Cost of "the Right to Build"

Virginia Postrel has a really interesting article in the Atlantic.com.  Often, home construction costs are disaggregated into the cost of land and the cost of the home.  She adds a third piece -- "the right to build" related to regulation and land use restrictions.  She cites a study that most of the cost of new homes in expensive markets like California are not building costs or even land acquisition costs, but the enormous costs involved in getting the government to let you build the house you want on your own land.

In a 2003 article, Glaeser and Gyourko calculated the two different
land values for 26 cities (using data from 1999). They found wide
disparities. In Los Angeles, an extra quarter acre cost about
$28,000"”the pure price of land. But the cost of empty land isn't the
whole story, or even most of it. A quarter- acre lot minus the cost of
the house came out to about $331,000"”nearly 12 times as much as the
extra quarter acre. The difference between the first and second prices,
around $303,000, was what L.A. home buyers paid for local land-use
controls in bureaucratic delays, density restrictions, fees, political
contributions. That's the cost of the right to build.

And that right costs much less in Dallas. There, adding an extra
quarter acre ran about $2,300"”raw land really is much cheaper"”and a
quarter acre minus the cost of construction was about $59,000. The
right to build was nearly a quarter million dollars less than in L.A.
Hence the huge difference in housing prices. Land is indeed more
expensive in superstar cities. But getting permission to build is way,
way more expensive. These cities, says Gyourko, "just control the heck
out of land use."

These differences cascade into a number of areas:

Dallas and Los Angeles represent two distinct models for successful
American cities, which both reflect and reinforce different cultural
and political attitudes. One model fosters a family-oriented,
middle-class lifestyle"”the proverbial home-centered "balanced life."
The other rewards highly productive, work-driven people with a yen for
stimulating public activities, for arts venues, world-class
universities, luxury shopping, restaurants that aren't kid-friendly.
One makes room for a wide range of incomes, offering most working
people a comfortable life. The other, over time, becomes an enclave for
the rich. Since day-to-day experience shapes people's sense of what is
typical and normal, these differences in turn lead to contrasting
perceptions of economic and social reality. It's easy to believe the
middle class is vanishing when you live in Los Angeles, much harder in
Dallas. These differences also reinforce different norms and
values"”different ideas of what it means to live a good life. Real
estate may be as important as religion in explaining the infamous gap
between red and blue states.

The Dallas model, prominent in the South and Southwest, sees a
growing population as a sign of urban health. Cities liberally permit
housing construction to accommodate new residents. The Los Angeles
model, common on the West Coast and in the Northeast Corridor,
discourages growth by limiting new housing. Instead of inviting
newcomers, this approach rewards longtime residents with big capital
gains and the political clout to block projects they don't like.

  • Jim Collins

    So what you're saying is that there are fewer palms that need to be greased in Dallas than there are in L.A.. Give Dallas time, I'm sure they will catch-up.

  • Ivan

    I've heard this argument before. It seems to me that in the case of Los Angeles you are ignoring geography. Los Angeles is just damn crowded. The available land has been subdivided so many times, that lots are just postage stamp size. And even if the local governments became extremely developer friendly all of sudden, the public infrastructure wouldn't support it. LA imports almost all of its drinking water, and don't even get me started on the traffic problems.

    Of course, there is affordable housing. Just move to the high desert - Littlerock, Lancaster, or Palmdale. There is tons of development occuring up there. Yep, you can get yourself a house on a 5 acre lot for the price of a 5000' sqft lot in LA. As long as you don't mind a 100 to 150 mile daily commute and 110 deg summer heat, it's great.

  • http://www.capitalmotion.com/ shashindra

    i think the available land has been subdivided so many times, that lots are just postage stamp size. And even if the local governments became extremely developer friendly all of sudden, the public infrastructure wouldn't support it.