Land-use regulation and the intensive margin of housing supply

Abstract

This paper proposes a method for estimating the extent to which density regulation causes the actual housing supply per land unit to deviate from the unconstrained amount, i.e., the impact of density regulation on the intensive margin of housing supply. To overcome the challenges that both the housing supply per land unit (which is a combination of quantity and quality measures) and its unconstrained amount are unobserved to the researchers, we extend the framework of Epple, Gordon and Sieg (2010) by explicitly allowing substitution between the quantity and quality inputs in the housing production function and by imposing a regulatory upper limit on the use of the quantity input. We show theoretically that the land share of the housing value can be used as a proxy for the stringency of the density regulation. We apply this method in our investigation of the stringency of floor-to-area ratio (FAR) regulation in urban China at the land-parcel level and find that the regulation imposes a significant binding constraint on the housing supply per land unit. We then explore the spatial and temporal variations of FAR regulation stringency. We also find that the FAR regulation stringency intensified the housing price appreciation that occurred during the economic stimulus period after 2008.