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
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Thanks for your attention