Housing Supply Constraints: A Test of Regulatory Impact

Land use regulations often introduce rigidities that constrain the ability of producers to respond to shifts in housing demand. This paper presents new evidence on the impact of such regulations on housing starts. We exploit a natural experiment in Singapore which avoids the need to construct measures of the regulatory environment. Land for private housing is supplied by the government and by private owners. Raw land sold by the state is virtually exempt from the costs of negotiating the development approval process whereas private land is not. We test for the impact of regulation on the determination of housing starts with the impulse response functions of a baseline VAR model. Using data from 1990:1 to 2004:1, the empirical strategy is to examine the short-run dynamics of the response in housing starts to our land supply variables as well as to other determinants of new supply in a flow-flow setting. We find that regulation depresses the response of housing starts. A key implication of the results is the importance of reducing supplyside rigidities for a more orderly market reaction to demand shocks.