Housing Affordability Drives the Cost of Living

The key to both housing affordability and an affordable standard of living is a competitive land market that makes it possible to produce housing at production costs, including competitive profit margins. Economists Edward Glaeser of Harvard University and Joseph Gyourko of the University of Pennsylvania, have defined this concept as the minimum profitable production cost (MPPC). For single detached houses in the United States, their research indicates that land (with associated infrastructure) costs 20% or less of the MPPC final house and land sale price. Glaeser and Gyourko consider a housing market to be functioning well if houses are produced at no more than 25 percent above the MPPC. Glaeser and Gyourko find little change in construction costs over the period that unaffordable markets have developed. The key difference is that land costs have risen substantially. For example, Glaeser and Gyourko find that virtually all of the costs above minimum production costs in the San Francisco metropolitan area are in land. According to their estimates (adjusted to allocate profits based proportionally between construction and land), land in the San Francisco metropolitan area is valued at 10 times the cost that would be expected in a well functioning housing market (Figure 2). Rather than representing 20 percent of the final cost, they estimated land represents more than 70 percent of the cost. The San Francisco market, with its strong urban containment policies had been well-functioning before the imposition of restrictive land use regulation, starting about 1970, when Median Multiples were under 3.0.