Government zoning policies restrict the supply of housing, thereby raising the price…
Government zoning policies — including include minimum lot sizes, maximum building heights, and planning approval processes — restrict the supply of housing, by design. Although these restrictions may have some benefits, they also raise the price of housing.
Anecdotal evidence suggests that zoning can have a huge effect on land values. For example, a 363-hectare site in Wyndam Vale (40 kilometers west of Melbourne) increased in value from $120 million to $400 million following its rezoning from rural to residential. Examples like this are common.
Such large increases in values as a result of zoning changes are inconsistent with the view that a physical shortage of land itself is the main cause of high land values and high housing prices — and instead point toward a high shadow price of government permission to build dwellings as a likely explanation.