Why is housing in the coastal enclaves so damned expensive? The median rent for a two-bedroom apartment in New York City is now running at $4,260 a month; in San Francisco, the figure is $4,600. The national average, by contrast, is about $1,300. What gives?
Blame zoning. The Wharton Residential Land Use Regulatory Index reports that land use restrictions in New York, San Francisco, and San Jose are among the tightest in the country.
You don't have to live in New York, San Francisco, or San Jose to feel the effects. A new study by economists Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of Stanford measured increases in the total factor productivity—that is, the efficiency with which inputs like labor and technology are combined to yield outputs—in 220 cities from 1964 to 2009. They concluded that onerous land use restrictions in high-productivity cities have huge spillover effects on the rest of the U.S. economy.
In a nutshell, artifically high housing costs keep workers from moving from low-productivity areas to high-productivity cities, thus depressing wages and economic growth. Those workers don't just get stuck in low-wage regions: Because they're stuck, job competition drives down the local wages even more. Meanwhile, most of the extra output produced in New York, the San Francisco Bay Area, and other overregulated regions are poured into housing costs rather than invested in more productive assets. In that way, highly restrictive zoning depresses economic growth and GDP.
"In the 1960s, developers found it easy to do business in much of the country," the Harvard economist Edward Glaeser noted in 2014. "In the past 25 years, construction has come to face enormous challenges from any local opposition. In some areas it feels as if every neighbor has veto rights over every project."
If land use regulations in New York and the Bay Area were set equal to the median U.S. city, those area's average wages would be 25 percent lower, but reduced housing costs would have more than made up for that. Furthermore, the researchers calculate, GDP would be 8.9 percent higher (as of 2009), translating into an addtional $8,775 in average wages for all American workers.
Still, it could have been worse. In the period studied by Hsieh and Moretti, Southern cities tended to eschew highly restrictive land use regulations. As a result, they have much lower housing costs and were responsible for about 33 percent U.S. aggregate GDP growth. If the big Southern cities had adopted the median U.S. level of residential zoning, the economists calculate, the change would have reduced GDP growth by 25 percent.