Editor: David Reiss
Brooklyn Law School

November 4, 2014

Regulation and Housing Supply

By David Reiss

Gyourko and Molloy have posted Regulation and Housing Supply to SSRN.  Unfortunately, it is behind a paywall (although it is also available at NBER if your library has access and an earlier draft can be found here). The abstract of this book chapter states that it reviews the scholarly literature on the causes and effects of local government regulation that “influences the amount, location, and shape of residential development.” The abstract continues,

We begin with a discussion of how researchers measure regulation empirically, which highlights the variety of methods that are used to constrain development. Many theories have been developed to explain why regulation arises, including the role of homeowners in the local political process, the influence of historical density, and the fiscal and exclusionary motives for zoning. As for the effects of regulation, most studies have found substantial effects on the housing market. In particular, regulation appears to raise house prices, reduce construction, reduce the elasticity of housing supply, and alter urban form. Other research has found that regulation influences local labor markets, and household sorting across communities. Finally, we discuss the welfare implications of regulation. Although the large positive externalities of some specific rules are clear, the benefits of more general forms of regulation are very difficult to quantify. On balance, a few recent studies suggest that the overall efficiency losses from binding constraints on residential development could be quite large.
Land use geeks are familiar with Gyourko’s analysis of land use regulation, but many non-economists are not.  Even if they are, they often give it short shrift. I found the extension of their analysis beyond the borders of the U.S. interesting:
In theory, the availability of buildable land might not constrain the supply of housing units if housing could be constructed as densely as necessary to meet demand. But in most places in the U.S.—and indeed around the world—local land use policy imposes limits on residential development that restrict the size and type of housing units that can be built on a given amount of land. These restrictions add extra costs to a construction project, creating a wedge between the sales price of a house and the cost of buying the land and building the structure. (3)
As communities struggle with housing affordability, the link between land use regulation and housing costs is one that should not be ignored.
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