The former causes the latter to rise, as this article from New Geography notes.
In a New York Times column entitled “Wrong Way America,” Nobel laureate Paul Krugman again reminds us of the high cost of overzealous land-use regulations. Krugman cites the work of Harvard economist Ed Glaeser and others in noting that “high housing prices in slow-growing states also owe a lot to policies that sharply limit construction.” He observes that “looser regulation in the South has kept the supply of housing elastic and the cost of living low” (Note 1).
Supply is the Issue
Krugman specifically cites Houston, Atlanta and the Sunbelt for their lower house prices and less restrictive housing regulation. In contrast, he points to New York and California as having high house prices and greater housing regulation. Krugman further observes that the secret of growth is “not getting in the way of middle- and working-class housing supply.”
This concern about housing supply is echoed by former World Bank principal planner Alain Bertaud who notes that the solution to the housing affordability problem “is to increase the supply of land” (Note 2). Bertaud further points out that “Restricting land supply and imposing too many controls also stifles business growth.”
Wrong Way Cities
However, the real problem is not a “Wrong Way America” that “gets in the way of middle- and working-class housing supply, but “Wrong Way Cities” (metropolitan areas) that have adopted land use regulations severely restrict the supply of land for urban development. The price increasing policies are often referred to as “smart growth” or “urban containment” and routinely involve restricting the supply of land for development through urban growth boundaries, large lot suburban, and exurban zoning and other strategies.
This destroys what Brookings Institution economist Anthony Downs (p. 36) calls the “competitive supply of land.” The result is higher house prices, because, all things being equal, the price of a good or service is likely to increase if its supply is severely limited. Otherwise, OPEC oil supply restrictions would never have raised concern.
Where more traditional, liberal land use policies remain, housing remains affordable. For example, during the housing bubble, an analysis by the Federal Reserve Bank of Dallas attributed the lower, and still affordable house prices in Atlanta, Dallas-Fort Worth, and Houston to avoiding more restrictive land use polices: “… these markets have weathered the increased demand largely with new construction rather than price appreciation because of the ease of building new homes.”
Retrieved September 10, 2014 from http://www.newgeography.com/content/004515-wrong-way-cities