Agglomeration and simplified housing boom

Both ‘spatial skewness’ in population sizes, incomes and house prices and ‘agglomeration economies’ are important features in many countries. This paper uses a solvable core-periphery model capturing the two features to specify a market-induced housing boom under the condition of a fixed or very inelastic housing supply. Two main insights emerge from our analysis. First, there exists a rising gap of housing rent to income ratio between two regions. Second, the growth rate of housing rents is higher than that of incomes during an endogenous agglomeration process. These results help us to realise that strong housing booms only take place in a few large cities or metropolitan areas stemming from a homogeneous economy.