REGULATION AND THE HIGH COST OF HOUSING Regulation and the High Cost of Housing in California

The rise in housing costs in California has far exceeded the national inflation rate. During the past three years, housing prices in five coastal counties increased by more than 60 percent. For the highest quintile of cities, prices increased by an average of more than 30 percent per year. Evidently California housing markets differ qualitatively from those in the rest of the country. One striking difference is the degree of regulation governing land use and residential construction. California represents the most extreme example of autarky in land-use regulations of any U.S. state. Cities are free to set their rules independently, with little oversight. Moreover, state tax policy creates incentives that are likely to decrease production and increase housing costs. Property taxes are constitutionally limited to 1 percent of acquisition costs while cities are permitted a share of local sales tax receipts. This creates regulatory incentives to favor retail development over housing construction, to favor development of expensive housing over moderately priced housing, and to discourage the construction of housing. In this paper, we explore the linkages between land-use regulations, growth in the housing stock, and housing prices in California cities. First, we assess whether housing is more expensive in more regulated cities. Next, we assess whether growth in the housing stock over the period of a decade depends on the degree of land-use regulation at the start of the decade. Finally, we estimate the price elasticity of housing supply in regulated and relatively unregulated cities. Our results suggest that current regulations have powerful effects on housing outcomes.