Zoning nonsense: first Houston, now Japan

Advocates of the “zoning can fix housing bubbles” point of view seem to have two main examples in mind. Houston, Texas, and Japan as a whole.

I have absolutely no idea why these examples are supposed to support this point of view. There are two good reasons not to use them as examples. First, both areas have planning controls. Second, both areas have had real estate booms and busts of epic proportions.

1. There are planning controls in these areas

Houston development is controlled by an array of ordinances and codes that are very similar to those I am familiar with in Australia. The main difference being that areas are not partitioned by types of uses, or zones. Yet no one seems to have a story about why allowing other uses to outcompete housing on a particular plot of land is beneficial for housing supply.

In Japan, there is a similar system, whereby a “ladder” of zones allows all use types from that rung and below. Again, allowing other uses to outcompete residential never seems to bother anyone making claims about planning being a barrier to total quantity of new residential development.

Some people also cite Germany’s “right to build laws”, but these are little different from Australian planning laws that allow for “self-assessable” development. If you comply with the code, you just inform the authorities that your development fits within the code. Nothing different at all. It is just that because there are so many freebies up fro grabs by exceeding the code, just about everyone tries to do it!

2. These areas have had major bubbles

Japan had the worlds biggest real estate bubble in the 1980s; one that is credited with causing their three decade stagnation in asset values and persistent deflation. That sheer unbelievable scale of that bubble is shown in the figure below.

Houston had a similar 1980s price bubble, with prices rising and falling 40% in real terms from the 1982 peak. And Houston is at the peak of another boom that has seen prices double in the past four years. Exactly what effect are the zoning rules meant to have had in respect to avoiding speculative bubbles in housing markets if these are the best examples around?

Some people want to argue that despite these bubbles the price to income ratio is relatively low. But this is a foolish measure; prices do not reflect the full cost of ownership, which includes interest rates on mortgages, property taxes, and even expectations of price growth. Any city can bring down this ratio by increasing taxes on residential land or increasing mortgage interest rates.

For a while I was tempted by the view that perhaps there are some effects from zoning on the overall market that I was missing, but the more I dig, the more the evidence is piling up against this view.