# The hidden cost of regulatory fat

**Published by:** [Brandon Donnelly](https://brandondonnelly.com/)
**Published on:** 2026-03-31
**Categories:** research-paper, los-angeles, housing, development, construction, real-estate, economics
**URL:** https://brandondonnelly.com/the-hidden-cost-of-regulatory-fat

## Content

In the olden days here in Toronto, approved development land used to sell for a premium compared to unapproved land. This was true because approved land meant you could start construction much sooner. And since time has value, this was worth something. Today, this is far less valuable to developers (if at all) because, in most cases, the market does not support new construction. So, the land may be approved, but what does one do with it? Rather than speed, I would say that the most valuable feature right now is the ability to be patient. Developers need to be able to stay solvent long enough for the market to return. But this does not mean that there isn't a cost to permitting, approvals, and lengthy pre-construction periods. Here is a recent paper (that I discovered via Thesis Driven) by economists Evan Soltas (Princeton) and Jonathan Gruber (MIT) that asks: "How Costly Is Permitting in Housing Development?" What they discovered in the Los Angeles market is the following:Developers have been willing to pay roughly 50% more for pre-approved development land (averaging about $48 per square foot).The permitting process in Los Angeles accounts for about 40% of the time required to develop and construct a new housing project.Approximately one-third of the gap between home prices and construction costs can be explained by permitting costs and delays.This last point is an interesting one to focus on because it tells you how much regulatory fat there is in the system. In a perfectly free and efficient market, the market price of a home should, in theory, be roughly equal to the cost of the land, construction costs, and the developer's margin. When you have a massive gap between the cost of the physical materials and labour required to build the home and the price of the home, it means that there are other costs being shouldered. The paper refers to some of these as "pure wait" (time) and "capitalized hassle" (dealing with bullshit). This is an important way to think about the efficiency of housing markets, because minimizing the gap is a clear way to make housing more affordable.Cover photo by Josh Miller on Unsplash

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