Filtering Across Space and Time: A Scale Synthesis of Housing Supply

Quantity change at a local spatial scale can be redistribution at wider spatial scale

Hidden at the heart of the conversation about planning regulations and housing are two competing economic claims.

First, a quantity theory — a claim that zoned density rules decrease (and upzoning increases) the rate of housing production and hence the stock of homes.

Second, a distribution theory — a claim that zoning determines the locational distribution of new housing and what it looks like (including its density), without reducing the rate of housing production.

On the surface, differentiating between these views seems easy. But it is not.

Here, we explain how elements of truth and evidence favour both this thesis (quantity theory) and anti-thesis (distribution theory), and how we can reconcile these in a synthesis view — what we call the scale synthesis.

That view is that at the smallest spatial scale, zoning and planning rules have only quantity effects and no distributional effects, and at the largest spatial scale, zoning and planning rules have only distributional effects, but no quantity effects.

The spatial scale of any analysis will determine how much of each effect is observed — whether zoning affects quantity or distribution depends on the ruler applied.

Time scales matter similarly.

Over short time scales, zoning and planning change might exert effects on quantities and prices — bringing forward or delaying development, dampening or raising prices. But over a long enough time scale, other factors determine equilibrium quantities in prices, as in other asset markets.

Scale matters. Scale synthesises competing claims about the effects of regulation on markets.

Our scale synthesis implies that the observed effects of planning and zoning rules on the outcomes of interest for housing affordability — quantity and price — will mostly reflect the spatial and time scales used in measurement, not the underlying economic forces.

This makes empirical analysis of housing markets extremely difficult, with many of the same troubling difficulties as empirical macroeconomics.

For example, we know that when one company fires people, the number of jobs at the company, and maybe even in that sector, will fall, but the total number of jobs in the economy may not, once job substitutions (general equilibrium effects) are taken into account.

The equivalent mechanism in housing markets is called filtering, or more generally, substitution (a term more common amongst economists).

We accept consumer-side filtering (substitution) as obvious.

When a household moves into a new home, that frees up another home, which allows for another household to relocate. As is commonly argued, producing new luxury apartments will free up housing elsewhere in the market via moving chains. Since people who move into any new home come from somewhere else, the market fills up the housing produced.

But production-side filtering happens too, for equally obvious reasons.

When zoning or planning rules allow only detached homes or low-rise buildings in areas where the profit-maximising site use is a higher density building, housing developers will produce in alternative locations and/or develop more sites to a lower density than they would have otherwise.

In brief, the equivalent of moving chains on the producer side meet household moving chains on the consumer side to determine a market equilibrium with a spatial dimension — an equilibrium for where homes are built, of what type, at what price, and with which residents. Households substitute by moving between built dwellings, and developers substitute by moving where dwellings are built (and what they look like). Spatial variation in rents and prices maintains and reflects this equilibrium, balancing these two forces.

The debate in action

Before we explain the scale synthesis and use a numerical illustration to demonstrate it in action, it is worth seeing how policy claims embed one or the other of these theories while rarely articulating them.