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Regulation and the Rise of Housing Prices

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  1. Regulation and the Rise of Housing Prices Bryce A. Ward Harvard University

  2. Fact: Substantial Price Growth in Several Housing Markets OFHEO Repeat Sales Price Indices 1980-2004, CPI Adjusted • Nassau-Suffolk (NY) 251 % • Boston Quincy (MA) 210 % • Cambridge-Newton (MA) 180% • Essex County (MA) 179% • Salinas (CA) 162%

  3. Why Have Prices Increased? Blue=Prices, Red=Permits • Higher Demand? • Demand growth matters, but high demand needn’t => Higher Prices • Prices increase when Supply doesn’t respond to growth in Demand

  4. 3 Reasons Supply Might Not Respond to Higher Prices • Higher Construction Costs • No More Land • Regulations

  5. Do Higher Construction Costs Explain Higher Prices?

  6. Have High Price Areas Run Out of Land?

  7. Is it Regulation? • Regulations reduce new construction (acts as a tax, but a really bad tax) • Several studies that compare communities with more stringent regulations to similar communities with less regulations find that more regulation => less new construction • E.g., Glaeser and Ward (2006) examination of 187 communities in Boston Ares finds: • .25 acre increase in average minimum lot size => 9% fewer houses in 2000, 10% fewer permits between 1980-2002 • Wetlands, Subdivision, and Septic Rules => 10-20% reduction in annual permits

  8. Regulations Have Become More Common in Many Areas

  9. Why Have Regulations Become More Common? • Better Organized/More Powerful Homeowners • More Incentives for Homeowners to Block Development (e.g., bigger negative effects of development or higher valuation of low density) • More Sympathetic Judges • Developers w/ Less Power

  10. Conclusion • Regulations Contribute to Housing Un-Affordability • Regulations Differ a Great Deal Across Space => No Simple Solutions • Improve Incentives • Reduce Uncertainty • Better Internalize Externalities