Regulation of Land and Real Estate

I. Market failures Public good: Goods the consumption of which by A does not prevent B from consuming them (radio broadcast. Defense. The cost of extending the service to another person is very low. The cost of excluding a person is very high. Pure public goods are rare in the urban contexts. Nonetheless, many goods, such as roads, parks, etc. have strong public good elements. Merit goods: Everyone would be better off if they are provided universally. Education, water, garbage collection. Externalities: Unpriced effects. Negative: pollution, noise, etc. Positive: landscape. Negative externalities will cause over production of bads. Positive externalities will cause under production of goods. Monopoly: Having one or a few strong supplier of a good or a service. Concerns are often made about a small number of land owners who control the market price. In urban areas, this is much harder to achieve. In fact, if there are large owners, they tend to be State institutions such as the military, the rail road station, etc.

II. Responses to market failures Public intervention in real estate markets happens through: Assigning and enforcing property rights Market regulations Land use planning Taxation and subsidies Provision of infrastructure Participating in the real estate market

III. Land Use Planning Which Forms Of Market Failure Is Land Use Planning Intended To Fix? Public Goods? Merit Goods? Externalities? Monopoly?

III. Land Use Planning Spatial Growth Controls: Green Belts, Agricultural land, Conservation Easements, etc. Volume Controls: Floor to Area Ratio (FAR), Height, Set backs Use Controls: (residential, commercial, industrial, recreational, office, mixed) Quality Controls: Construction Standards, External Appearance Standards, Infrastructure standards Price Controls: Rent Control (?)

IV. The effects of land use regulations: Do land use regulations matter? US Evidence: Effects of Growth Control Effects of Volume Controls Effects of Separating Uses

A Stylized View of Growth Control Source:Fischel, (1990) Underdeveloped Area Value = $100m Developed Area Value = $500m Underdeveloped Area Value = $50m Developed Area Value = $750m 1984 Total Value = $600 million1988 Total Value = $800 million Effect of growth control introduced within the outside rectangle in 1986

Hypothetical Relationship Between Aggregate Land Values and the Extend of Development in the Community: As the community grows, aggregate land value grows, but to a point Source: Fischel, (1990) Total Land Value D* Extent of Development D

Dark areas are nonresidential areas Community A Community B Source: Fischel, (1990) Separating Uses: Which is better, A or B? Depends on the Uses!

Effect on Prices: Are Higher Prices Good or Bad? Good... if they imply more attractive communities, higher productivity. Bad... if they imply artificial restrictions on supply. Also, what are the spillover effects? …higher prices in one place, lower prices in the other.

Source: Fischel, (1990) P P Price 2 1 D Q2Q1Quantity S’ S Bad Effects: Supply Restriction

P 2 P 1 D’ D Q1 Price Q2 Quantity S Source: Fischel, (1990) Good Effects: Demand Stimulation

Is there a need for land use controls at all? Evidence suggests that there is demand for some kind of land use controls whether publicly or privately provided. The evidence from Houston.

IV. The effects of Land use regulations: Developing Countries Evidence Regulatory Framework Market Conditions Supply Side Demand Side The “Escape Valve”: Informality The Development Process

Regulatory Framework: Property rights can be poorly defined and/documented. Land use regulations often copied from Colonial/Western western sources. Mechanisms for modifying regulations less well developed. Formal appeals mechanism less developed. Limited enforcement capacity. => Less Ability to Adapt to Changing Conditions

Market Conditions: Supply Side: Infrastructure provision constrained by limited public resources and limited private sector participation. Public ownership of land or concentrated private ownership creates monopoly conditions. Areas with contested rights can be removed from the market. Limited ability to re-develop land in central areas. Rigidities in FAR increases. Rent control.

Market Conditions: Demand Side: High rural- urban migration rates.. High population growth and household formation. High income disparities. Investment in land as hedge against inflation.

Market Conditions: The Escape Valve: Informal Land Markets Illegal occupancy of land (invasion, squatting) Illegal conversion of rural land to urban land Non-compliance with subdivision and service regulations Non-compliance with volume standards Illegal transfer of title

Development Process: Formal Development: Zoning ---> Trunk service provision ---> Site development ---> Building ---> Occupation Informal Development: Occupation ---> Building ---> Trunk services ---> Site services ---> Planning/Zoning

V. Sao Paulo Case Study Zoning Law allows FAR of 1 for 83% of the city lots, and of 4 only for 10% of lots. 144 million square meters of empty serviced lots capable of supporting 7.5 million people Majority of dwellers are living in unserviced land.

Macrozoning Urban Zone High Density Zone Low Density Zone Rural Zone Sao Paulo

Proposed Master Plan (1994) Macrozoning principles Base FAR ratio Urbanization Fund Buildable area stock Land use preferences

V. Conclusions Process: More attention to how regulations come about, how can they be changed. Information: The need to monitor markets and adjust regulations Enforcement: A scarce resource, use it wisely Illegality offers reformers insight on how to reform land regulations: The expected benefits of breaking the law > the costs of penalty x the probability of being caught.