Land Use Regulation, the Redevelopment Premium and House Prices

Ryan Greenaway-McGrevy, Gail Pacheco () and Kade Sorensen ()
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Gail Pacheco: NZ Work REsearch Institute, Faculty of Business, Economics and Law, Auckland University of Technology
Kade Sorensen: Department of Economics, University of Auckland

Working Papers from Auckland University of Technology, Department of Economics

Abstract: The right to redevelop a residential property can carry a significant positive premium. Although the existing literature has examined how this redevelopment premium is affected by the inherent characteristics of a residential structure, comparatively little research has focussed on how land use regulations (LURs) interact with these characteristics to affect redevelopment premia. In this paper we study the effect of upzoning (i.e., a relaxation of restrictions on site development) on the redevelopment premium and house prices using a rich dataset of residential sales transactions. To study the effects of this policy intervention, we embed a difference-in-differences structure within a hedonic pricing function, wherein the upzoning quasi-treatment is interacted with a commonly-used empirical proxy for the opportunity cost of redevelopment-intensity (i.e., the ratio of improved value to the total value of the property). We find that upzoning significantly increases the redevelopment premium and generates a substantial increase in the price of underdeveloped properties relative to properties that were already intensively developed.

Date: 2018-03
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