Regulation and Frontier Housing Supply

TL;DR

This paper develops a method to estimate the impact of regulation on housing supply by quantifying regulatory costs in monetary terms using only prices and building heights, revealing significant variation and correlation with location factors.

Contribution

It introduces a novel approach to identify regulatory costs from supply and demand shocks without instrumental variables, and applies it to Israeli housing data to quantify regulation's monetary impact.

Findings

Estimated mean regulatory tax is 48% of housing prices.

Regulatory tax varies across locations, from 40% to 53%.

Regulatory tax is positively correlated with centrality, density, and prices.

Abstract

Regulation is a major driver of housing supply, yet often difficult to observe directly. This paper estimates frontier cost, the non-land cost of producing housing absent regulation, and regulatory tax, which quantifies regulation in money terms. Working within an urban environment of multi-floor, multi-family housing and using only apartment prices and building heights, we show that the frontier is identified from the support of supply and demand shocks without recourse to instrumental variables. In an application to new Israeli residential construction, and accounting for random housing quality, the estimated mean regulatory tax is 48% of housing prices, with substantial variation across locations. The regulatory tax is positively correlated with centrality, density, and prices. We construct a lower bound for the regulatory tax that allows quality to differ systematically over location and time, by assuming (weak) complementarity between quality and demand. At the end of our sample, when prices are highest and our bound is most informative, we bound the regulatory tax between 40% (using a 2km radius) and 53%.