Is Water Policy Limiting Residential Growth? Evidence from California

Rapid population growth and increasing costs of new water supplies have led state and local authorities throughout the American West to institute regulations conditioning the approval of residential development on the adequacy of long-term water availability. Using a measure of local water screening policies from an original survey, this paper examines the effects of these policies on residential housing growth in California from 1994 to 2003. Random- and fixed-effects panel regressions find jurisdictions with local policies to have significantly slower residential growth. These water policy effects are distinct from effects of general growth control measures. Water impact fees, meanwhile, do not significantly slow construction. Water screening policies are not associated with a higher incidence of conservation policies, raising the possibility that some communities may be using water screening as a tool to limit growth, while maintaining high per capita water availability and low water prices. Although such practices may be locally efficient under existing water rights law, in which communities are the rights-holders, they raise the possibility of broader social inefficiencies in the management of water resources. Absent a change in water rights, introduction of explicit buy-in fees for new construction may be a preferred strategy relative to ad hoc administrative review.