The impact of residence requirements on housing prices

In typical vacation regions, people from other parts of the country, or from other countries, may often want to buy properties for the use as vacation homes. This may easily drive up property prices. Moreover, if houses built for permanent residence are converted into vacation homes, these houses will be in use only a few weeks of the year. Many of those who have their permanent residence in areas where houses are being bought for vacation use may want to keep house prices low, and houses used for permanent residence. Since 1974 Norwegian municipalities have had the option to introduce residence requirements. Such requirements implying that a house which initially is approved for the use as a permanent dwelling cannot legally be used only as a vacation home. Hence, the person buying such a house must sign a contract that the house will be used for permanent residence. Residence requirements have been a heavily discussed topic all the time since they were introduced, but little research on how such requirements work have been carried out. In the present paper we focus on how residence requirements impact house prices. We first discuss this issue within a theoretical model, and subsequently carry out an empirical investigation. The empirical analysis is based on data on house transactions over a 7-year period from four municipalities on the South-Eastern coast of Norway. The results show that house prices along the coast increased significantly when residence requirements are abolished, but that there was no impact on house prices far from the coast.