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Regulation of Land and Real Estate

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Regulation of Land and Real Estate. I. Market failures Public good :

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I. Market failures

Public good:

Goods the consumption of which by A does not prevent B from consuming them (radio broadcast. Defense. The cost of extending the service to another person is very low. The cost of excluding a person is very high. Pure public goods are rare in the urban contexts. Nonetheless, many goods, such as roads, parks, etc. have strong public good elements.

Merit goods:

Everyone would be better off if they are provided universally. Education, water, garbage collection.

Externalities:

Unpriced effects. Negative: pollution, noise, etc. Positive: landscape. Negative externalities will cause over production of bads. Positive externalities will cause under production of goods.

Monopoly:

Having one or a few strong supplier of a good or a service. Concerns are often made about a small number of land owners who control the market price. In urban areas, this is much harder to achieve. In fact, if there are large owners, they tend to be State institutions such as the military, the rail road station, etc.

slide3

II. Responses to market failures

  • Public intervention in real estate markets happens through:
  • Assigning and enforcing property rights
  • Market regulations
  • Land use planning
  • Taxation and subsidies
  • Provision of infrastructure
  • Participating in the real estate market
slide4

III. Land Use Planning

Which Forms Of Market Failure Is Land Use Planning

Intended To Fix?

Public Goods?

Merit Goods?

Externalities?

Monopoly?

slide5

III. Land Use Planning

  • Spatial Growth Controls: Green Belts, Agricultural land, Conservation Easements, etc.
  • Volume Controls: Floor to Area Ratio (FAR), Height, Set backs
  • Use Controls: (residential, commercial, industrial, recreational, office, mixed)
  • Quality Controls: Construction Standards, External Appearance Standards,
  • Infrastructure standards
  • Price Controls: Rent Control (?)
slide6

IV. The effects of land use regulations:

  • Do land use regulations matter?
  • US Evidence:
  • Effects of Growth Control
  • Effects of Volume Controls
  • Effects of Separating Uses
a stylized view of growth control
A Stylized View of Growth Control

Underdeveloped Area

Underdeveloped Area

Value = $100m

Value = $50m

Developed Area

Developed Area

Value = $750m

Value = $500m

Source:Fischel, (1990)

1984 Total Value = $600 million 1988 Total Value = $800 million

Effect of growth control introduced within the outside rectangle in 1986

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Hypothetical Relationship Between Aggregate Land Values and the Extend of Development in the Community: As the community grows, aggregate land value grows, but to a point

Total Land Value

Source: Fischel, (1990)

D

D* Extent of Development

slide9

Separating Uses: Which is better, A or B?

Depends on the Uses!

Community A

Community B

Dark areas are nonresidential areas

Source: Fischel, (1990)

slide10

Effect on Prices: Are Higher Prices Good or Bad?

Good... if they imply more attractive communities, higher productivity.

Bad... if they imply artificial restrictions on supply.

Also, what are the spillover effects? …higher prices in one place, lower prices in the other.

slide11

S’

S

Price

P

2

P

1

D

Q2

Q1

Quantity

Bad Effects: Supply Restriction

Source: Fischel, (1990)

slide12

Price

S

P

2

P

D’

1

D

Q1

Quantity

Q2

Good Effects: Demand Stimulation

Source: Fischel, (1990)

slide13

Is there a need for land use controls at all?

Evidence suggests that there is demand for some kind of land use controls whether publicly or privately provided. The evidence from Houston.

slide14

IV. The effects of Land use regulations: Developing Countries Evidence

  • Regulatory Framework
  • Market Conditions
    • Supply Side
    • Demand Side
    • The “Escape Valve”: Informality
  • The Development Process
slide15

Regulatory Framework:

  • Property rights can be poorly defined and/documented.
  • Land use regulations often copied from Colonial/Western western sources.
  • Mechanisms for modifying regulations less well developed.
  • Formal appeals mechanism less developed.
  • Limited enforcement capacity.
  • => Less Ability to Adapt to Changing Conditions
slide16

Market Conditions:

  • Supply Side:
  • Infrastructure provision constrained by limited public resources and limited private sector participation.
  • Public ownership of land or concentrated private ownership creates monopoly conditions.
  • Areas with contested rights can be removed from the market.
  • Limited ability to re-develop land in central areas.
  • Rigidities in FAR increases.
  • Rent control.
slide17

Market Conditions:

  • Demand Side:
  • High rural- urban migration rates.
  • . High population growth and household formation.
  • High income disparities.
  • Investment in land as hedge against inflation.
slide18

Market Conditions:

  • The Escape Valve: Informal Land Markets
  • Illegal occupancy of land (invasion, squatting)
  • Illegal conversion of rural land to urban land
  • Non-compliance with subdivision and service regulations
  • Non-compliance with volume standards
  • Illegal transfer of title
slide19

Development Process:

Formal Development:

Zoning ---> Trunk service provision ---> Site development ---> Building ---> Occupation

Informal Development:

Occupation ---> Building ---> Trunk services ---> Site services ---> Planning/Zoning

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V. Sao Paulo Case Study

  • Zoning Law allows FAR of 1 for 83% of the city lots, and of 4 only for 10% of lots.
  • 144 million square meters of empty serviced lots capable of supporting 7.5 million people
  • Majority of dwellers are living in unserviced land.
slide21

Sao Paulo

Macrozoning

Urban Zone

High Density Zone

Low Density Zone

Rural Zone

slide22

Proposed Master Plan (1994)

  • Macrozoning principles
  • Base FAR ratio
  • Urbanization Fund
  • Buildable area stock
  • Land use preferences
slide23

V. Conclusions

  • Process: More attention to how regulations come about, how can they be changed.
  • Information: The need to monitor markets and adjust regulations
  • Enforcement: A scarce resource, use it wisely
  • Illegality offers reformers insight on how to reform land regulations:
  • The expected benefits of breaking the law > the costs of penalty x the probability of being caught.
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