Effects of Zoning in New York City

  • Rollet, Vincent, 2025, “Can We Rebuild a City? The Dynamics of Urban Redevelopment,” SSRN Working Paper no. 5205801, June.

Zoning reduces housing supply and increases costs, but it is not the only supply constraint. Even in Houston, famous for its lack of zoning, the supply elasticity of housing has declined in recent years because greenfield development within reasonable driving distance of the city center is approaching depletion, and the costs of infill housing are higher. (See Working Papers, Spring 2023.) So, both zoning and commuting distance to the city center matter for housing supply and prices.

What about a city with especially tight zoning and other housing restrictions? In this paper, Rollet examines the characteristics of buildings on all 833,000 parcels in New York City between 2004 and 2022. About 22,000 parcels were redeveloped during those 18 years.

New buildings were on average 3.4 times larger than the ones they replaced. And redevelopment seldom occurred if existing floorspace was at the maximum density allowed by zoning. Relaxing zoning constraints increased redevelopment, particularly on parcels where redevelopment was most profitable: those with high floorspace prices and low levels of existing development.

Rollet constructs a general equilibrium model to estimate the effect of zoning on redevelopment through the year 2060. In the absence of zoning changes, the model projects a 13 percent growth of New York’s floorspace between 2019 and 2060. If zoning regulations were completely removed (excluding parcels that are landmarked, in historic districts, or in flood zones), the city would have 72 percent more floorspace by 2060. But relaxing zoning would decrease rents by only 13 percent by 2060 if zoning were completely removed. In Rollet’s model, additional construction would trigger migration to the city, dampening local rent reductions while contributing to diffuse rent declines in other cities.

The neighborhoods whose growth are most distorted by zoning are those with limited density despite high floorspace prices: Western Brooklyn and Northern Queens. In contrast, upzoning most parts of the Bronx or Midtown Manhattan would not substantially boost construction. —P.V.D.

Rental Housing Returns

  • Damen, Sven, et al., 2025, “An Alpha in Affordable Housing?” NBER Working Paper no. 33470, February.

How do the owners of rental housing fare? The surprising answer is that residential properties with the lowest rent levels provide the highest investment returns to their owners, according to data from the United States and two European countries.

The net rental yield, which subtracts costs associated with maintaining and managing the property, property taxes, and revenue loss from tenant turnover and tenant non-payment, is 0.9 percent higher in the first than in the tenth decile of rent prices in Belgium, 1.1 percent in the Netherlands, and 0.6 percent per year in the United States.

The capital gains differential between the first and tenth deciles of the rental price distribution is 0.84 percent per year in Belgium, 2.5 percent in the Netherlands, and 3.25 percent in the United States.

The total annual returns are 1.74 percent higher in Belgium, 3.60 percent higher in the Netherlands, and 3.86 percent higher in the United States for low-rent than high-rent properties. Investors in low-rent properties earn significantly higher returns.

Are the persistent high returns a reward for business cycle risk? That is, do lower-rent properties do worse in recessions? Quite the opposite: Low-rent properties’ net cash flows fall by less, or even rise, in recessions. An affordable rental becomes more valuable in bad times. This counter-cyclical property of rent makes low-tier properties a hedge from investors’ perspective. Hedges should earn average returns that are lower rather than higher.

Are persistent high returns a reward for regulatory risk? Again, the authors find no evidence that states with stronger tenant protections have higher returns or return profiles that slope downward more steeply (with respect to rental price).

So why aren’t the high returns competed away? The authors attribute this to a series of “frictions.” Diversified high-rent investors do not expand their portfolios to include low-rent properties because they fear reputational risk for being slumlords. Existing investors in low-rent housing lack access to external equity capital and can’t scale up. And such investors don’t own properties across cities. “This constellation of frictions results in an equilibrium where unincorporated, medium-sized investors active in areas with a preponderance of low-income rentals persistently earn high risk-adjusted returns.” —P.V.D.

GSEs and Mortgages

  • Flanagan, Thomas, 2025, “Do GSEs Subsidize Mortgage Lending?” SSRN Working Paper no. 5252921, May.

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) transform credit-risky mortgages into credit-risk-free mortgage-backed securities (MBS) by guaranteeing the default risk in exchange for a fee from the lender. Do Fannie and Freddie subsidize homeownership by charging below-market rates for this insurance?

To answer this, Flanagan examines the Freddie Mac cash flows from 1999 to 2018. If the present value of cash flow is negative, Freddie does not receive large enough premiums to compensate it for insuring the default risk. If the cash flow has a zero or positive present value, the premiums are fairly priced.

The author finds that, over the entire period studied, the present value cannot be distinguished from zero. But before the financial crisis of 2008, there was an annual subsidy of about 20 basis points (0.2 percent), while after the crisis there was an annual profit of about the same magnitude. So, there once was a subsidy for homeownership, but no longer.

Further evidence of post–financial crisis Freddie profits is found in the so-called “jumbo” loan market for mortgages (i.e., mortgages that are “non-conforming” because of the large amount borrowed, lower borrower creditworthiness, or other factors). These loans can only be served privately. Using a plausibly exogenous measure of whether loans are just over or under the GSE loan-size limits, the author confirms that jumbo loans have lower rates than conforming loans in the post-crisis period. This, too, indicates that Freddie provides no current subsidy to homeownership. —P.V.D.

Pre-Emptive Rights for New Shares

  • Lawrence Haar and Andros Gregoriou, 2025, “Pre-Emptive Rights—A Theoretical and Empirical Examination,” Review of Law & Economics 21(1): 5–43.

European regulators often favorably compare their more tightly controlled capital markets to the “cowboy capitalism” of the United States. An example of this involves a principal–agent problem in the issuance of new shares in a firm: When management (the agent) issues new shares, existing shares are diluted, meaning existing shareholders (the principal) experience a decrease in voting power and downward pressure on share price. European markets thus grant existing shareholders “pre-emptive rights”: a right of first refusal to purchase the new shares, often at a discount. In US markets, there are few instances of pre-emptive rights, so shareholders generally must turn to litigation if they believe management has violated its fiduciary duty by issuing new shares.

The strong form of the Efficient Market Hypothesis (EMH) suggests the risk of dilution is already capitalized in share prices on US markets, making regulation unnecessary. Creating a US pre-emptive right would thus only produce a one-time wealth gain for existing shareholders (who previously purchased their shares at lower prices because they recognized the possibility of future issues), while new and future share purchasers would pay higher prices for shares.

The authors test this idea empirically using US, European Union, and United Kingdom market data for rights issues. They find that EU share prices fell just like US share prices after the announcement of share issuance, while UK prices rose very slightly. The change in prices in all three markets was modest. Those results support the EMH notion that risk of dilution is already capitalized into US markets’ prices while the enhanced protection in European markets comes at the cost of lower returns. Notwithstanding good intensions, markets are self-regulating. —T.A.F.