Economic Geography, Jobs, and Regulations:

The Value of Land and Housing

Nils Kok Maastricht University

AREUEA Meetings, Denver January 2011

Paavo Monkkonen University of Hong Kong

John M. Quigley UC Berkeley

Land in housing production Value of urban land is difficult to observe   Price of land is a basic indicator of the attractiveness of a specific

site and the amenities available at that location.

  Variations in price of land affect cost of housing and spatial variations in density of population.

  Determinants of rural land values in the US are well documented (Alston, 1986; Goodwin, et al., 2003).

  Urban land values inferred from transaction prices for housing, based on assumptions about production function (Davis and Heathcote, 2007; Davis and Palumbo, 2008).   Does not account for intra-metropolitan variation in land component

  Observations on sales of urban land are scant…

…or are they? Manhattan: 90 transactions of vacant land per year, ‘99-’06 Andrew Haughwout, et al, 2008

Value of land: determinants and consequences Economic geography, jobs, and regulations

“What are the determinants of urban land prices in the San Francisco Bay Area and how does they affect house prices?”

  First attempt to measure land prices and its determinants directly (Davis and Palumbo, 2008)

  Aims to understand better the intra-metropolitan relation between topography, demographics, regulation, and land prices (Saiz, 2010)

  The San Francisco Bay Area:   Substantial variation in economic geography

  Proximity to jobs and economic conditions   Wide variations in topography – elevation, slope, earthquake risk   Exposed to different levels of public services

  Infamous for restrictive pattern of land-use regulation

Data Nine-county San Francisco Bay Area, 1990 – 2010 7,278 complete and geocoded land transactions, CoStar

Employment access: jobs within 45 minutes of travel time (Wachs and Kumagai, 1973)

Most jobs are in East Bay, but some locations in central city command higher prices.

Job access and land value Distance and cumulative opportunity measure Location relative to CBD: airline

distance to SF Ferry Building

But: decentralization of workplaces. Just 14 percent of jobs still in SF (2003)

Results (I): accessibility, use, and land prices

  Indicators of land condition and proposed use included   Income growth instrumented by 1980-1990 income growth   API score instrumented by census tract demographic data in 1990

Results (II): topography, demography and prices Elements of economic geography have distinct influence

Regulation and land prices 110 independent jurisdictions in Bay Area alone   Cities are often afforded great freedom to regulate land use

  Wharton Regulation Index (Gyourko, et al., 2008)

  California-specific regulation measures   Survey of Planning Director in each city (Glickfield and Levine, 1992)

  Restrictiveness Index (e.g., building permits)   Hospitality Index (e.g., “fast-tracking”)

  Survey of regulatory structure SF Bay Area (Quigley, et al., 2007)   Independent reviews and approvals required for building permit   Number of reviews municipal authorities required for zoning change   Estimate of average delay between request and decision (months)   Number of stakeholders involved in land-use decisions

  Endogenous regulation measures instrumented by popular vote for:   California’s Prop 13 (substantial property tax rollback, 1978)   Ronald Reagan (national election against Jimmy Carter, 1980)

Results (III): regulation and land prices Stringency of regulation has powerful effect

  If average delay were increased by one st.dev., or 8 months, land prices would be increased by 16 percent, ceteris paribus

  Findings corroborate with many others, e.g., Glaeser and Gyourko (2003)

Land prices and house prices Transactions of single-family lots and single-family homes   Intra-metropolitan variation in the effects of economic geography,

jobs, and regulation on land prices

  The link between land prices and house prices (Davis and Palumbo, 2008):

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where is the sum of physical capital , and the land it is built on and stocks of capital and land are valued at current prices

  We obtain quarter year data on average transaction prices for single-family homes in each of the 110 cities in the Bay Area, 1990 – 2010 (source: DataQuick)

  Data matched to 902 transactions of single-family lots in CoStar file

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Land values as fraction of average house prices The importance of land is substantial and increasing

  Land represents about 34 percent of the selling price, on average   Fraction varies between 31 percent (’90-’95) and 43 percent (‘05 –’10)   Davis and Palumbo (2008): 75 percent (1984) to 89 percent (2004) in

the City of San Francisco

  Regressions are re-estimated under changed economic conditions   Estimate changes in house values using (predicted) land prices

  “Move to flatland”: elevation and hilliness set to zero, fault lines one SD away   “Improve schools”: improve API scores by one SD   “Suburbanization of jobs”: equalize job density throughout region   “Reform regulation of land use”: reduce restrictiveness measures by one SD

Price effects of changing economic conditions Counterfactual estimates: Bay Area, SF, and suburban areas

Comparison of with other indexes   Transaction-based land index   Case-Shiller house price index   Construction cost index

Land prices, house prices, and capital costs Summary Comparison land price indexes   Transaction-based land index   Inferred land price index (Davis

and Palumbo, 2008)

Conclusions and implications Important links among geography, regulation, and land prices   Land prices in urban areas are typically inferred from housing

transactions, making assumptions about production function and capital costs.

  This paper exploits a unique source of urban land transactions in the San Francisco Bay Area.

  Intra-urban variations in topography, demographics and amenities are quite important determinants of land prices.

  Restrictiveness of legal environment drives up value of land.

  Both economic geography and regulation directly affect single-family house prices.