The influence of real estate interest groups

Summary:

This contribution presents an economic analysis of real estate interest groups. These groups are capable of influencing the supply of housing by acting on urban growth.

Many groups have an interest in influencing real estate markets by implementing  » Urban Growth Controls » to encourage changes in real estate law and regulations, and in the way they are applied.

For example, obtaining a building permit may be subject to a minimum construction size imposed per plot of land. This measure constrains the supply of new housing and keeps prices above the competitive equilibrium level. This is the principle of the « Regulatory Tax, » which corresponds to the difference between the actual market price and the price if the market were competitive.

Interest groups favoring a slowdown in urban growth

There are three types of interest groups: individuals who do not want to « pay the cost » of urban growth, resident homeowners, and landowners of already developed land.

The first group refers to individuals who do not want to « pay the cost » of urban growth because of a deterioration in their quality of life. This deterioration may be due to construction work or congestion effects linked to population growth.

To defend their interests, these individuals will either form an interest group or politically sanction, during the electoral process, the local policy-maker behind the urban growth projects.

These two forms of action can result in an extension of urban boundaries or, for cities of limited size, a halt to urban growth. This translates into a limitation on the supply of new housing, keeping real estate prices above their equilibrium level.

This resistance from the first interest group will be particularly strong among resident homeowners. They have the same incentives to protect their quality of life as resident tenants, but they also have another incentive: to protect the value of their property.

According to Fischell (2001), homeowners have very strong incentives to control municipal teams to ensure that no project reduces the value of their property. However, uncontrolled urban growth would hurt prices.

Owners of developed land also have an interest in supporting the introductionof urban growth controls. They are « standard » producers whose prices (property prices, rent, or rents paid to them) depend on supply and demand. Restricting supply and blocking the entry of new competitors ensures them a more favorable equilibrium price. Urban growth controls can therefore be analyzed as quotas (Richer 1995).

This group of owners, along with their counterparts, the owners of undeveloped land, are crucial to understanding the establishment ofurban growth controls; since Hilbert & Robert-Nicoud (2006), they have been referred to as « influential landowners. »

Opposing these three groups are two others that seek to promote urban growth: owners of undeveloped land and those who make up the « Growth Machine. »

Interest groups promoting accelerated urban growth

These owners of undeveloped land want to maximize the value of their land, which is mainly determined by its buildability. These owners of undeveloped land appear to be limited in their activities due to the imposition of quotas on new housing. They will therefore seek to prevent the introduction of urban control.

The concept of the « Growth Machine » was defined by Molocht (1976) to refer to companies, institutions, or assets that profit from urban growth. The « Growth Machine » is the last interest group involved in the battle for urban growth. Although it is composed of a diverse range of actors, the following are traditionally associated with the « Growth Machine »:

– Construction companies, for whom the imposition of urban controls represents a brake on activity.

– The banking sector, for whom urban growth encourages the growth of real estate loans and their client portfolios.

– Unoccupied assets and unions, which associate urban growth with the creation of new jobs.

How can the influence of real estate interest groups be measured?

Scientific literature faces two difficulties in measuring the influence of interest groups on the real estate market.

– The first difficulty is effectively measuring all urban controls, which can take different forms between two cities. This problem is all the more difficult to solve because two cities with identical regulations may differ in how they apply those regulations.

The second difficulty is measuring the influence of interest groups. This variable is not directly observable. For example, using the size of a group as an estimate is likely to create problems of reverse causality.

To address these challenges, econometricians have developed two complementary approaches.

The first approach is to select an « Urban Growth Control. » This variable can be the number of plots of land declared « buildable » by a municipality or the local infrastructure tax. Once the variable has been selected, the impact of interest groups on it is measured. This relationship is used to determine the influence of interest groups on Urban Growth Control and, therefore, on urban growth and real estate market prices. The two main findings of this literature are as follows:

– landowners exert significant influence

– the influence of resident homeowners is much more mixed[3].

This literature has also revealed a few stylized facts, in particular:

– greater political competition would mean less construction.

– Cities on the left of the political spectrum would impose more urban growth control.

– The most indebted cities would accept more housing starts.

The second approach aims to measure the « regulatory tax. » The methodology is as follows: in the absence of any regulation, the price of a home should be the price of its land and its construction cost. This makes it possible to estimate the price at which a home would have been sold in the absence of regulation; the level of the « regulatory tax » is obtained by comparing the price obtained with the actual price of a home.

Three main findings specific to the United States emerge from the limited empirical studies on this subject:

– Glaeser et al. (2005) show that real estate prices in Manhattan are 50% higher than they would be if competition alone prevailed.

– Cheung et al. (2009) show that the increase in the regulatory tax accounts for at least half of the price change between 1995 and 2005 in certain regions of the US. This « tax » can reach more than €100,000 in some American localities.

– Cheshire and Hilbert (2007) show that these regulations have an impact not only on residential housing but also on commercial premises. According to their estimates, the tax amounts to 8% of the price of offices in London (excluding the City), 4.37% in Frankfurt, and 3.05% in Paris (excluding La Défense). Brussels is the least regulated city in Europe, with a « tax » of only 0.68%. In addition, commercial areas managed in the interests of businesses have a lower tax rate than other areas in the same locality, such as the City of London (4.49%) or La Défense in Paris (1.67%)[4].

Conclusion:

Econometric studies show not only that certain groups influence the level of urbanization growth, but also that these activities have a significant effect on real estate prices.

Thus, the activity of these groups is an important determinant in the valuation of real estate prices. Regulatory taxes can account for up to 50% of real estate prices in some cities.

Notes: