Land-Use Regulations Make Housing Less Affordable

U.S. housing prices have risen faster than income since 2000.

U.S. housing prices have risen faster than income since 2000, making housing less affordable.

The solution is more housing, and the question is what is holding that back? Recent research finds that land-use regulations have made construction firms less productive:

The likelihood that a project is approved decreases as its size increases. Thus, regulation causes the average project size to shrink as entrepreneurs pursue a smaller project scale for a higher probability of receiving a permit ... As firm size shrinks, so do incentives to invest in technology. The overall productivity of the industry consequently declines.

Indeed, the authors present evidence that:

areas with stricter land-use regulations ... have smaller and less productive construction firms. [Moving from] Atlanta’s [to] San Francisco’s regulatory strictness is associated with a 12 percent reduction in total revenue per firm and a one-third reduction in the share of employment in large firms.

Ultimately, their findings reveal:

much less residential and nonresidential construction activity in areas with stricter land-use regulations.

This research adds to the growing evidence that relaxing land-use regulations is the most effective way to expand housing supply and increase affordability. For example, local governments should allow more multi-family developments.