Fernando Ferreira on the Economic Value of Zoning Reform

Fernando Ferreira is Chair of the Real Estate Department, C.F. Koo Professor of Real Estate, and Professor of Business Economics and Public Policy at The Wharton School, a Research Associate with the National Bureau of Economic Research, and a Penn IUR Faculty Fellow.

Fernando Ferreira is widely recognized for his influential research in urban economics, real estate, and public economics, with a particular focus on how public policy and market forces interact to shape cities, housing markets, and public outcomes. His interdisciplinary approach combines insights from real estate, urban economics, and public policy to address complex and pertinent urban issues. Ferreira’s corpus of work places particular emphasis on the neighborhood as a key unit of study, yielding valuable insights into the intersection of economics, policy, and social equity.

Ferreira has contributed significantly to understanding causal relationships in urban economics. Ferreira’s widely cited work with Nathaniel Baum-Snow in Handbook of Regional and Urban Economics focuses on impactful research methodologies for identifying causal effects in urban and regional economics, emphasizing the importance of data variation and parameter heterogeneity.

In his seminal paper “A Unified Framework for Measuring Preferences for Schools and Neighborhoods,” Ferreira together with co-authors Patrick Bayer and Robert McMillan presents a novel model for estimating household preferences with respect to school and neighborhood attributes when accounting for sorting. Using metro-level Census data, the paper finds that an improvement in local school performance results in an increased willingness to pay as reflected by housing prices. The paper shines light on heterogeneous preferences as reflected in patterns of self-segregation by race and educational attainment at the neighborhood level.

Another impactful paper co-authored by Ferreira, Stephanie Riegg Cellini, and Jesse Rothstein, “The Value of School Facilities: Evidence from a Dynamic Regression Discontinuity Design,” analyzes the impact of voter-approved school bonds on school district balance sheets, local housing prices, and student achievement. This landmark research identifies the immediate positive impact of school bond issuance on housing prices as shown by a homebuyer willingness-to-pay of $1.50 for every $1.00 of school facility spending.

In an upcoming publication in American Economic Journal: Economic Policy, “Estimating the Economic Value of Zoning Reform,” Ferreira, together with co-authors Santosh Anagol and Jonah Rexer, examines the development and affordability impacts of targeted zoning reform in Sao Paulo, Brazil. This paper assesses the effects of a 2016 zoning reform policy easing density regulations within specific neighborhoods, generating an increase in multi-family construction to expand housing supply and, as a result, lower prices. However, economic stratification persists, as the policy benefits well educated households relocating from the suburbs to the city for workplace proximity.

The global urban population has been steadily increasing, from 33% in 1960 to 56% in 2019, with a predicted increase to 68% by 2050. However, there is considerable uncertainty and debate regarding the ability of cities to provide adequate housing for their residents in the future. Satisfying the demand to live and work in cities will only be possible with a strong supply response from developers who build residential structures. In most cities, however, the supply of buildings is highly regulated by local authorities—the so-called ”not in my back yard” NIMBYism—who can legally determine if and how developers can build (Glaeser, Gyourko and Saks, 2005; Gyourko and Molloy, 2015; Gyourko, Hartley and Krimmel, 2021).

In this paper we study the impact of a 2016 zoning reform in Sao Paulo that increased the ability of developers to supply housing units by lifting limitations on permitted densification on a block-by-block basis. Using a spatial discontinuity design and the timing of the reform, we find that developers responded swiftly to obtain approximately 65 percent more permits in blocks that relaxed zoning rules. In the medium-run, the reform increased availability of homes for sale and reduced prices in neighborhoods with larger increases in allowed densification.

We also develop a framework to estimate welfare of local residents by integrating the spatial RD design into a supply and demand model of residential housing. With this model we can estimate structural demand and supply parameters, and simulate prices, the built environment, and welfare over a ten year time horizon. Our framework accounts for both costs and benefits of densification, which allows for a more complex picture of the effects of zoning reforms.

We find mild aggregate price and supply changes due to the fact the aggregate supply response induced by the 2016 reform is small relative to the Sao Paulo housing stock. However, we find that certain neighborhoods that allowed for more densification had larger increases in supply and bigger reductions in prices, i.e., improved affordability. Our welfare analysis suggests that higher income and education groups benefit the most from the reform, due to the reform lowering prices in areas appealing to these groups, and their ability to move from the suburbs to areas in the city that are closer to workplaces. Welfare gains are four times larger when accounting for changes in the built environment of the city, especially with respect to neighborhood density and age of buildings. This suggests a fair amount of the economic value of zoning reforms comes through the presence of newer housing stock, as opposed to lower prices. We also find that developer profits are much larger than the realized consumer gains. Finally, such reforms negatively impact the housing wealth of existing homeowners and landlords, which may generate political backlash in the form of NIMBYism.