Planning Regulations: Does Land Use Regulation Lower the Average Price of Housing in Cities?

A substantial empirical literature finds a positive partial relation between indexes of land use regulations and differences in the asset price of housing among cities. A complimentary theoretical literature concludes that this result arises because planning restricts laissez faire housing supply. The theoretical models use highly stylized characterizations of the effects of land use regulation. This paper provides, for the first time, a formal analysis of the theoretical effects of four stylized specifications of land use restrictions. The sign of the relation between regulation and the average price of housing in cities varies among the four alternatives. Furthermore, analysis of a realistic representation of planning demonstrates that regulation is likely to lower average housing price. Therefore, empirical evidence that housing prices vary directly with regulation could indicate positive amenity effects or benefits of planning and that higher housing prices justify added planning restrictions.