How Building Regulations Subsidize Mansions

From Alex Tabarrok of Marginal Revolution.

"Regulations that prevent land from being fully developed raise the price of housing. That’s true but land use regulations can also make some types of housing less expensive. In particular, Jaap Weel has a good post explaining how land regulations subsidize mansions.

Consider the buildings below: a mansion on a 1 acre lot in Atherton, and a 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City. The mansion just sold for $6m. The condo building, when finished, will probably fetch hundreds of millions.

If it weren’t for Atherton’s zoning code, you’d never be able to buy that mansion for a mere $6m. A developer that wanted to tear it down and build condos could bid far more than that. But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.

In a market economy bidding tends to move resources from low-valued uses to high-valued uses. Regulations that prevent bidding freeze resources into low-valued uses–that’s bad for the resource owners and bad for society as the total value of production is reduced but it can be good for the consumers of low-valued uses.

Addendum: For more on floor area ratio regulations, see my video on skyscrapers and slums in Mumbai."

Wikipedia on Floor area ratio.

"Floor area ratio (FAR) is the ratio of a building's total floor area (gross floor area) to the size of the piece of land upon which it is built. The terms can also refer to limits imposed on such a ratio through zoning.

As a formula FAR = (gross floor area) / (area of the plot)"