Struggling For Rents

In many metropolitan areas around the world there exist binding restrictions on residential development that are regularly adjusted to the increasing housing needs of the urban population. Such adjustments of direct land use regulations often give rise to significant scarcity rents. These rents are somehow distributed between the parties involved in the development process: the owners of the land where building restrictions are relaxed, the municipal authorities that determine the restrictions, the developers of the land and the residents of the newly constructed housing. The institutional and economic constraints and the behaviour of the various actors within the limits imposed by these constraints determine the outcome of the development process. The purpose of this paper is to study the efficiency and distributional properties of the resulting outcome. To do this, we develop an economic model that allows us to analyse the various issues within the inst itutional context of the Netherlands. The model is consistent with two stylized facts about land use and housing supply in that country: the absence of a substantial response of housing construction (both in terms of quantity and quality) to the increase in the real house price that has occurred since 1970 and the discrepancy between land prices and the willingness to pay for land in the heavily urbanized western part of the country. In an attempt to explain the frequent occurrence of delays in the construction of new housing we extend the model by introducing uncertainty with respect to the development of house prices. This introduces new issues: adaptation of existing plans in response to changing market conditions (which is time-consuming) and waiting for improvements in market opportunities may become attractive strategies.