Anyone familiar with housing affordability in the Washington (DC-VA-MD-WV) metropolitan area is aware that prices have risen strongly relative to incomes in the last decade
However, a recent Washington Post commentary by Roger K. Lewis both exaggerates the contribution of higher construction costs and misses the principal factor that has driven up the price of housing — more restrictive land-use regulations.
Lewis compares construction costs in the early 1970s to current costs and finds that they are approximately 6 times as high. In fact, however, when the R. S. Means construction cost index for locations in the metropolitan area are adjusted for inflation, the increase is more like 15% (1970 to 2007).
Lewis also indicates that construction costs have risen faster than the “relatively flat income curve.” In contrast, Census Bureau data indicate that median household incomes in the Washington metropolitan area have increased more than 30% since the early 1970s, after adjustment for inflation. House construction costs are the flatter of the two, not incomes.
While Lewis’ focus is affordable housing, costs in this low income sector are impacted by many of the same factors that drive overall housing affordability (overall house prices relative to incomes).
Lewis does not consider the huge cost increase in the non-construction costs of housing. In the Washington metropolitan area, we have estimated that the land and the regulatory costs for a new house have been driven to more than 5.5 times the level that would be expected in a normal regulatory environment (see the Demographia Residential Land & Regulation Cost Index). The problem is that the restrictive land-use policies, such as the Montgomery County agricultural reserve, similar regulations in other metropolitan area counties and the large lot building restrictions in Loudoun County have driven the price of land up substantially, and with it, the price of housing. We estimate that more restrictive land use regulations have driven the price of a new house up approximately $75,000.
Not surprisingly, Washington’s Median Multiple (median house price divided by median household income) remains more than a third above the 3.0 historic norm, at 4.0, even after the burst of the housing bubble. So long as governments in the Washington, DC area continue to strictly ration land for development, higher than necessary costs will continue to plague both housing affordability and affordable housing.