The Financial Times has a nice article on the causes of housing price inflation (House prices are rising as a percent of national income (from 10% to almost 60%).
A clever 2005 study by American economists Edward Glaeser and Joseph Gyourko compares the price of an extra square foot of land attached to a house (a slightly bigger back yard, perhaps) with the average price of a square foot of land under a house in the same city. If the problem is a natural shortage of land, the two prices should both be high because it is profitable to build on the back yards until the two prices converge.
That is not what happens, however. In the cities of coastal California, the average price of urban land is 10 times the price of land in a back yard because zoning laws make it impossible to turn one into the other. ...
The ratio of these two figures – as much as 10 to 1 – suggests only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions.
BOTTOM LINE: zoning restrictions transfer income from those who own houses to those who do not.
The desire to preserve open space and familiar, low-density cities is quite natural – but it is time to wake up to the enormous cost. ... If we want to make society fairer and more equal, just let people build.