Land Use Regulation, Regulatory Spillover and Housing Prices

33 Pages Posted: 17 May 2019 Last revised: 2 Oct 2020

See all articles by Desen Lin

Desen Lin

University of Pennsylvania, Department of Economics

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: September 11, 2020

Abstract

We estimate the effect of city land use regulation on housing prices in the presence of regulatory spillover. The total effect of regulation is decomposed into a direct effect in which regulation lowers housing productivity and an indirect effect in which household location choice mitigates the price effects of regulatory restrictions. Using housing sales data from California, we structurally estimate a closed-form housing price equation based on a housing model with spatial arbitrage. We find that the total price effect of a one standard deviation increase in city restrictiveness is 9.3% on average, ranging from 4.1% to 14.4% across cities. The spillover effect is economically significant, with the size of the indirect effect equal to 21% of the direct effect for an average city, ranging from 0 to 47%. We point to the importance of identifying direct and indirect effects by controlling for regulation in surrounding locations. For jurisdictions with the power to impose regulation on a larger number of locations, regulation has a stronger price impact due to limits on regulatory spillover.

Keywords: housing prices, land use regulation, spillover effect, California

JEL Classification: R10, R13, R31, R52, R58

Suggested Citation

Lin, Desen and Wachter, Susan M., Land Use Regulation, Regulatory Spillover and Housing Prices (September 11, 2020). Available at SSRN: https://ssrn.com/abstract=3363947 or http://dx.doi.org/10.2139/ssrn.3363947

Desen Lin (Contact Author)

University of Pennsylvania, Department of Economics ( email )

PCPSE 535, 133 South 36th Street
Philadelphia, PA 19104
United States

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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