LAND USE REGULATIONS AND HOUSING AFFORDABILITY Paloma Taltavull de La Paz International Economy Institute University of Alicante Barcelona, December, 19, 2007 Index Introduction Concept of land use regulations from the economic perspective Impact on the housing supply Concept of affordability… effect from the demand side Linking concepts: relationship between both Some empirical evidence Conclusions Introduction Land regulation and affordability are two perspectives of housing market difficult to link. Land regulation affect to the supply side Affordability is a demand side parameter Way through which the land regulations affect to affordability?. Prices? Concept of land use regulations from the economic perspective Land is an basic input to produce houses, then, developers… Tend to accumulate it …… monopolies of land? One of the responsibles of the supply restrictions (not the only one) Capitalize the increase on housing prices Land is scarce. There are no ilimit quantities of land (finit input) It has their use regulated by administrative decissions Concept of land use regulations from the economic perspective Results: Scarce supply of land (more than it should?) because: Use regulations define the available land (total supply) It is revised in the long term Trends to accumulate the available land .. In those hands of the most capitalised companies Land accumulation (land bourses) Monopoly power Slow entrance of the land into the market (extreme case) Total available land depends of the Administration sensibility: Or the better positioned in local market Few or much land?, Who urbanize it ? City design? If land is scarce ……. Few intensity on house-building … lack on housing ‘a’ effect Short run housing market equilibrium Supply Real housing prices Demand Time ‘b’ effect P1 P2 1 2 3 456 7 P0 8 9 10 11 12 H0 H1 Housing Concept of land use regulations from the economic perspective Another view: land use definition is the answer of the city concept Authorities and citizens are the right to define how the city has to be Result: Land is a natural monopoly With a ‘one-time-use’ in the long run With increases on the available quantity when the Plan is revisited (land supply growth in ‘saw-tooth’) Dependent of the public process With intense negociation process… and irreversible Concept of land use regulations from the economic perspective Uses: Urbanizable and non urbanizable land plus ‘suelo protegido’ Land use to be defined during the planning process….. distributing the needs among the new land The use is ordered according to a general concept (General Plan) The detailed uses are fixed by Parcial Plans which develop in detail each area. Land value depends on what type of real estate and economic activities will be developed: When land pass from non-urbanizable to be urbanizable Sharing different uses: public and private uses Destinates land for public uses, the rest is shared among the owners intensive edification, higher price, extensive edification have lower value (in the beginning of the process), other private uses like industrial and so on, depends of the economic activity) The planning decision is hard: the trace-line discriminates the value Concept of land use regulations from the economic perspective Inefficient distribution of land uses generates scarcity of land Excessive regulations on land (use and changes on use, and limitations on the land use) generates distortion on the market and inflexibility when changes on economic uses occurs Unbalanced distribution of land among uses also drive to a inefficient allocation of resources and out-of-market solutions irregularities on land use A market with scarcity on land received the stronger impact on prices when short-run equilibrium perform No ‘b’ effect Supply Demand Housing prices Time P1 1 2 3 456 P2 7 P0 12 H0 H1 Housing 8 9 10 11 Concept of land use regulations from the economic perspective Expectations about future values Long period for planning Information about where the line is going to be draw Before and after the line, because land is a long term investment asset The impact of the land regulation on the housing new supply Land supply increase with new plans Positive effects on housing supply if: Land for housing rise Developers compete by the land and housebuilding Housing supply lies down when land availability increase, after a new Plan Housing prices e=0 e<1 e=1 e>1 p0 p1 V0V1 Housing Concept of affordability Demand side determinant.. Short run Affordability exists if: Debt service/income =< 30% Loan to value =< 80% Price/income ratio is about 3 (flexible conditions) Formula: Where: M * ir * maturity debtservice income M f housprice ; f 80% SPANISH HOUSING MARKET AFFORDABILITY RATIOS 1981-2007 (En % ) 140,00 130,00 R.accesib 15 años.. 30% 120,00 110,00 R.accesib 20 años.. 30% R.accesib 30 años.. 30% R. Crédito/Valor (LVR).. 80%* 100,00 90,00 R. Crédito/valor .. 80% 80,00 70,00 60,00 50,00 40,00 30,00 20,00 R. Accesibilidad... 30% 10,00 Fte. INE, MFOM, BDE y Elaboración propia 0,00 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 * 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 affordability Demand factor, but short- medium run effects Main demand drivers are Population, income and finance They ‘move’ the demand Very relevant the effect of the new supply.. Housing supply lies down when land availability increase, after a new Plan Housing prices e=0 e<1 e=1 p1 e>1 p2 p0 V0V1 V2 Housing Linking concepts: relationship Link is the housing and real estate prices Direct effect: Through the repercussion of land value on final real estate price…. Price formation process from supply side Indirect effect: Through the scarcity of land…. Market equilibrium Linking concepts: relationship With a maximum: D land prices D land repercussion on total housing construction costs NEGATIVE INCENTIVES TO THE MARKET Weaker housing demand Reduction on affordability D house market price Some empirical evidence Housing new supply equations: ln(Qtsnin,t) = a1 + a2 ln PH,t+ a3 ln Cmt + a4 ln Cst+ a5 ln it + a8 lnpHe + nt Some empirical evidence Exhibit 3.- HOUSING MARKET CLASIFICATION BY AUTONOMOUS COMUNITIES, SPAIN, REGARDING SUPPLY ELASTICITIES AND MARKET PERFORMANCE* 3,00 2,50 HIGH ELASTICITY AND LOW EXPLANATION CAPACITY HIGH ELASTICITY AND HIGH EXPLANATION CAPACITY La Rioja Cataluña Galicia 2,00 Conventional elasticity Navarra Castilla La Mancha Asturias 1,50 Balearic Islands Madrid Valencia Community 1,00 Canary Islands Aragón Andalucía 0,50 0,00 0,00 Castilla León 0,10 Extremadura 0,20 0,30 Murcia 0,40 0,50 0,60 0,70 0,80 0,90 -0,50 LOW ELASTICITY AND LOW EXPLANATION CAPACITY -1,00 LOW ELASTICITY AND HIGH EXPLANATION CAPACITY Cantabria *In bold, the most active markets in house-building In red, elasticity no significative -1,50 Adjusted R2 1,00 Some empirical evidence No evidence from repercussion costs of land on total housing costs estimations, but Higher repercussion of land land costs on cities and strong development areas Lower repercussion of land costs in new areas Conclusion remarks Land is an input It also is an investment asset Land use to be charge with the housing price increasing responsability Most housing transactions are not done on new but existent housing….. Known economic mechanism to land market performance Demand factor initiate the revaluation process on housing market and, then, on land market Conclusion remarks Huge impact of the land use laws To define the future city To order the sprawl process Land scarcity influence on the inflexible housing supply, Land surplus could stop prices appreciation Challenge: Make play land regulation with the housing market Crecimiento más suave? Oferta Demanda precios Tiempo P1 P2 1 2 3 456 7 P0 12 H0 H1 viviendas 8 9 10 11 References Analistas Financieros Internacionales, 2004, El mercado inmobiliario español, Asprima-Estudio Planner, Madrid DiPascuale, D. And Weaton, W.C, 1996, Urban Economics and Real Estate Markets, Prentice Hall, London. INE, estadísticas, varios años LEY 10/2004, de 9 de diciembre, de la Generalitat, del Suelo No Urbanizable. [2004/12638] LEY 14/1997, de 26 de diciembre, de Medidas de Gestión Administrativa y Financiera y de Organización de la Generalitat, (Artículo 19. Del aprovechamiento urbanístico subjetivo o aprovechamiento susceptible de apropiación). LEY 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 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 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 Medidas 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 Real Estate Economics. Reading University Ministerio 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 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 aplicación 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 Urbana Red vivienda, 2005, ‘El papel del suelo en el mercado de la vivienda’, Economistas, num 102, Colegio de Economístas de Madrid, Madrid Taltavull, P., 2001, Economía de la construcción. 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 Fiscales, pp331-378 Wheaton, W.C, 1998, "Land Use and Density in Cities with Congestion", Journal of Urban Economics, 43, pags 258-272 Thanks for your attention