Local House Price Developments and Housing Supply

On the basis of classical economic theory, if the housing market is functioning as it should, then supply will soon respond to a shock in demand and restore reliability in house prices. However, the housing market is not functioning as it should: new supplies depend on the complex decisions of the builders, thus making it difficult to statistically express the causality between house price developments and new supplies. Housing market theory does, of course, offer some explanations for house price developments in relation to the level of new supply. Most studies suggest that macro data is unable to measure the true dependency between house prices and new building and claim at the same time that micro data sets are incomplete. In this paper we shall attempt to identify the relationship between (local) housing supply and (local) house price developments in the Netherlands. To do so we used micro data from real estate agents. Since the last decade, Dutch housing policy has been more geared towards the market and has framed its objectives accordingly. Despite the liberalization of the housing market, house prices rocketed in the 1990s and Ò although there are local differences Ò the supply turned out to be incapable of an adequate response.