The impact of land use regulation on regional variations in housing supply elasticity

Abstract

The responsiveness of housing supply to changes in demand, i.e., the price elasticity of housing supply, is a key factor on the housing market. Previous literature has shown that the housing supply elasticity varies significantly across regions, and land use regulations, among other factors such as urban density, level of population, and geographical constraints, have been found to be important predictors of the variation. While the literature has widely acknowledged the negative impact of regulation on new housing supply and thereby an increasing effect on housing prices, an often brought up gap in the existing research is that it relies on rather crude measures of regulatory stringency. Different types of regulatory interventions may, however, have different effects on housing market outcomes, which makes it challenging to interpret the estimated effects of aggregate measures of land use restrictiveness. Moreover, the existing literature has focused mainly on the contexts of US and UK, while less attention has been devoted to examining impacts of land use regulation in the context of countries with statutory planning systems. This study contributes to the extant empirical research by examining the regional variation of housing supply elasticity and its determinants in the Finnish context. The study utilizes refined measures of land use policy stringency, which reflect the prevalence and stringency of different paths of land use policy interventions. Specifically, a two-step analysis is conducted. First, this paper estimates the housing supply elasticity in the 30 largest Finnish cities. Second, these estimates and the measures of land use policy stringency are used to conduct cross-sectional investigation of the role of different types of land use regulatory interventions – including both land policy and planning interventions – in explaining differences in the housing supply elasticity across cities. The study provides hence information also on the impacts of land policy interventions, such as public land banking and negotiable developer obligations, which have received much less attention in the literature than the impacts of planning interventions.