The 1906 San Francisco Fire and the Cost of Zoning

Abstract: Real estate prices in cities like San Francisco are far above the cost of construction, with regulatory restrictions on development cited as a likely explanation. In this paper we use a natural experiment setting to test this hypothesis and estimate the cost of zoning: the implicit tax that results when zoning regulations limit development within a city. After the 1906 fire, residential land in the burned portion of San Francisco was rebuilt at much greater densities, thus causing differential density patterns to arise across burned and unburned areas. These patterns were then locked into place by the 1921 zoning code and exist to the present day, a feature that allows us to utilize the fire's boundary as an exogenous source of variation in the zoning code. Using a border discontinuity approach, we analyze the effect of dense zoning on land prices in transactions involving single family homes, which have greater potential to be redeveloped for a different use and thereby benefit from less-restrictive zoning, relative to transactions involving condos. We find that zoning restrictions lead to an implicit tax of around $300 per square foot of land, with conservative calculations implying welfare losses of $4.45 billion per year--a substantial fraction of area annual income.