Does issuing building permits reduce the cost of land? An estimation based on the demand for building land in France

While the aggregate value of constructed land rose from 45% to nearly 260% of gross domestic product in France between 1998 and 2006, stabilising after the crisis, regulatory constraints on construction are used to explain the rise in land prices, which are weighing on production costs for new housing units. We analyse to what extent the issuance of building permits reduces the price of land. We first propose a theoretical model for assigning heterogeneous households (in terms of preferences) to heterogeneous building plots (in terms of location) to study the effects of construction on the price of land. We then estimate the inverse demand for building land by instrumenting construction (quantity) by instrumental variables relating to the nature of the land, to its topography, to the agricultural opportunity cost and to the presence of industrial brownfields. A 1% increase in the number of permits issued resulted in a moderate decrease in land prices of 0.3%, on average. The effect, which differs according to the type of construction, increases with proximity to dense zones.