this sufficiently. The salary offer is a hard number; housing costs and other cost of living factors are fuzzy numbers, and quality of life is hard to reduce to a $ value at all. It's fairly rational to pay more attention to hard numbers than to uncertain, fuzzy numbers, but the overall effect is that companies that choose to locate in high-cost or less livable areas do not pay as high a cost in higher salaries and difficult recruiting as they should. And then there are all the people that learned no more math than is necessary for a public high school diploma, and wouldn't know how to compare salaries even if given exact costs of living in the different areas.

    The second problem is all the people that leave one overregulated socialist hellhole, and then vote to make their new home more like the one they left...

  • anon17

    One of the things that may be influencing governments at least on the local level is the fact that there are external costs to homebuilding that local government is not allowed to charge builders when they build new homes. Instead of charging builders a fee that reflects what the new house entails in new capital (new schools, fire trucks etc.), the only recourse municipalities have is to restrict what is built (only on 10 acre lots or more is what is currently in air here).

    A new house pays only so much in school and local town and county taxes. By far the largest are the school taxes of course. But at least in my area (upstate NY) the taxes on a new house don't come close to covering even one additional child in the school system. Nor are expenses such as new roads or overpasses allowed (by the state) to be taken into account when approving new housing. Hence the only recourse for local government is to enact restrictive zoning.

    Toll may complain about restrictions to new homebuilding, but they just are not paying their fair share. Increased property taxes a Toll property may pay tend to cover a portion only of the marginal costs of educating a child, but do not necessarily cover any portion of the fixed costs. I'm all for allowing anyone to do what they will with their property, until what they do starts costing the rest of the people money.

  • Max Lybbert

    /* When Americans move, they usually go where the best job offer is. Too often, that's somewhere that even the suburbs are overpopulated, overregulated, and overpriced. They should discount those high salary offers by the local housing prices and other cost of living and quality of life factors, but I don't think most people do this sufficiently.
    */

    Then they'll move again, and try harder next time. Believe me, Los Angeles has experienced this for some time now. Very few Fortune 500 companies are headquartered in LA today.

    /* The second problem is all the people that leave one overregulated socialist hellhole, and then vote to make their new home more like the one they left...
    */

    Yes, that's a problem. Then again, democracy makes sure you get what you deserve.

    /* One of the things that may be influencing governments at least on the local level is the fact that there are external costs to homebuilding that local government is not allowed to charge builders when they build new homes.
    */

    Sorry. I'm aware of several ways local governments pass this on to the home builders (and then to the homeowners). When I lived in Riverside, CA, new homes were suddenly required to put in extensive sprinkler systems in order to reduce the cost the fire stations had to bear. The only controversial issue was that the city's richest neighborhood was exempt from the requirement.

    Give somebody a full-time job running the city, and you'd be surprised how clever they can be.

    /* A new house pays only so much in school and local town and county taxes. By far the largest are the school taxes of course. But at least in my area (upstate NY) the taxes on a new house don't come close to covering even one additional child in the school system.
    */

    Then again, not every homeowner has children going to public schools.

    /* Nor are expenses such as new roads or overpasses allowed (by the state) to be taken into account when approving new housing.
    */

    Riverside used to charge people per foot of curb placed in front of their house, whether it was a new house or just new curb added to an old neighborhood.

    /* Toll may complain about restrictions to new homebuilding, but they just are not paying their fair share.
    */

    Then, by definition, the old homeowners aren't paying their fair share either. Because they're both paying equal shares.

  • Mathemagician

    There is a really, really simple explanation for this.

    UK = ~240 people / square kilometer
    US = ~33 people / square kilometer

  • Mike

    For me, home ownership is a net loss, at least with respect to the government. On the plus side, I had the mortgage interest tax deduction and (maybe) I enjoyed some inflated assest appreciation due to zoning. On the minus side, I have lost thousands of dollars per year in property and school taxes.

    Add up the numbers and it's not even close.

  • Max Lybbert

    In regards to New York's system, my previous post did not clearly acknowledge that we are talking about state an local laws, which *will* be different all over the country. My point is simply that even in places with broken systems, it's possible to fix the problem and move on. Of course it's also possible to break a working system. That's the part of democracy that guarantees you get what you deserve.

  • http://duanegran.com/blog/ Duane Gran

    The post, anon17, makes some very good points, similar to something that I wrote (http://duanegran.com/blog/?p=233) earlier this year. There are real infrastructure costs to building a new home that are spread out among the populace at large or left unfunded. Surely the Libertarians who frequent this site are in favor of the homeowner bearing the cost to fund the roads, water, electrical and other such public services.

    Naturally the obvious way would be to implement California style "traffic impact fees" (I'm not making that up, it exists in Monterey) or to raise property taxes in general, but this exposes the politician to rebuke and poor prospects for re-election. Passing the cost to the builder, who in turn makes the home owner pay, is a workable solution except that the builder's have lobbied state governments to make it unlawful to proffer them for road improvements.

    So this raises quite a mess for Libertarians, in my opinion. I'm curious how a Libertarian would go about ensuring that a home owner bears the social cost of a new home.

  • http://inactivity.blogspot.com Inactivist

    [ So this raises quite a mess for Libertarians, in my opinion. I'm curious how a Libertarian would go about ensuring that a home owner bears the social cost of a new home.]

    I think that Libertarians would advocate getting government out of building roads, supplying water, etc. so that 'social costs' are largely non-existent and the true cost of home building and road building (to name but a few) are passed on to those who make use of the services or buy the houses. The current system of semi-socialized costs ensures an ongoing conflict between factions.

    Not that I expect this sort of thing to ever come to pass.