Regulatory Hurdles and Costly Delay in Housing Development

• In Event: Zoning, Regulations, and Housing Supply

Abstract

This paper studies the effect of a discretionary permitting process on the supply of multifamily housing. Using the universe of permit applications in Seattle, Washington, beginning in 2008 when a unit count threshold for discretionary review was introduced, I show that proposed developments bunch at the threshold and that such a threshold induces a discontinuity in the unit count–development size relationship, introducing distortions to the housing stock. I then propose and estimate a novel model of the multifamily housing production function that explicitly accounts for a policy-induced discontinuity in marginal cost of adding a unit. The estimated capital share of output is consistent with earlier findings from the literature if constant returns to scale (CRS) is assumed, but the estimates imply a relatively high degree of decreasing returns to scale, consistent with higher market valuations of developments with a larger number of smaller units. Estimates of the distribution of costs from discretionary review imply that the median cost of design review is small but highly variable and negatively correlated with the marginal unit cost, suggesting that developers who face a higher cost of design review and choose to build above the unit count threshold may compensate by providing lower quality amenities. Counterfactual simulations suggest that removing the design review threshold would have increased the number of units built by 3%, or 122 units, but that both average unit size and average profit per unit would be lower.

Author

• Daniel E Gold, University of Wisconsin-Madison
  Presenting Author