Investigating and Modelling the link between planning law and real-estate prices with business cycles, economic productivity and new business creation

There exists much research linking household balance sheets and house price movements to aggregate economic activity (Mian and Sufi, 2010; Adelino et al., 2015). Equally, there exists a thriving body of work that has established strong links between land use regulations and house prices (Glaeser, 2005; Green, Malpezzi, and Mayo, 2005; Cheshire and Hilber, 2008). In my PhD research I aim to investigate the link between the first and the second strands of literature. In particular, my aim is to understand how land use and planning regulations, through house price changes, affect aggregate economic activity like output, employment, productivity, investment, consumption and entrepreneurship and new business creation.

The debate over housing and land use in the UK is one of the most prominent in today's political landscape. House and commercial property prices in the UK are among the most expensive in the OECD. Cheshire and Shepphard (2002) have shown that estimated net costs of land use planning policies in the UK amount to as much as 3.9% of annual household incomes. Cheshire and Hilber (2008) estimate the regulatory tax for 14 British and 8 continental European office locations. The authors find an average shadow tax, of 800% of marginal construction costs in the West End of London and 68% in Brussels, over the sample period.

Recent research has also uncovered significant long-term impact of land use regulations on economic activity. Hseih and Moretti (2019) using a spatial equilibrium model and data from 220 metropolitan areas find that stringent restrictions to new housing supply effectively limit the number of workers who have access to high productivity cities and regions in the US.

How do land use regulations interact with other factors such as financial innovations, regulation and technology in determining house prices? Papers in the post-crisis literature find that restrictive land use regulations, through a lower house price elasticity, worsened the effects of the crisis. For example, Mian and Sufi (2010) report that between 2002 to 2006 counties in the US with lower house price elasticity experienced sharper increases in leverage than others which in turn caused larger drops in durable consumption expenditure, and later, large increases in unemployment.

Thus my PhD will focus on integrating the above remarks into the theoretical framework used to understand and model economic growth. The multisector growth model developed in Davis and Heathcote (2007) will be used as a starting point where construction, manufacturing, and services are combined, in different proportions, to produce consumption, business investment, and residential structures. To this starting point will be added components that will contribute to model: the effects of varying credit regimes, different styles of urban development and temporal and spatial variation of real-estate price elasticity on aggregate economic measures in a more realistic and enlightening manner.