When people talk about government intervention as a causal factor in the house price bubble, they’re usually talking about the contentious issue of Fannie/Freddie, the CRA, and other policies associated with encouraging homeownership. Much more important than those factors, whose existence are not necessary conditions for the bubble, may be local regulations that restrict land use. A new paper investigates:

“Using data from 326 US cities, our study examines empirically how residential land use regulation, geographic land constraint and credit expansion are related to the swing of house prices between January 2000 and July 2009… We find that cities that are more regulated or have less developable land experienced greater price gains between January 2000 and June 2006, and greater price declines between June 2006 and July 2009. In addition, the natural and man-made constraints both amplified the responses of house prices to an initial demand shock arising from the mortgage market, turning the shock into a greater price gain and subsequently a greater loss. Finally, over the entire period, cities that had more marginal borrowers before the credit expansion did not experience greater growth in housing prices, indicating that the subprime expansion did not leave a positive legacy on the price front.”

I think convincingly proving this would require some panel data rather than the cross section used by the authors, and potentially some natural experiments. But I am glad to see this being investigated empirically, it strikes me as an important point: some very very common regulations may have serious unintended costs.

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