Marginal and Average Prices of Land Lots Should Not Be Equal: A Critique of Glaeser and Gyourko's Method for Identifying Residential Price Effects of Town Planning Regulations

Abstract

Glaeser and Gyourko’s (2003) (henceforth G&G’s) method of measuring the gap between marginal and average land prices of housing lots has become a popular way of demonstrating the degree to which planning controls, or “regulatory taxes”, increase residential land prices. This has led policy-makers across the globe to focus on town planning as a critical determinant of rising home prices. We show, however, that G&G’s method shows no such thing. Instead, even according to their own model, the price gap is a product of the location premium of land, diminishing returns to buyers of residential land size, and historical city development patterns. Additional flaws and contradictions identified in their model are (1) that they confuse total lot supply with land supply per lot, (2) that minimum lot size restrictions will increase the marginal land value compared to the average rather than decrease it, (3) that the economic incidence of taxes on land matters to the outcome whereas they claim it does not, and (4) that there are no subdivision incentives for landowners. Standard price-taking models of residential land markets contain none of these flaws and provide a better interpretation of land price patterns. Empirically, we show that G&G’s method will find a high “regulatory tax” even in the absence of regulatory constraints using both simulated data and historical land sales data from colonial Australia and ancient Mesopotamia. This exercise demonstrates that G&G’s method cannot differentiate between planning-constrained and unconstrained development patterns. In short, there is no information regarding the effect of planning controls on the supply of new dwellings in a comparison of marginal and average land prices and this method should not be relied upon to inform planning and housing policy decisions.