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A 2017 increase in allowed floor area ratio in Mumbai had a tremendous impact on affordability by accidentally improving the economics of smaller apartments.
Geetika Nagpal‘s job market paper, written with Sahil Gandhi, shows that a 2017 increase in allowed floor area ratio in Mumbai had a tremendous impact on affordability by accidentally improving the economics of smaller apartments.
(Note that the authors are updating the paper, so some of the following may change).
ABSTRACT:
Does relaxing zoning regulations increase affordable housing or simply trigger the building of new luxury units? This paper exploits a rule-based relaxation of the regulatory cap on building height and floorspace, the Floor Area Ratio (FAR), to answer this question in Mumbai, India. Leveraging granular panel data and exploiting variation in time and space, we find that the reform increased housing supply in treated areas by 28%, implying an elasticity of housing supply to the FAR of 1.59. The FAR relaxation increases the scale of development, resulting in higher investment in shared amenity space within the building. This increased public good provision facilitates an 18% decline in unit sizes, leading to a 29% decrease in apartment prices that allows lower-income households to access housing. We develop a structural model of housing supply and demand that incorporates the provision of amenity floorspace and shows that after the relaxation, average home buyer incomes are 3.18% lower. We use the estimated model to show that a further 5% rule-based relaxation would amplify the scale economies and increase the affordability gains from deregulation. Taken together, our results show that concentrating FAR relaxation can improve affordability.
Some quick notes:
The last point left me with two questions the authors could answer pretty easily:
Excellent work and I look forward to its refinement.