Resident Evil 7: Biohazard's genesis originates with 2012's Resident Evil 6. The game, while Capcom's second-highest selling title, received mixed-reception due in large part to its increased focus on gameplay over atmosphere, which alienated older fans of the series. An attempted sequel to the game produced by Masachika Kawata in the same style was cancelled in 2013 as a result of this reception. On 4 January 2014 Capcom CEO Kenzo Tsuhimoto personally telephoned Jun Takeuchi, who had previously produced Resident Evil 5. Wanting a new Resident Evil title in development after Resident Evil: Revelations 2's release, the game was greenlit for a second time, now with Takeuchi in charge. He also gave himself the duty of finding a cost-effective solution to art design, the price for AAA development of which was becoming a serious problem for Japanese gaming.
In the first two months a development team of ten people was formed, and they began listing things what to and not to have in the game, based on Takeuchi asking what Resident Evil meant to them. Focus on atmospheric horror and item management were agreed upon. Online play was rejected due to concerns a two-player horror game would be practical, while an open-world setting was rejected due to the belief that by keeping a more constricted setting it would be of greater visual quality. Reminding himself of his work for the original Resident Evil, Takeuchi wanted the story to be contained within an isolated house, echoing both the original game as well as The Evil Dead, which Masachika Kawata watched for further insight.
Takeuchi's core team consisted of Kawata and Tsuyoshi Kanda as producers and Kōshi Nakanishi as director. Makoto Kodono was also hired as Project Manager to handle the administration.
Early production began in March with the founding of three departments: Prototype development, art design and engine development, with the intention of creating a playable section of the game. To get inspiration for a realistic derelict house, Nakanishi had the core team tour Osaka for abandoned, supposedly haunted houses. The unease they felt while recording their experiences would serve as insight into how to keep the player feeling tense, as well as inspiration for the Sewer Gators subplot and found footage element. Takeuchi had Toshihiko Tsuda create a short film which visualised his idea of the game, a first-person view of a corridor in a derelict house where the character is harassed by a ghostly woman in a dress. Early staff members would watch the film to get an idea of Takeuchi's and Nakanishi's intended style, and the derelict house was used as the basis of the guest house in the finished game. Used as a proof-of-concept piece, the core team was happy to find it was well-liked by the staff.
The art department was given great freedom in visualising the game. Rather than drawing settings and characters to fit an established plot, it was decided instead the scenario would be created based around designs. Art design gradually evolved to consist of three leads: Hiroyuki Chi who would propose an idea, art director Tomonori Takano draw it, and Toshihiko Tsuda who would explain its purpose. Though they enjoyed their great freedom, the lack of a script meant the proposed cast and their designs could radically change. To save money on the design budget as Takeuchi envisioned, artist Makoto Fukui proposed that photogrammetry be used to create objects. The system, which converts digital photographs of real life people and objects into 3D objects for games, was found to half design time. Whereas the department was expected to take some forty days of work to finish individual objects, photogrammetry took only twenty days and a single photography session. With enemies planned to be mostly human-based the use of photogrammetry was also offered for humanoid enemies by taking photographs of actors wearing prosphetics. The downside to the proposal was that a studio had to be constructed, which was finished at the end of 2014, using 150 high-performance digital cameras.
Prototype development began as a "grey box" demo, which could be added to over time. As it was found that the PlayStation 4 could not load MT Framework properly, it was decided the game would be developed in Unity for approximately a year as a purpose-built engine was devised. Rather than keep with a third-party engine, the purpose-built engine was proposed by Takeuchi since it would be for the next-generation console, would be designed specifically for the game, and could be of use for later games in the series. One of the rules for the programmers was not to create the "engine for the engine's sake", meaning to only create coding for mechanics which would serve a purpose. Development of this engine, led at various points by Satoshi Ishida and Takedumi Tahara, was expected to take a year until reaching a usable state, at which time content would be rewritten for the engine's use. This engine was named "Reach for the Moon", though was otherwise dubbed "RE Engine" for its first two letters. The benefits of working in a new engine was that only programming that was intended for use would be added. In the Summertime, the first stage of the game was finished, though was re-designed when staff found it to be boring.
At the end of the year the RE Engine reached a stable level of development that the conversion process could begin. However, over the next few months as it was discovered that the level of photorealism was simply too great and there were RAM issues. The art director offered his resignation, which was rejected, and he later decided to remove objects deemed unnecessary, such as a photorealistic deck of cards which existed for no practical purpose. With those issues settled, the first stage of the game was completed in April 2015.
In early 2015, development proper took place and the Project Management Office was formed to handle staff. As many as three hundred people in countries such as Britain, Canada, China and Taiwan were outsourced to handle 3D asset production, under the oversight of assistant project manager Yoshizumi Hori.
During this period, VR technology was considered, having been ignored entire in 2014. Programmer Kazuhiro Takahara, who had experience with VR due to personally owning an Oculus Rift SDK, began asking for the game to be VR-friendly. It was eventually agreed, but with Capcom having never considered next-generation VR gaming, a PlayStation VR SDK had to be purchased, then known as "Project: Morpheus". A test game was created over the next few months on the lead-up to E3 2015, where Capcom intended to feature the game at Sony's private Morpheus demonstration event. During development the team discovered that the standard speed of 6.1 km/h caused headaches in VR, so the speed was dropped to 4.2. When discussing what to actually feature in the demo, ideas went from an unseen entity throwing chairs, to the player running around the derelict house, and finally it was agreed they were to be tied up to a chair in the kitchen, exposed to disturbing images and finally stabbed. The demo, dubbed "KITCHEN", received praise in spite of its relation to Resident Evil being kept as a success. However, similarities were raised between it and the newly-released demo to Silent Hills; ultimately this had no effect on development as that game was cancelled soon after. November 25 was the deadline for completion of the pre-alpha stage, though was delayed to mid-December, with over a hundred employees working extra hard to catch up.
The Beta stage was approached completion in Spring 2016, with Kadono calling for a two month extension due to the volume of bug fixes and file deletions being made. The developers still stressed for an October completion, despite this delay. Also during this time was production of a new interactive demo using the derelict house featured in "KITCHEN"; the demo, titled BEGINNING HOUR, was released during E3 2016 alongside a trailer produced by Takeuchi and Takano. The demo and trailer marked the first confirmation the game was in production. Taking reviews from BEGINNING HOUSE into account, the dev team made a push to make corrections to the game until October.