Linking housing Tobin’s Q to zoning, regulation and land prices

We interpret upzoning as an effort of a municipality to allow more housing area on a given space, and propose that a housing Tobin’s Q (HTQ), the ratio of house prices on replacement costs, is an inverse indicator of that effort. To acquire estimates of the HTQ, we exploit data from a cross-section of Norwegian housing markets and inspect whether markets produce single-family homes at prices that are aligned with the replacement costs. In the short run, the two valuations, house prices and replacement costs, may deviate significantly. In the long run, well-functioning markets should ensure that they converge. If the HTQ is (considerably) above unity over a period of time, it could indicate boundaries to supply, i.e. the presence of regulations that prevent land development, i.e. an absence of upzoning. We observe substantial differences in the HTQ over time in a given market and across cities at given time. To probe deeper into the supply side mechanisms, and to understand the obstacles to supply, we use tear-down sales to estimate regional land prices and accounting data to estimate markups for developers. We compare the estimated HTQ with a Housing Construction Facilitation Ranking (HCFR), which includes measures of zoning and regulation, for a cross-section of Norwegian municipalities. We find a clear association between a high estimated HTQ and a low score on HCFR. • We propose housing Tobin’s Q (HTQ) as an inverse indicator of the level of upzoning. • We observe substantial differences in the HTQ over time and across cities. • We derive land prices from tear-down sales; high HTQ is linked to higher land prices. • We find a clear link between HTQ and a housing construction facilitation ranking.