Urban land-use regulations and housing markets in developing countries: Evidence from Indonesia on the importance of enforcement

• Economic theory suggests strict urban land-use regulation increases housing prices.
• Indonesia has restrictive urban land-use regulation but not high housing prices.
• I analyze housing markets and land-use regulation using data from several sources.
• I find that flexible enforcement facilitates the informal production of housing.
• Yet land-use regulation reduces investment in housing infrastructure.

Standard urban economic theory suggests that stringent urban land-use regulation leads to higher housing prices due to both direct impacts on costs and a reduction in the price elasticity of supply. Indonesia has one of the most restrictive land registration and construction permitting systems in Asia, yet housing is affordable, rates of household formation are high, and housing supply is relatively elastic. This paper explores the relationship between land use regulations and housing markets in Indonesia through various analyses; an overview of 90 cities, a direct assessment of the relationship in 15 cities, and detailed case studies of two medium-sized cities. Regulations do impact the production of housing in Indonesia, but they do not affect housing markets in the predicted way because of their flexible enforcement and a widespread and dynamic informal housing-production system. The main impact of the strict land-use regulations in Indonesia is thus argued to be under investment in physical infrastructure related to housing; a substantial detriment to urban development and economic growth. The case of Indonesia demonstrates the importance of regulatory enforcement and local context in the analysis of land use regulations.