House tangled in red tape, leading to affordable home

Decoding the Housing Crisis: Is Regulation the Hidden Culprit?

Jordan Keane in Business & Economy August 2025 • 4 min read.

"New research uncovers the significant impact of housing regulations on affordability and supply, offering insights into potential solutions for a more accessible market."

The dream of owning a home is becoming increasingly elusive for many. Skyrocketing prices, limited supply, and complex market dynamics create a perfect storm of unaffordability. While factors like land costs and material prices are often cited, a less visible yet powerful force is at play: housing regulations.

Regulations, intended to ensure safety, quality, and community well-being, can inadvertently drive up costs and restrict the supply of new homes. This phenomenon, known as the "regulatory tax," adds a hidden burden to the already strained budgets of potential homeowners and renters. Understanding the extent of this regulatory impact is crucial for policymakers and anyone seeking to address the housing crisis.

A groundbreaking study, “Regulation and Frontier Housing Supply,” sheds light on this complex issue. By analyzing the Israeli housing market, the research offers a framework for quantifying the impact of regulations on housing costs and provides insights that resonate globally.

Unveiling the Hidden Costs: How Regulations Impact Housing

House tangled in red tape, leading to affordable home

The research highlights the difficulty in directly observing and measuring the impact of housing regulations. Diverse forms of regulation, coupled with inconsistent enforcement, make it challenging to quantify their effects. The study introduces the concept of "frontier cost," representing the non-land cost of producing housing in the absence of regulation, and "regulatory tax," which quantifies regulation in monetary terms.

By focusing on multi-floor, multi-family housing in urban environments and using apartment prices and building heights as key data points, the study demonstrates that the frontier cost can be identified without relying on traditional instrumental variables. This innovative approach allows for a more direct assessment of the regulatory burden.

Quantifying the Impact: The study estimates that regulatory tax accounts for a significant 48% of housing prices on average.
Geographical Variation: The regulatory tax varies significantly across locations, highlighting the localized nature of regulatory burdens.
Drivers of Regulation: Higher regulation is associated with proximity to the city center, higher density areas, and higher overall prices.

The research also acknowledges the role of housing quality. By constructing a lower bound for the regulatory tax that allows quality to differ systematically over location and time, the study provides a more nuanced understanding of the true cost of regulation. This lower bound is particularly useful when prices have increased, offering a more accurate assessment in dynamic markets.

Navigating the Regulatory Maze: Towards a More Affordable Future

The study's findings underscore the significant impact of housing regulations on affordability. By providing a framework for quantifying this impact, the research offers valuable insights for policymakers seeking to address the housing crisis. Creating a more streamlined and efficient regulatory environment could unlock the potential for increased housing supply and greater affordability, making the dream of homeownership a reality for more people.

About this Article -

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2208.01969,

Title: Regulation And Frontier Housing Supply

Subject: econ.gn q-fin.ec

Authors: Dan Ben-Moshe, David Genesove

Published: 03-08-2022

Everything You Need To Know

What is the 'regulatory tax' and how does it affect housing prices?

The 'regulatory tax' is a concept introduced in the research to quantify the monetary impact of housing regulations. It represents the hidden costs that regulations add to the price of a home, increasing the burden on potential homeowners and renters. The research, specifically focusing on the Israeli housing market, estimates that the regulatory tax accounts for a significant 48% of housing prices on average. This implies that nearly half the cost of a home can be attributed to the various regulations in place, impacting the affordability and accessibility of housing.

How does the study 'Regulation and Frontier Housing Supply' assess the impact of regulations on housing costs?

The study 'Regulation and Frontier Housing Supply' analyzes the impact of housing regulations by introducing the concept of 'frontier cost,' which represents the cost of producing housing in the absence of regulation. The research team focused on multi-floor, multi-family housing in urban environments, using apartment prices and building heights as key data points. This approach enables them to calculate the 'regulatory tax' by comparing the actual housing costs with the estimated 'frontier cost'. By quantifying the regulatory tax, the study provides a direct assessment of the burden imposed by regulations, revealing their significant contribution to overall housing prices.

What are the geographical variations in the 'regulatory tax', as highlighted in the research?

The research found that the 'regulatory tax' varies significantly across different locations. This highlights the localized nature of regulatory burdens, indicating that the impact of housing regulations is not uniform. Factors such as proximity to the city center, the density of the area, and the overall prices in a given location are associated with higher regulation. This suggests that regulations have a more pronounced effect in specific areas, potentially exacerbating affordability challenges in those locales.

Besides the 'regulatory tax', what other concepts were introduced by the research and how are they defined?

The research introduces two primary concepts: 'frontier cost' and 'regulatory tax'. The 'frontier cost' represents the cost of producing housing in the absence of regulation, essentially the non-land cost of construction. The 'regulatory tax' quantifies the impact of regulations in monetary terms, reflecting the additional costs imposed by these regulations. The study uses these two concepts to determine the extent of the impact of regulations on housing prices. The 'regulatory tax' is derived by comparing actual housing costs with the estimated 'frontier cost'. The research provides a more accurate assessment in dynamic markets by constructing a lower bound for the regulatory tax that allows quality to differ systematically over location and time.

In what ways can streamlining the regulatory environment contribute to addressing the housing crisis?

Streamlining the regulatory environment can significantly contribute to addressing the housing crisis by unlocking the potential for increased housing supply and greater affordability. The research underscores the significant impact of housing regulations on affordability. By providing a framework for quantifying this impact, the research offers valuable insights for policymakers seeking to address the housing crisis. A more efficient regulatory environment could reduce the 'regulatory tax', making it easier and more cost-effective to build new homes. This increased supply, coupled with lower costs, could make homeownership a reality for more people, thus easing the current affordability challenges.