The Effect of Land Supply for New Homes on Residential Investment and House Prices

We use parcel-level data to provide new facts on the amount and distribution of land available for residential development, focusing on New England housing markets from 2007 to 2021. Most buildable parcels are small, and large buildable parcels are scarce in most geographic markets. Large buildable parcels are less available in more populous markets, become scarcer as populations grow, and have become scarcer over time. Markets with fewer large parcels experience higher house price growth and residential development that is lower relative to house price growth. We present evidence consistent with developer returns to scale in parcel size, meaning that fragmentation of buildable land across small, disjoint parcels increases house prices by reducing construction productivity and making development less responsive to demand. In counterfactual simulations from a simple calibrated model, we show that recombining small buildable parcels into larger ones while holding the total amount of buildable land fixed would increase supply, increase construction productivity, and slow house price growth.