Policy

Small Town Blues

Regulating apartments away.

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Zoning officials in Manhattan, a sleepy hamlet on the banks of the Hudson, help preserve the municipality's small-town feeling through a sensible set of regulations designed to prevent rapid growth. Real estate developers are discouraged from building new units, partly to avoid the suffering (obstructed views, congestion, access problems) that new construction causes existing property owners and tenants.

Now a study from the National Bureau of Economic Research reveals just how thoroughly the unpredictable array of regulatory mechanisms and the city's reluctance to issue new building permits have distorted the real estate market. While condo space in the Big Apple sells at around $600 per square foot, new construction costs are less than half that. Until the 1980s, even modest increases in housing prices were met quickly by new construction, keeping supply and demand in reasonable balance. The study estimates that legal limits on new housing are equivalent to a tax on existing apartments of $7,300 to $10,000 per apartment each year.

Although existing property owners don't benefit directly from the costs developers incur through the permitting process, they have a clear incentive to game the regulatory process and keep the housing supply artificially limited. The real price in a city that bends over backward to create "tenant-friendly" regulation is being paid by tenants in search of reasonably priced apartments. At this rate, New York may become another of those quaint little towns where only wealthy retirees can afford the cost of living.