Land Use Regulation and the Rental Housing Market: A Case Study of Massachusetts Communities

The effect of local land use regulations on housing markets has been the subject of extensive research and discussion among both urban economists and policymakers. However, very few studies distinguish between the effects on owner-occupied and rental housing. Since most lowand moderate-income families are renters, the effects of regulation on the rental market will have important implications for what is traditionally regarded as “affordable” market-rate housing. In this paper, I use a uniquely detailed dataset on local zoning in eastern and central Massachusetts to examine the extent, origins, and effects of regulations on the rental housing market. Results suggest that communities with less restrictive zoning issue significantly more building permits for both multifamily and single-family units and have lower prices of owner-occupied housing, but do not have significantly lower rents. However, the effect of regulations on rents may be confounded by the development of subsidized rental housing under the state’s affordable housing law. Section 1: Introduction The role of local land use regulations in rising housing prices has been the subject of extensive theoretical and empirical research by urban economists, as well as a topic of concern to policymakers and affordable housing advocates. However, very few studies distinguish between the effects on owner-occupied and rental housing. Although the majority of American households own their homes, most lowand moderate income households are renters, so the effects of regulation on the rental market have important implications for what is traditionally referred to as “affordable” unsubsidized housing. In this paper, I examine the extent, origins and effects of local land use regulations on the rental housing market in Massachusetts. Massachusetts offers an interesting setting to test for regulatory impacts on rental housing. Rents in Massachusetts are quite high relative to other parts of the country; the median monthly contract rent in the Boston metropolitan area was $727, well above the national average of $519, and third highest among the ten largest PMSAs (after San Francisco and Washington, DC), according to the 2000 census. Yet new construction of rental housing is fairly scarce; as shown in Figure 1, 79 of the cities and towns the Boston metropolitan area issued no permits for new multifamily construction between 2000 and 2005, while another 57 issued permits for fewer than 50 units during the six-year period. The state’s legal environment and history are conducive to strict land use regulations, combining a strong tradition of home rule by local governments, aesthetic and cultural preferences for low-density housing consistent with the character of New England towns, and highly fragmented political authority across a large number of small cities and towns, each of which contains only a small fraction of the metropolitan area’s labor force and housing stock. To analyze the effects of local land use regulations on Massachusetts’ rental housing market, I use a uniquely detailed dataset on local zoning in 187 cities and towns in eastern and central Massachusetts to construct multidimensional measures of regulatory stringency. I then estimate cross-sectional reduced-form regressions of the number of new housing permits, rents and prices on the regulatory measures, controlling for standard demandand supply-side variables. Results suggest that communities with less restrictive zoning issue significantly more building permits for both multifamily and single family housing and have lower prices for owner-occupied housing but do not have significantly lower rents. However, the effect of zoning