The Impact of Building Restrictions on Housing Affordability

[...]In this paper, after first surveying housing costs in theUnited States, we examine why the expensive places have suchhigh housing costs. High-cost places generally have either veryattractive local amenities (great weather or good schools) orstrong labor markets. The Rosen (1979) and Roback (1982)framework has proved useful in such studies, and one of us(Gyourko and Tracy 1991) has written on this topic.It is noteworthy that we do not focus here on the housingdemand side of the cost equilibrium. Instead, we focus on therole of housing supply. What is it that creates places where thecost of housing is so much higher than the physicalconstruction costs? We offer two basic views. First, there is theclassic economics approach, which argues that houses areexpensive because land is expensive. According to this view,there is a great deal of demand for certain areas, and land, by itsvery nature, is limited in supply. As such, the price of housingmust rise. Traditional models, such as the classic Alonso-Muth-Mills framework, take this view.[...]