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Competing Institutional Solutions to Housing Supply Restrictions

by JohnKroencke {{qctrl.question.publish_time | dateStr}} Edited on {{qctrl.question.edited_time | dateStr}} {{"estimatedReadingTime" | translate:({minutes: qctrl.question.estimateReadingTime()})}}
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    In the last few years, increasing numbers of people across the political spectrum and across the developed world have begun to recognize the effects of restrictive housing rules on high housing prices in many global cities. In these cities, the physical cost of producing an additional unit of housing is lower than the value at which one could sell it for, but people do not produce more because of regulations. And importantly, the implications of restricted housing development don’t end with elevated prices, as those prices create economic and social ripples

    Cities  are many things, but they are primarily labor markets. As successful cities become more expensive, prospective employees and founders are prevented from moving there. Because there are agglomeration and other network effects, firms want to locate near one another and related businesses. Compared to the counterfactual where moving to successful cities were easier, we are both poorer and growing slower. 

    Too often analysis of this problem stops there and assumes by some magical thinking that pointing at the issue is the same thing as solving it. Once the basic problem is outlined, questions of political economy become central. Why is housing restricted? What can be done about it? How do places without housing shortages operate? Thankfully, a number of activists are engaged in the difficult task of reform. 

    The purpose of this essay is to assess the two major approaches to reforming housing policy: one which seeks to use political power at a higher level to disempower locally imposed restrictions, and the second which seeks to use higher-level power to bypass mid-level veto players and let small groups upzone themselves. 

    Logic of blanket decisions from above 

    YIMBY is an acronym standing for “Yes, In My Back Yard" and designates a pro-housing movement supportive of increasing the housing supply in cities. It’s often contrasted with and sets itself in opposition to NIMBY-ism ("Not In My Back Yard") where residents oppose proposed development in their local area. The YIMBY position supports increasing the housing supply as a response to escalating and unaffordable housing costs. 

    Many of the recent YIMBY successes in the United States have relied on state preemption to upzone large swathes of the state. Urbanist Nolan Gray made the case for this approach in a 2017 article where he argued that local policymakers are biased in favor of narrow interests that ultimately harm the aggregate. On the other hand, “State policymakers are often removed from the parochial interests of NIMBY neighborhoods groups… They are also judged on the performance of the state as a whole. This means that they can take a broader view.” Unlike more legally complex issues of federal preemption, state level preemption is conceptually clear: “given that local governments are ‘creatures of the state,’ state policymakers can, in a sense, regulate the regulators, determining how local governments can and cannot operate.” 

    This approach has had legislative success in California, Minnesota, and other states that have sought to force municipal governments to allow more houses. One of the most successful elements of these reforms has been related to accessory dwelling units (also known as granny flats or casitas). Additional reforms have targeted increased density near existing public transit, minimum lot size requirements, and floor area ratios (FAR). 

    On the other hand, this approach relies on the ability of NIMBYs not to collectively organize and limit the imposed liberalization, whether through their state legislator or by amending the state constitution. In recent months the latter has received more attention after the continued success of YIMBY bills. 

    In the rest of the world, much planning is done at the national level. In Japan, for example, this seems to have a positive effect, but there are a number of other differences in political economy that may limit the lessons that can be derived. Additionally, planning in the United Kingdom is mainly national, and the situation is if anything worse there than in the United States. This is in part due to the discretionary nature of the UK system, which state action has been unable to remove.

    Logic of allowing opt-ins or opt-outs

    In the UK, another approach has had more political traction but is also receiving attention in the United States. Rather than shifting the level of decision making up, advocates of hyperlocal zoning argue that the city or block level is more appropriate. The argument is rooted in both the political economy literature (Ostrom, Coase, Ellickson), law in other sectors, and pragmatic political concerns. The latter was strengthened with the recent failure of the UK government’s attempt to engineer planning reforms from the national level and the departure of former Housing Secretary Robert Jenrick. His replacement Michael Gove has signaled support for allowing hyperlocal upzoning. 

    The details of any policy would likely be based on the Strong Suburbs report from last February in which it was proposed that residents of streets (not homeowners) would be allowed to vote on whether to expand the buildable space on their street. Should a supermajority of 60% of residents vote to approve the change, homeowners could expand their homes in line with an architectural design code submitted prior to the vote. Beyond the protections determined by residents, the proposal itself places limits on densification and alteration. For instance, it only would apply to buildings erected after 1918, and the max number of floors residents could allow would be determined by existing density. 

    Homeowners would be incentivized to liberalize their neighborhoods through the direct financial benefits that would accrue to them because the market value of added space is higher than the physical cost of the extension. Furthermore, the rules set by them and limited by the proposal itself limit the spillover effects of neighboring development.

    Other empirical support for this type of approach can be found in existing examples from the United States, Korea, and Israel. In each of these cases, locals’ concerns were taken seriously (or at least more seriously than in the competing approach), and there was an ability for hyper-local districts to vote on rule changes and/or opt out. The idea is that allowing the most resistant subset the option of not opting in–as well as the option of opting out–will make it easier to form a winning coalition for reform without exciting the blocking activity of veto players. Still, John Myers argues that in the examples of Korea and Israel, insufficient attention was paid to local concerns, which gave rise to political resistance and the limitation of the reforms. 


    Below is my prediction on whether by 2032 the California Constitution will be amended to restrict the state's authority to set zoning policy: 

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