LAND USE REGULATIONS AND LAND USE REGULATIONS AND

HOUSING AFFORDABILITYHOUSING AFFORDABILITY

Paloma Taltavull de La PazPaloma Taltavull de La PazInternational Economy InstituteInternational Economy Institute

University of AlicanteUniversity of Alicante

Barcelona, December, 19, 2007Barcelona, December, 19, 2007

IndexIndex

IntroductionIntroduction Concept of land use regulations from the Concept of land use regulations from the

economic perspectiveeconomic perspective Impact on the housing supplyImpact on the housing supply Concept of affordability… effect from the Concept of affordability… effect from the

demand sidedemand side Linking concepts: relationship between both Linking concepts: relationship between both Some empirical evidenceSome empirical evidence ConclusionsConclusions

IntroductionIntroduction

Land regulation and affordability are two Land regulation and affordability are two perspectives of housing market difficult to perspectives of housing market difficult to link.link.Land regulation affect to the supply sideLand regulation affect to the supply sideAffordability is a demand side parameterAffordability is a demand side parameter

Way through which the land regulations Way through which the land regulations affect to affordability?. Prices?affect to affordability?. Prices?

Concept of land use regulations Concept of land use regulations from the economic perspectivefrom the economic perspective

Land is an basic input to produce houses, Land is an basic input to produce houses, then, developers…then, developers…

Tend to accumulate it …… monopolies of land?Tend to accumulate it …… monopolies of land?One of the responsibles of the supply restrictions One of the responsibles of the supply restrictions

(not the only one)(not the only one)Capitalize the increase on housing pricesCapitalize the increase on housing prices

Land is scarce.Land is scarce.There are no ilimit quantities of land (finit input)There are no ilimit quantities of land (finit input)It has their use regulated by administrative It has their use regulated by administrative

decissionsdecissions

Concept of land use regulations Concept of land use regulations from the economic perspectivefrom the economic perspective

Results: Scarce supply of land (more than it should?) Results: Scarce supply of land (more than it should?) because:because:

Use regulations define the available land (total supply)Use regulations define the available land (total supply) It is revised in the long term It is revised in the long term Trends to accumulate the available land .. In those hands of the most Trends to accumulate the available land .. In those hands of the most

capitalised companiescapitalised companies Or the better positioned in local marketOr the better positioned in local market

Land accumulation (land bourses) Land accumulation (land bourses) Monopoly powerMonopoly power Slow entrance of the land into the market (extreme case)Slow entrance of the land into the market (extreme case)

Total available land depends of the Administration sensibility:Total available land depends of the Administration sensibility: Few or much land?, Few or much land?, Who urbanize it ?Who urbanize it ? City design?City design?

If land is scarce ……. Few intensity on house-building If land is scarce ……. Few intensity on house-building … … lack on housinglack on housing

Short run housing market Short run housing market equilibriumequilibrium

Real housing prices

Housing

Supply

Demand

Time

P0

P2

P1

H0 H1

1 2 3 4 5 6

7 8 9 10 11

12

‘a’ effect

‘b’ effect

Concept of land use regulations Concept of land use regulations from the economic perspectivefrom the economic perspective

Another view: land use definition is the answer Another view: land use definition is the answer of the city conceptof the city concept Authorities and citizens are the right to define how the Authorities and citizens are the right to define how the

city has to becity has to be Result: Result:

Land is a natural monopolyLand is a natural monopoly With a ‘one-time-use’ in the long runWith a ‘one-time-use’ in the long run With increases on the available quantity when the With increases on the available quantity when the

Plan is revisited (land supply growth in ‘saw-tooth’)Plan is revisited (land supply growth in ‘saw-tooth’) Dependent of the public processDependent of the public process

With intense negociation process… and irreversibleWith intense negociation process… and irreversible

Concept of land use regulations from the Concept of land use regulations from the economic perspectiveeconomic perspective

Uses: Urbanizable and non urbanizable land plus ‘suelo protegido’Uses: Urbanizable and non urbanizable land plus ‘suelo protegido’ Land use to be defined during the planning process….. distributing Land use to be defined during the planning process….. distributing

the needs among the new landthe needs among the new land When land pass from non-urbanizable to be urbanizableWhen land pass from non-urbanizable to be urbanizable Sharing different uses: public and private usesSharing different uses: public and private uses Destinates land for public uses, the rest is shared among the ownersDestinates land for public uses, the rest is shared among the owners

The use is ordered according to a general concept (General Plan)The use is ordered according to a general concept (General Plan) The detailed uses are fixed by Parcial Plans which develop in detail The detailed uses are fixed by Parcial Plans which develop in detail

each area. each area. Land value depends on what type of real estate and economic Land value depends on what type of real estate and economic

activities will be developed:activities will be developed: intensive edification, higher price, intensive edification, higher price, extensive edification have lower value (in the beginning of the process), extensive edification have lower value (in the beginning of the process), other private uses like industrial and so on, depends of the economic other private uses like industrial and so on, depends of the economic

activity) activity) The planning decision is hard: the The planning decision is hard: the trace-linetrace-line discriminates the value discriminates the value

Concept of land use regulations from Concept of land use regulations from the economic perspectivethe economic perspective

Inefficient distribution of land uses generates scarcity of Inefficient distribution of land uses generates scarcity of land land

Unbalanced distribution of land among uses also drive to a inefficient Unbalanced distribution of land among uses also drive to a inefficient allocation of resources and out-of-market solutionsallocation of resources and out-of-market solutions

Excessive regulations on land (use and changes on use, Excessive regulations on land (use and changes on use, and limitations on the land use) generates distortion on and limitations on the land use) generates distortion on the market and inflexibility when changes on economic the market and inflexibility when changes on economic uses occursuses occurs

irregularities on land use irregularities on land use

A market with A market with scarcity on land received the stronger scarcity on land received the stronger impact on prices when short-run equilibrium perform impact on prices when short-run equilibrium perform

No ‘b’ effectNo ‘b’ effect

Housing prices

Housing

Supply

Demand

Time

P0

P2

P1

H0 H1

1 2 3 4 5 6

7 8 9 10 11

12

Concept of land use regulations from Concept of land use regulations from the economic perspectivethe economic perspective

Expectations about future valuesExpectations about future valuesLong period for planningLong period for planning Information about where the Information about where the lineline is going to is going to

be drawbe drawBefore and after the Before and after the lineline, because land is a , because land is a

long term investment assetlong term investment asset

The impact of the land regulation The impact of the land regulation on the housing new supplyon the housing new supply

Land supply increase with new plansLand supply increase with new plansPositive effects on housing supply if:Positive effects on housing supply if:

Land for housing riseLand for housing riseDevelopers compete by the land and Developers compete by the land and

housebuildinghousebuilding

Housing supply lies down when land Housing supply lies down when land availability increase, after a new Planavailability increase, after a new Plan

Housing

Housing prices

<1=0

=1

>1

p1

V0

p0

V1

Concept of affordabilityConcept of affordability

Demand side determinant.. Short runDemand side determinant.. Short run Affordability exists if:Affordability exists if:

Debt service/income =< 30%Debt service/income =< 30% Loan to value =< 80%Loan to value =< 80% Price/income ratio is about 3Price/income ratio is about 3 (flexible conditions)(flexible conditions)

Formula: Formula:

Where: Where: %80; fhouspricefM

income

maturityirMedebtservic

**

SPANISH HOUSING MARKET AFFORDABILITY RATIOS 1981-2007

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

110,00

120,00

130,00

140,00

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

R.accesib 15 años.. 30%

R.accesib 20 años.. 30%

R.accesib 30 años.. 30%

R. Crédito/Valor (LVR).. 80%*

(En % )

Fte. INE, MFOM, BDE y Elaboración propia

R. Crédito/valor .. 80%

R. Accesibilidad... 30%

* El ratio crédito valor se ha estimado entre 1981 y 1987 utilizando el ritmo de crecimiento de los precios de las hipotecas para valorar el precio de las viviendas

Concept of affordabilityConcept of affordability

Demand factor, but short- medium run Demand factor, but short- medium run effectseffects

Main demand drivers are Population, Main demand drivers are Population, income and financeincome and financeThey ‘move’ the demandThey ‘move’ the demand

Very relevant the effect of the new supply..Very relevant the effect of the new supply..

Housing supply lies down when land Housing supply lies down when land availability increase, after a new Planavailability increase, after a new Plan

Housing

Housing prices

<1=0

=1

>1

p0

V0

p1

p2

V1 V2

Linking concepts: relationshipLinking concepts: relationship

Link is the housing and real estate pricesLink is the housing and real estate prices

Direct effect: Through the repercussion of Direct effect: Through the repercussion of land value on final real estate price….land value on final real estate price…. Price formation process from supply sidePrice formation process from supply side

Indirect effect: Through the scarcity of Indirect effect: Through the scarcity of land…. Market equilibriumland…. Market equilibrium

Linking concepts: relationshipLinking concepts: relationship

With a maximum:With a maximum: land

repercussion on

total housingconstruction

costs house

market price

land prices

Reduction on affordability

Weaker housing demand

NEGATIVE INCENTIVESTO THE MARKET

Some empirical evidenceSome empirical evidence

Housing new supply equations:Housing new supply equations:

ln(Qln(Qttsnsn

in,tin,t) ) = = 1 + 1 + ln P ln PH,tH,t+ + 3 ln Cm3 ln Cmtt + + 4 4

ln Csln Cstt+ + 5 ln i5 ln itt + + 8 ln8 lnHHe e + + tt

Some empirical evidenceSome empirical evidenceExhibit 3.- HOUSING MARKET CLASIFICATION BY AUTONOMOUS COMUNITIES, SPAIN,

REGARDING SUPPLY ELASTICITIES AND MARKET PERFORMANCE*

-1,50

-1,00

-0,50

0,00

0,50

1,00

1,50

2,00

2,50

3,00

0,00 0,10 0,20 0,30 0,40 0,50 0,60 0,70 0,80 0,90 1,00

Adjusted R2

Co

nv

en

tio

na

l e

las

tic

ity

Extremadura

Canary Islands

Andalucía

Valencia Community

Castilla La Mancha

Galicia

Cataluña

Balearic Islands

Aragón

Asturias

La Rioja

Cantabria

Madrid

Navarra

Castilla León Murcia

*In bold, the most active markets in house-buildingIn red, elasticity no significative

HIGH ELASTICITY AND HIGH EXPLANATION CAPACITY

LOW ELASTICITY AND LOW EXPLANATION CAPACITY

HIGH ELASTICITY AND LOW EXPLANATION CAPACITY

LOW ELASTICITY AND HIGH EXPLANATION CAPACITY

Some empirical evidenceSome empirical evidenceNo evidence from repercussion costs of No evidence from repercussion costs of

land on total housing costs estimations, land on total housing costs estimations, butbutHigher repercussion of land land costs on Higher repercussion of land land costs on

cities and strong development areascities and strong development areasLower repercussion of land costs in new Lower repercussion of land costs in new

areasareas

Conclusion remarksConclusion remarks Land is an inputLand is an input It also is an investment assetIt also is an investment asset Land use to be charge with the housing price increasing Land use to be charge with the housing price increasing

responsabilityresponsability Most housing transactions are not done on new but existent Most housing transactions are not done on new but existent

housing…..housing….. Known economic mechanism to land market performance Known economic mechanism to land market performance Demand factor initiate the revaluation process on housing Demand factor initiate the revaluation process on housing

market and, then, on land marketmarket and, then, on land market

Huge impact of the land use lawsHuge impact of the land use lawsTo define the future cityTo define the future cityTo order the sprawl processTo order the sprawl process

Land scarcity influence on the inflexible Land scarcity influence on the inflexible housing supply,housing supply,Land surplus could stop prices appreciationLand surplus could stop prices appreciation

Challenge: Make play land regulation with Challenge: Make play land regulation with the housing market the housing market

Conclusion remarksConclusion remarks

Crecimiento más Crecimiento más suave?suave?

precios

viviendas

Oferta

Demanda

Tiempo

P0

P1

P2

H0 H1

1 2 3 4 5 6

7 8 9 10 11

12

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Del aprovechamiento urbanístico subjetivo o aprovechamiento susceptible de apropiación).Del aprovechamiento urbanístico subjetivo o aprovechamiento susceptible de apropiación). LEY 15/2001, de 14 de diciembre, del Suelo y Ordenación Territorial de ExtremaduraLEY 15/2001, de 14 de diciembre, del Suelo y Ordenación Territorial de Extremadura Ley 4/1992, de 5 de junio, de la Generalitat Valenciana, sobre suelo no urbanizable.Ley 4/1992, de 5 de junio, de la Generalitat Valenciana, sobre suelo no urbanizable. LEY 5/1999, de 8 de abril, de Urbanismo de Castilla y LeónLEY 5/1999, de 8 de abril, de Urbanismo de Castilla y León LEY 6/1994, de 15 de noviembre, de la Generalitat Valenciana, Reguladora de la Actividad UrbanísticaLEY 6/1994, de 15 de noviembre, de la Generalitat Valenciana, Reguladora de la Actividad Urbanística LEY 6/1998, de 13 de abril, sobre régimen del suelo y valoraciones. Modificada por REAL DECRETO LEY 4/2000, de 23 de junio, de LEY 6/1998, de 13 de abril, sobre régimen del suelo y valoraciones. Modificada por REAL DECRETO LEY 4/2000, de 23 de junio, de

Medidas Urgentes de Liberalización en el Sector Inmobiliario y TransportesMedidas Urgentes de Liberalización en el Sector Inmobiliario y Transportes MEEN, Geoffrey, 2002, "Social Interactions Models and Policy Analysis in Urban Housing Markets: A Review", WP Centre for Spatial and MEEN, Geoffrey, 2002, "Social Interactions Models and Policy Analysis in Urban Housing Markets: A Review", WP Centre for Spatial and

Real Estate Economics. Real Estate Economics. Reading UniversityReading University Ministerio de Vivienda, estadísticas de precios y transacciones, varios añosMinisterio de Vivienda, estadísticas de precios y transacciones, varios años REAL DECRETO 1093/1997, de 4 de julio, del Ministerio de Justicia, por el que se aprueban las Normas complementarias al Reglamento REAL DECRETO 1093/1997, de 4 de julio, del Ministerio de Justicia, por el que se aprueban las Normas complementarias al Reglamento

para la ejecución de la Ley hipotecaria sobre inscripción en el registro de la propiedad de actos de naturaleza urbanística.para la ejecución de la Ley hipotecaria sobre inscripción en el registro de la propiedad de actos de naturaleza urbanística. REAL DECRETO 3288/1978, de 25 de agosto, por el que se aprueba el Reglamento de Gestión Urbanística para el desarrollo y REAL DECRETO 3288/1978, de 25 de agosto, por el que se aprueba el Reglamento de Gestión Urbanística para el desarrollo y

aplicación de la Ley sobre Régimen del Suelo y Ordenación Urbanaaplicación de la Ley sobre Régimen del Suelo y Ordenación Urbana REAL DECRETO LEGISLATIVO 1/1992, de 26 de junio, Texto Refundido de la Ley sobre el Régimen del Suelo y Ordenación UrbanaREAL DECRETO LEGISLATIVO 1/1992, de 26 de junio, Texto Refundido de la Ley sobre el Régimen del Suelo y Ordenación Urbana Red vivienda, 2005, ‘El papel del suelo en el mercado de la vivienda’, Red vivienda, 2005, ‘El papel del suelo en el mercado de la vivienda’, EconomistasEconomistas, num 102, Colegio de Economístas de Madrid, Madrid , num 102, Colegio de Economístas de Madrid, Madrid Taltavull, P., 2001Taltavull, P., 2001, Economía de la construcción, Economía de la construcción. Civitas, Madrid. Civitas, Madrid Taltavull, P., 2003, ‘La Política de Vivienda’, en Salinas J. Y Álvarez, S, (coord.), El Gasto Público en la Democracia, Instituto de Estudios Taltavull, P., 2003, ‘La Política de Vivienda’, en Salinas J. Y Álvarez, S, (coord.), El Gasto Público en la Democracia, Instituto de Estudios

Fiscales, pp331-378Fiscales, pp331-378 Wheaton, W.C, 1998, "Land Use and Density in Cities with Congestion", Journal of Urban Economics, 43, pags 258-272Wheaton, W.C, 1998, "Land Use and Density in Cities with Congestion", Journal of Urban Economics, 43, pags 258-272

Thanks for your attentionThanks for your attention