Mugged on Park Avenue

The stories of Manhattan's outrageous apartment prices are legendary: residents routinely pay through the nose for a studio roughly the size of a childhood tree house. It seems intuitive that the high cost of living in the core of the Big Apple grows out of the high demand for housing there. But new economics research offers an alternative explanation for the pricey real estate: the city's confusing morass of government regulation.

In "Why Is Manhattan So Expensive?" a recent Manhattan Institute report, Harvard professor of economics Edward L. Glaeser and Joseph Gyourko, Bucksbaum professor of real estate and finance at the Wharton School, assert that upwards of half the cost of new housing on the island stems from what they call a "zoning tax": costs associated with developers' having to navigate the city's bureaucracy and regulations. The study examined a sample of 23,060 condominiums throughout the borough and tried to determine why — when the cost of building new high-rise apartments there ranges from about $150 to $200 per square foot — the going rate for purchasing those units is between double and triple that.

The researchers found that between 1984 and 2002, the mean and median sales prices for condominiums in Manhattan were about $486 per square foot and $455 per square foot respectively (adjusted to 2002 dollars) — meaning a 500-square-foot condo would cost nearly $250,000. Ordinarily, such robust prices would lead to increased competition and greater supply, which would cause prices to fall. However, Manhattan's prices have continued to rise at rates more than double the national average. And since 1980 — despite strong demand, rising prices, and a surging economy — there's been a steady drop in new housing starts there.

Glaeser explains that, traditionally, four artificial barriers lead to inflated housing costs: shortages of available space, technological barriers, cartel-like building oligopolies, and barriers created by the government. None of the first three apply to New York City, says Glaeser: "There aren't any natural barriers of entry into the construction industry, and we've seen that actually, New York City's market can be violently competitive at times." And even in the densest parts of Manhattan, developers can, theoretically, always "build up" by adding more stories to existing structures.

Instead, the city's regulatory restrictions impose a hidden "zoning tax" on new housing, the researchers say. According to the study, 50 percent or more of the total median price of a Manhattan condominium — or about $200 per square foot — is attributable to this "tax." No single rule or regulation is to blame. As Glaeser explains, "There are a thousand different ways for a project to be shot down," from building codes to environmental regulations to disagreements over air rights. The totality of New York's deeply complex system of overlapping oversights and regulatory agencies drives the huge zoning tax.

Taken as a whole, that process can undermine a city's potential. "If a city wants to have a growing economy, they're going to have to allow new building," Glaeser says. Without a supply of housing for workers, for example, housing prices will rise, driving up the wages necessary to attract new workers and retain old ones. This, in turn, slows growth and capital investment.

Glaeser notes that some mediating restraints on building are necessary, because new residents do impose costs on the city (for more police and fire coverage, education, and roads, for example) and on other residents (such as greater density). The researchers argue that addressing these societal costs should be a transparent process in which developers pay clearly defined fees rather than indirect charges resulting from expensive regulations. Ideally, they say, the costs should equal the marginal social cost of a new resident to the community — which Manhattan's current "zoning tax" clearly exceeds. They calculated that the tax should be around 17.5 percent — roughly 5 percent to cover additional city crowding and 12.5 percent to cover the social cost of blocking the views of nearby apartments. Instead, the actual figure is two to three times too high.

"There's no sense that New York City is special," notes Glaeser. "It's just where the data were best and most available. Many small Massachusetts cities around Boston are far worse." The zoning tax amounts to as much as one-third to one-half the value of new housing in such major California cities as Los Angeles, Oakland, San Francisco, and San Jose. In Boston, Washington, D.C., and Newport News, Virginia, it can be as much as one-fifth of the cost of new housing.

In response, Glaeser puts forward the possibility of a regional cost-sharing mechanism whereby cities and towns that blocked new housing growth would be taxed and the revenues would go to offset the cost of new residents in nearby cities where growth was allowed. He also suggests that municipalities examine how their economic profiles have changed in recent decades: land once used for manufacturing, for example, can often be freed for new housing.

~Garrett M. Graff

 

Edward Glaeser e-mail address:
eglaeser@harvard.edu

Report website:
www.manhattan-institute.org/html/cr_39.htm    

Click here for the July-August 2004 issue table of contents

Read more articles by Garrett M. Graff

You might also like

Antisemitism on Campuses

Jewish studies faculty react to a year of turmoil. 

Can Multivitamins Reduce Cancer Risk and Slow Memory Loss?

The scientific evidence on vitamin supplements and age-related health decline

Five Questions with Professor Jia Liu

Harvard bioengineer on AI in brain-machine interfaces, and using technology to treat disease

Most popular

The World’s Costliest Health Care

Administrative costs, greed, overutilization—can these drivers of U.S. medical costs be curbed?

Antisemitism on Campuses

Jewish studies faculty react to a year of turmoil. 

Five Questions with Professor Jia Liu

Harvard bioengineer on AI in brain-machine interfaces, and using technology to treat disease

Explore More From Current Issue

Do Ivy League Athletes Outperform in Careers?

How does undergraduate participation in varsity sports enhance career success?