The Rise of Housing Supply Regulation in the US: Local Causes and Aggregate Implications
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| Primary Author | Andrii Parkhomenko |
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| Theme | Housing Supply |
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Abstract
Regulatory restrictions on housing supply lead to high prices and discourage workers from locating in productive cities. I study why regulation emerges and how it affects allocation of labor across space, wages, housing prices and aggregate productivity. I document that the dispersion of wages and housing prices across U.S. metro areas has increased and the sorting of college graduates into highly productive and expensive places has become stronger since 1980. I argue that these rising regional disparities have been amplified by the choices of residents of the most demanded metro areas to tighten regulation. To quantify this amplification effect, I build a general equilibrium model with multiple locations and heterogeneous workers. Local housing prices depend on regulation, which is decided by voting: renters want less regulation and owners want more. Faster productivity growth in some locations attracts workers and raises housing prices there. High-skilled workers, being less sensitive to rising prices, sort into productive and expensive areas. The growing prices in turn make homeowners vote for stricter regulation, which raises prices even more. This amplification effect of endogenous regulation choices is sizable. I calibrate the model to the U.S. and find that the rise of regulation accounts for 23% of the increase in wage differences across metro areas and the entire jump in house price dispersion from 1980 to 2007. Absent the rise of regulation, aggregate productivity would be 2% higher. Policy interventions that limit regulatory powers of local governments and reduce their incentives to regulate could lower housing prices and wage inequality, and lead to productivity gains.