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Supply constraints and housing market dynamics

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  • Paciorek, Andrew
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    Abstract

    Although the volatility of house prices is often ascribed to demand-side factors, constraints on housing supply have important and little-studied implications for housing dynamics. I illustrate the strong relationship between the volatility of house prices and the regulation of new housing supply. I then employ a dynamic structural model of housing investment to investigate the mechanisms underlying this relationship. I find that supply constraints increase volatility through two channels: First, regulation lowers the elasticity of new housing supply by increasing lags in the permit process and adding to the cost of supplying new houses on the margin. Second, geographic limitations on the area available for building houses, such as steep slopes and water bodies, lead to less investment on average relative to the size of the existing housing stock, leaving less scope for the supply response to attenuate the effects of a demand shock. My estimates and simulations confirm that regulation and geographic constraints play critical and complementary roles in decreasing the responsiveness of investment to demand shocks, which in turn amplifies house price volatility.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Urban Economics.

    Volume (Year): 77 (2013)
    Issue (Month): C ()
    Pages: 11-26

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    Handle: RePEc:eee:juecon:v:77:y:2013:i:c:p:11-26

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    Web page: http://www.elsevier.com/locate/inca/622905

    Related research

    Keywords: Housing supply; Regulation; House prices; Volatility; Supply lags;

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    Cited by:
    1. Wouter Vermeulen & Christian A.L. Hilber, 2012. "The Impact of Supply Constraints on House Prices in England," CPB Discussion Paper, CPB Netherlands Bureau for Economic Policy Analysis 219, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Rickman, Dan S., 2014. "Assessing Regional Quality of Life: A Call for Action in Regional Science," MPRA Paper 58109, University Library of Munich, Germany.
    3. Hans Haller & Ming Yi, 2013. "Paths of a Continuum of Independent Random Variables," Working Papers, Virginia Polytechnic Institute and State University, Department of Economics e07-44, Virginia Polytechnic Institute and State University, Department of Economics.
    4. Elias Oikarinen & Risto Peltola & Eero Valtonen, 2014. "Regional variation in the elasticity of supply of housing, and its determinants: The case of a small sparsely populated country," Discussion Papers, Aboa Centre for Economics 91, Aboa Centre for Economics.

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