Tag Archives: market

When to permit new construction

In places with zoning laws (restrictions on what kind of buildings are allowed at a given address), there is often debate on whether to relax the restrictions. This would allow new construction or enlargement of existing buildings. The renters are generally in favour of more buildings, because the increased supply of housing lowers prices at a given demand. The landlords oppose construction, because it reduces the rents they can charge. These economic arguments are already part of the debate.

Much lobbying effort (that costs time and money and may create corruption) could be avoided if the market price of housing (rents or house transactions) was used directly in the regulations. New construction is allowed if the average rent is above a cutoff and denied below. Zoning laws may be a bad thing overall, but if they are to remain, they could be made more resistant to manipulation by basing restrictions on objective indicators, not lobbying.

The good incentives created by this require interest groups to put their money where their mouth is: if landlords want to prevent new construction, they should lower the rents they charge. Only with average rents low would building be blocked. Similarly, if tenants want more housing, they should pay the landlords more. They may of course decide to pool their money and found a property development firm instead.

Property developers want to get construction permits for themselves, but deny them to other property developers (their competition). The motivation to get a permit by fair means or foul is stronger when property prices are higher. In this case, the above reliance on the market price to regulate permits does not create good incentives. If new housing is allowed when prices are high, developers are motivated to form a cartel and raise the price. Permits reward high prices. A good price-based regulation of property development would require the opposite of the rental market mechanism – a low selling price of new housing should lead to more construction permits.