Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices

TLDR

Manhattan’s housing prices, which have risen sharply since the 1990s, exceed supply costs despite a competitive construction industry and the high marginal cost of adding floors to new high‑rise buildings. The authors contend that land‑use restrictions are the primary cause of this price–supply gap. Evidence shows that similar regulatory constraints in other U.S.

Abstract

In Manhattan, housing prices have surfaced since the 1990s. Although rising incomes, lower interest rates, and other factors can explain the demand side of this increase, some sluggishness in the supply of apartment buildings is needed to account for high and rising prices. In a market dominated by high‐rises, the marginal cost of supplying more housing is the cost of adding an extra floor to any new building. Home building is a highly competitive industry with almost no natural barriers to entry, and yet prices in Manhattan currently appear to be more than twice their supply costs. We argue that land use restrictions are the natural explanation for this gap. We also present evidence that regulation is constraining the supply of housing in a number of other housing markets across the country. In these areas, increases in demand have led not to more housing units but to higher prices.