Space and the city


land, advised Mark Twain; they’re not making it any more. In fact, land is not
really scarce: the entire population of America could fit into Texas with more
than an acre for each household to enjoy. What drives prices skyward is a
collision between rampant demand and limited supply in the great metropolises
like London, Mumbai and New York. In the past ten years real prices in Hong
Kong have risen by 150%. Residential property in Mayfair, in central London,
can go for as much as £55,000 ($82,000) per square metre. A square mile of
Manhattan residential property costs $16.5 billion.

Even in these great cities the
scarcity is artificial. Regulatory limits on the height and density of
buildings constrain supply and inflate prices. A recent analysis by academics
at the London School of Economics estimates that land-use regulations in the
West End of London inflate the price of office space by about 800%; in Milan
and Paris the rules push up prices by around 300%. Most of the enormous value
captured by landowners exists because it is well-nigh impossible to build new
offices to compete those profits away.

The costs of this misfiring property
market are huge, mainly because of their effects on individuals. High housing
prices force workers towards cheaper but less productive places. According to
one study, employment in the Bay Area around San Francisco would be about five
times larger than it is but for tight limits on construction. Tot up these
costs in lost earnings and unrealised human potential, and the figures become
dizzying. Lifting all the barriers to urban growth in America could raise the
country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion. It
is difficult to think of many other policies that would yield anything like


Two long-run trends have led to this
fractured market. One is the revival of the city as the central cog in the
global economic machine (see article). In the 20th
century, tumbling transport costs weakened the gravitational pull of the city;
in the 21st, the digital revolution has restored it. Knowledge-intensive
industries such as technology and finance thrive on the clustering of workers
who share ideas and expertise. The economies and populations of metropolises
like London, New York and San Francisco have rebounded as a result.

What those cities have not regained
is their historical ability to stretch in order to accommodate all those who
want to come. There is a good reason for that: unconstrained urban growth in
the late 19th century fostered crime and disease. Hence the second trend, the
proliferation of green belts and rules on zoning. Over the course of the past
century land-use rules have piled up so plentifully that getting planning
permission is harder than hailing a cab on a wet afternoon. London has strict
rules preventing new structures blocking certain views of St Paul’s Cathedral.
Google’s plans to build housing on its Mountain View campus in Silicon Valley
are being resisted on the ground that residents might keep pets, which could
harm the local owl population. Nimbyish residents of low-density districts can
exploit planning rules on everything from light levels to parking spaces to
block plans for construction.

good thing, too, say many. The roads and rails criss-crossing big cities
already creak under the pressure of growing populations. Dampening property
prices hurts one of the few routes to wealth-accumulation still available to
the middle classes. A cautious approach to development is the surest way to
preserve public spaces and a city’s heritage: give economists their way, and
they would quickly pave over Central Park.

However well these arguments go down
in local planning meetings, they wilt on closer scrutiny. Home ownership is not
especially egalitarian. Many households are priced out of more vibrant places.
It is no coincidence that the home-ownership rate in the metropolitan area of
downtrodden Detroit, at 71%, is well above the 55% in booming San Francisco.
You do not need to build a forest of skyscrapers for a lot more people to make
their home in big cities. San Francisco could squeeze in twice as many and
remain half as dense as Manhattan.


Zoning codes were conceived as a way
to balance the social good of a growing, productive city and the private costs
that growth sometimes imposes. But land-use rules have evolved into something
more pernicious: a mechanism through which landowners are handed both
unwarranted windfalls and the means to prevent others from exercising control
over their property. Even small steps to restore a healthier balance between
private and public good would yield handsome returns. Policy makers should focus
on two things.

First, they should ensure that
city-planning decisions are made from the top down. When decisions are taken at
local level, land-use rules tend to be stricter. Individual districts receive
fewer of the benefits of a larger metropolitan population (jobs and taxes) than
their costs (blocked views and congested streets). Moving housing-supply
decisions to city level should mean that due weight is put on the benefits of
growth. Any restrictions on building won by one district should be offset by
increases elsewhere, so the city as a whole keeps to its development budget.

Second, governments should impose
higher taxes on the value of land. In most rich countries, land-value taxes
account for a small share of total revenues. Land taxes are efficient. They are
difficult to dodge; you cannot stuff land into a bank-vault in Luxembourg.
Whereas a high tax on property can discourage investment, a high tax on land
creates an incentive to develop unused sites. Land-value taxes can also help
cater for newcomers. New infrastructure raises the value of nearby land,
automatically feeding through into revenues—which helps to pay for the

Neither better zoning nor land taxes
are easy to impose. There are logistical hurdles, such as assessing the value
of land with the property stripped out. The politics is harder still. But
politically tricky problems are ten-a-penny. Few offer the people who solve
them a trillion-dollar reward.

* Original