The Price Of Regulation

Today’s Washington Times tells a story that brings home, quite literally, the costs that government regulation impose on society.

Escalating prices that have made houses unaffordable for many people in Washington are mostly the result of homeowners using political and regulatory means to block construction of new housing, economic studies show.

The so-called “slow growth” movement has been a political force in the Washington DC area for several years. For the most part, these groups characterize their efforts to limit the construction of new homes as a method to put the reins on “out of control” growth which has led, supposedly, to crowded roads, crowded schools, and crowded neighborhoods. At the same time, the costs of housing the D.C. area has soared. The reality is that this has simply caused a lack of housing and affordable housing at that. Companies like The Property Block are doing their best to redevelop buildings in order to provide more housing.

Washington home prices continued to soar last month despite a slowdown in sales, with gains of 21.5 percent and 18 percent over November 2004 in the District and Montgomery County, respectively, the Greater Capital Area Association of Realtors reported this week.

It now costs $618,692 to buy an average-priced home in the District, and $560,327 in Montgomery County. Prices in Northern Virginia also have maintained breathtaking heights, among the highest in the country, despite some slackening of sales.

Until now, nobody has put the two together to see that it is in fact so called “slow growth” that is causing housing to become unaffordable for a growing segment of society.

Economists increasingly are concluding that the shortage of affordable housing in Washington and other major U.S. cities on the East and West coasts is a result more of man-made restrictions on development than high construction costs or other market forces.

“It simply takes too long and is too expensive to move through the development process,” said Mark Vitner, senior economist at Wachovia Securities, pointing at “smart growth, slow growth and no growth” movements in many of the same areas where the population and demand for housing are growing the fastest.

What many economists have been proclaiming as a “bubble” in Washington and other high-cost areas can be mostly explained by the restrictions on development, combined with a rush to homeownership by renters taking advantage of low interest rates, he said.

The effects of these policies can be seen throughout the area:

Montgomery County imposed a temporary moratorium on building this year after a controversy over a developer’s violation of height restrictions in Clarksburg.

The county already had banned most development in one-third of the jurisdiction set aside as an agricultural reserve. Under pressure from residents’ groups, it is considering further restrictions on building in the reserve by churches and nonprofit institutions.

Loudoun County, one of the fastest-growing jurisdictions in the nation, put severe restrictions on the density of housing several years ago, but some of those restrictions were overturned later by a more pro-development Board of Supervisors.

Prices are booming in the District, where federal ownership of large tracts has limited the land available for development and height restrictions imposed by Congress have been in effect for more than a century.

Prince George’s County, with much land available for development, only recently lifted a restriction against building in areas where police and fire-safety infrastructure is not able to accommodate new residents.

Even Fairfax County, which gained fame in earlier decades for free-wheeling development policies that led to rapid job growth and construction, is contending with homeowners against plans to increase the density of housing near the Vienna Metro station.

Existing homeowners, in other words, have become more politically active and have been using the power of their local governments and zoning boards to prevent developers from building new homes regardless of whether the demand exists. The result, of course, is predictable, with a decreased supply of housing, the price of that housing increases. Hence, the housing market “bubble” that everyone talks about. And, since the market is not being permitted to operate in its normal fashion, distortions are inevitable:

The resulting shortage of housing causes an escalation of prices as new residents and renters seeking to become homeowners bid up prices to purchase the few homes available. That further serves the interests of the homeowners by pushing up the value of their houses.

The result is to turn the housing market on its head, the study found. High home prices should act as an inducement for developers to build more houses, increasing supply and lowering prices. But construction rates in Washington and other high-priced cities are substantially lower than those in the interior, less-pricey areas of the country.

Its not very often that we see the cost of government regulation so easily displayed in a monetary amount. For those of us in the D.C. area, all we have to do is glance at the weekly real estate listings.

Cross-Posted at Below The Beltway