In Colorado, escalating housing prices are well-documented. A lot of blame gets placed on investors buying houses for cash, making it harder for ordinary people to acquire their first home. However, the fundamental problem is simply a matter of economics – Colorado’s population is rising faster than new housing is built, and so prices go up. Why is this? Why can’t we build houses, condos, and apartments faster? Shortages of inputs are one reason – shortages of material and labor. However, perhaps a better explanation is land use codes.
Land use codes contain development review processes. So, what is it about land use codes that hinders construction of new housing? There are multiple forces at work. First, the applicable standards for even medium sized cities are extremely complex. It takes a lot of work on the part of the developer to comply. There may be multiple iterations of the project that come about though discussions with the municipalities’ planners. Second, complying with the standards may be economically difficult or impossible, and so the developer may completely abandon a project. Third, there is almost always some degree of public participation, where essentially any member of the public can deliver their thoughts on the project. A large project may be the subject of multiple hearings. Also, developers may not even be able to count on the stability of the land use code, as I wrote about here.
Finally, at least some of the criteria for approval are quite subjective (like “compatibility” with the surrounding neighborhood). Such is the biggest “feature” of land use codes that gets in the way of development. The subjective nature of approval criteria has two implications. First, it becomes easy for decisionmakers to say no, especially for controversial projects. This makes their decisions unduly vulnerable to political pressure. Second, the high degree of discretion makes it very difficult to overturn land use decisions in court.
Contrast that process with getting a building permit for a house. If you want a building permit, the local building department cannot refuse so long as your plans meet a set of objective criteria such as setbacks, height restrictions, etc. In other words, granting a building permit is more or less a ministerial act, not discretionary.
This is not to say that land use codes are bad – we need them. However, they are structured in a way that definitely distorts the market by crimping the supply of new housing units.