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economics of the situation as well as the history— and to scrutinize alternative explanations of these patterns.

Economics

Many things can cause housing prices to rise, including anything that affects either supply or demand. Rising incomes and growing population obviously affect the demand for housing. Supply is affected to the extent that the land area is so built up that litde land remains to build on in a given

area. The	innumerable legal restrictions and			bans on building also affect
supply, as	does the	ease of delaying	construction		with environmental,
aesthetic	or other	objections raised	by	officiais,	non-governmental

organizations, or individual citizens. Even when these objections are found to be groundless or are otherwise over-ruled, delay in itself can cost millions of dollars when vast sums of borrowed money are financing a project and interest has to be paid on that money, regardless of whether the building is proceeding on schedule or is stalled by claims that take time to investigate or adjudicate.

How do we know which of these factors is responsible in any given case? Only by examining each of these possibilities in each specific case.

If population is growing rapidly in a given area, it might seem that this would tend to cause more demand for housing and therefore rising housing prices in that area. But neither supply nor demand by itself can explain prices, which are determined by the combined effects of the two. As one economic study pointed out: "The population of Las Vegas almost tripled between 1980 and 2000, but the real median housing price did not change."3 1 However, the average price of houses in Palo Alto, California, nearly quadrupled in one decade without any increase in population at all.3 2 The difference is that severe building restrictions began in Palo Alto during that decade— the 1970s— but not in Las Vegas, where builders could simply construct new homes as the demand for housing increased. But not one new home was built in Palo Alto during the decade when its housing prices nearly quadrupled.

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A similar pattern showing housing prices affected more by building restrictions than by increased demand for housing was shown in New York City, where "tens of thousands of new units were built in Manhattan during the 1950s, while prices remained flat."33 In later years, especially after severe building restrictions began in the 1970s, that all changed: "In spite of skyrocketing prices, the housing stock has grown by less than 10 percent since 1980" in Manhattan, according to an article in an economics journal 25 years later.3 4 Moreover, the proportion of new housing units in buildings 20 stories tall and higher, which had been increasing in Manhattan from the beginning of the twentieth century until 1970, suddenly reversed and began a decades-long decline.3 5

Height restrictions are among the many building restrictions which can be imposed, either direcdy or by allowing complaints by neighbors to initiate cosdy construction delays while these complaints are adjudicated before various authorities. Those who make such complaints pay litde or no costs, even when their complaints turn out to be completely unfounded and cost millions of dollars in construction delays to builders— and ultimately to those who buy or rent the housing that is being built.

Height restrictions have both economic and social consequences. Since the cost of housing includes both construction costs and the cost of the land on which the housing is built, the taller an apartment building on a given plot of land the lower the land cost per apartment. In places where the cost of the land exceeds the cost of constructing housing, height restrictions can mean that much higher rents or condominium prices must be charged. If economic considerations would lead to the building of a 20-story apartment building but local laws restrict the height of buildings to 10 stories, then twice as much land will be required to house the same number of people. Moreover, if a community cannot expand upward, then it must expand outward, leading to longer commutes to work, more highway congestion and, almost inevitably, more highway fatalities. All that is in addition to higher rents.

Income is another factor in housing prices. With or without population growth, rising incomes can lead to a rising demand for houses by people who would otherwise be living in apartments and a rising demand for bigger

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or better houses by people otherwise living in more modest homes. To what extent does income growth explain housing prices in those places where these prices have skyrocketed?

Prior to 1970, housing prices in California were much like housing prices in the rest of the country, even though California housing prices later rose to become three or more times housing prices in the country at large. Since this meteoric rise in California housing prices began in the 1970s, how did California income increases compare to national income increases during that decade? Income rose less sharply in California during that decade than in the country as a whole.3 6 Meanwhile, in Houston during the late 1970s, "average incomes surged well ahead of the rest of the US" but nevertheless Houston remained "one of the fifteen least-expensive housing markets of the 319 US regions examined by Coldwell Banker." As already noted, Houston does not even have zoning laws, much less the large array of housing restrictions found elsewhere. The city grew rapidly but housing prices rose less than in the country as a whole. Adjusting for inflation, real housing prices in Houston in the early twenty-first century were found to be "15 percent below the 1980 peak."3 7

Unlike Houston, Dallas does have zoning laws but their effect is more limited than in other communities where zoning is an instrument of severe building restrictions. Over all, Dallas, like Houston, "has had little in the way of growth management." The result:

Dallas has consistently maintained family incomes about 10 percent above the US average, while its housing prices are generally lower than the US average.38

One of the obvious factors in the price of housing is the cost of constructing homes and apartment buildings. These construction costs can vary from place to place and from one time period to another, especially as people begin buying bigger and higher quality housing with more associated amenities, such as garages and air conditioning. The question here is: How far does this factor go toward explaining housing prices in those communities where housing prices are some multiple of what they are in other communities?

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As already noted, in Palo Alto, California, where home prices nearly quadrupled during the decade of the 1970s, there was not a single new home built during that decade, so this was simply a question of the same existing homes selling for far more than before, and obviously had nothing to do with construction costs, since there was no new construction. Many other communities with strikingly higher housing prices than the national average, and sharply rising housing prices as well— Boston, Boulder, San Diego, and San Francisco, for example— have likewise had severe limits on new construction, so that construction costs there cannot explain skyrocketing housing prices in these communities, since so little new construction was permitted.

An economic study of 21 housing markets around the country found that, in 12 of these markets, the cost of housing exceeded the combined costs of construction and the land by no more than 10 percent. It was precisely in other communities with extremely high housing prices that these prices exceeded construction and land costs by more than 10 percent— as high as 33 percent to 50 percent in Los Angeles, San Francisco, Oakland, and San Jose. In midtown Manhattan, the prices charged for condominiums have been double their construction and land costs.3 9 A New York Times story provided a glimpse of the market for condominiums in Manhattan:

Katalin Shavely, a 30-year-old bedding designer in Manhattan, devotes her weekends to scanning the classifieds and attending open houses, searching for just the right one-bedroom apartment for less than 1750,000. She can't find it.4 0

Where builders are allowed to construct homes and apartments without severe government restrictions, even growing populations and rising incomes do not cause housing prices to shoot up, because the supply of newly constructed housing keeps up with the growing demand, as in Las Vegas or Houston. High profit margins, over and above the costs of construction and land, attract more builders who wish to share in these lucrative returns on investments in home building. This increased supply of new housing then drives prices back down or else prevents them from rising in the first place. There is little opportunity for housing prices to continue