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- In major cities around the world, housing is becoming less and less affordable.
- Tokyo, Japan, is a notable exception, with prices barely rising since 1995.
- The US has restrictive, often absurd regulations, and should instead mirror Tokyo.
- Jairaj Devadiga is an economist specializing in public policy and economic history.
- This is an opinion column. The thoughts expressed are those of the author.
In major cities around the world, housing prices have spiraled out of control.
In California's Bay Area, the median house price is $1.3 million. In Vancouver, the average household must save for 34 years to make a down payment on a house, and put aside 85% of its pre-tax income for mortgage payments. In Sydney, a decrepit house without any toilet facilities sells for $3.5 million.
In this sea of craziness, Tokyo has been an island of sanity. Its housing prices have barely risen since 1995. This is not due to deflation either.
While the population of Japan as a whole has been shrinking, Tokyo has been growing. Between 1995 and 2019, the population of Tokyo grew by 2.17 million, or just above 90,000 per year on average. To accommodate all these new people, lots of housing had to be built. Over the same time period, there was an average of 153,000 housing starts annually.
A study by the Fraser Institute illustrates what happens when housing supply fails to keep up with demand. Between 2015 and 2019, 120,000 new jobs were created in Vancouver and Toronto. In the same time period, there were only 57,000 housing starts every year. Since demand was growing more than twice as fast as supply, prices skyrocketed. The same story played out in almost every major city. Lots of new jobs being created, lots of people wanting to move, and not enough homes being built for all of them.
There are numerous bad policies which prevent the construction of more housing. Chief among them are restrictive zoning laws. In most cities with expensive housing, vast swathes of residential land are reserved exclusively for single family homes. Until very recently, the worst of the bunch was San Jose, with 94% of the land being off limits for apartment buildings. No wonder it is the least affordable city in America.
Not only does this make housing costlier for middle and low income folks, but also subsidizes mansions for the rich. The land on which a mansion sits would be worth a lot more if an apartment building could be built on it. The developer would make a profit even if they sold each apartment at an affordable price.
However, because that's not allowed, developers won't bid for that land, thus driving down its price.
While Tokyo does have low density zones, these do not prohibit multi-family buildings. Thus it is not uncommon to see a three story apartment building right next to a single family home.
Apart from zoning, cities dictate minimum lot sizes and maximum floor area ratios (how much of the plot is covered by the building itself), which further stifle construction. In much of Mumbai, for instance, the floor area ratio was capped at 1.33 until 2018.
This had the disastrous result of pushing poor people into slums, as they could not compete with affluent families for the limited housing. In 1971, 22% of Mumbai's population lived in slums. By 2010, this had risen to 62%. By contrast, Tokyo allows floor area ratios as high as 13, and even higher with government permission.
Another problem is cities wanting to preserve too many historical sites. For instance, cities often declare old homes or commercial establishments to be historical monuments, which prevents them from being torn down and replaced with apartment buildings.
In some cases, cities prevent development even when the historical monument itself would be untouched. For instance, last year, a historic preservation board in Seattle rejected a proposal for a 200-unit apartment building because it would be taller than nearby historical monuments. While Tokyo has historic buildings, its criteria for preservation are much stricter and thus don't get in the way of affordable housing.
Another important factor in raising housing prices is over-regulation. A recent report by the National Association of Home Builders estimates that regulations add almost $94,000 to the price of new homes. The vast majority of these regulations are purely aesthetic, such as mandating certain types of landscaping and architectural styles, or banning vinyl sidings.
This is not exclusive to American cities. A study on India's Ahmedabad shows that unnecessary regulations add 34% to the cost of housing. By contrast, Tokyo has very few common sense regulations; mainly to protect against the frequent earthquakes. As long as developers follow these and the very liberal zoning laws, they are free to build as they please.
At this point, you might wonder why these restrictive rules persist if they are so obviously bad. Why is liberal city-planning the exception, rather than the norm? To answer this, we must examine the policy making process itself, to understand the motivations of all participants.
Consider San Jose, with its 94% single-family zoning. The politicians in San Jose were catering to the wishes of their constituents; the people already living in San Jose. Those voters wanted high prices. To them, their house is an investment, which would lose value if more housing were built in their neighborhood. It would also result in new neighbors bringing in a different culture from what the residents are used to.
People who wanted to move to San Jose, but couldn't due to high prices, would benefit from more liberal planning. They might live in different parts of California, or even in other states. Obviously they don't get to vote in San Jose elections, thus local politicians have no incentive to help them.
The same process plays out across every city, resulting in sky-high prices.
At the state or national level, though, the political calculus changes completely. People in a particular city might want to restrict housing development, but everyone else wants more. Thus state and national politicians have an incentive to liberalize.
This is exactly what happened in Japan. It too had local governments choking the housing market, resulting in a massive housing bubble in the 1980s. This prompted the national government to enact a series of reforms to rein in housing prices.
The national government formulates building codes, zoning laws, and other city-planning regulations for the entire country, giving very little leeway to local governments.
Recently, governor Gavin Newsom did something similar in California, by finally abolishing single-family zoning statewide, and also loosening some other restrictions.
To win elections, local politicians must necessarily keep down the supply of new housing. It is up to state and national governments to deny them that power, and quickly. Otherwise, home-ownership will remain a pipe-dream for most people.