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Supply constraints and housing market dynamics

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  • Paciorek, Andrew

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.

Suggested Citation

  • Paciorek, Andrew, 2013. "Supply constraints and housing market dynamics," Journal of Urban Economics, Elsevier, vol. 77(C), pages 11-26.
  • Handle: RePEc:eee:juecon:v:77:y:2013:i:c:p:11-26
    DOI: 10.1016/j.jue.2013.04.001
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    Citations

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    Cited by:

    1. Bahadir, Berrak & Mykhaylova, Olena, 2014. "Housing market dynamics with delays in the construction sector," Journal of Housing Economics, Elsevier, vol. 26(C), pages 94-108.
    2. Bimonte, Salvatore & Stabile, Arsenio, 2015. "Local taxation and urban development. Testing for the side-effects of the Italian property tax," Ecological Economics, Elsevier, vol. 120(C), pages 100-107.
    3. Gyourko, Joseph & Molloy, Raven, 2015. "Regulation and Housing Supply," Handbook of Regional and Urban Economics, Elsevier.
    4. John J. García & Daniel Mateo Cossio & Ricardo Mesa Urhan, 2017. "Efectos de mecanismos institucionales en el precio de la vivienda nueva en Medelli?n," DOCUMENTOS DE TRABAJO CIEF 015658, UNIVERSIDAD EAFIT.
    5. Dan S. Rickman, 2014. "Assessing Regional Quality of Life: A Call for Action in Regional Science," The Review of Regional Studies, Southern Regional Science Association, vol. 44(1), pages 1-12, Spring.
    6. Oikarinen, Elias & Peltola, Risto & Valtonen, Eero, 2015. "Regional variation in the elasticity of supply of housing, and its determinants: The case of a small sparsely populated country," Regional Science and Urban Economics, Elsevier, vol. 50(C), pages 18-30.
    7. Juan Carmona & Markus Lampe & Joan Rosés, 2017. "Housing affordability during the urban transition in Spain," Economic History Review, Economic History Society, vol. 70(2), pages 632-658, May.
    8. Hans Haller & Ming Yi, 2013. "Paths of a Continuum of Independent Random Variables," Working Papers e07-44, Virginia Polytechnic Institute and State University, Department of Economics.
    9. Christian A. L. Hilber & Wouter Vermeulen, 2016. "The Impact of Supply Constraints on House Prices in England," Economic Journal, Royal Economic Society, vol. 126(591), pages 358-405, March.
    10. repec:eee:regeco:v:68:y:2018:i:c:p:130-147 is not listed on IDEAS
    11. repec:eee:regeco:v:64:y:2017:i:c:p:68-80 is not listed on IDEAS
    12. Dag Einar Sommervoll & Jan de Haan, 2014. "Homes and Castles: Should We Care about Idiosyncratic Risk?," Land Economics, University of Wisconsin Press, vol. 90(4), pages 700-716.
    13. Dieci, Roberto & Westerhoff, Frank, 2016. "Heterogeneous expectations, boom-bust housing cycles, and supply conditions: A nonlinear economic dynamics approach," Journal of Economic Dynamics and Control, Elsevier, vol. 71(C), pages 21-44.
    14. Lozano Navarro, Francisco-Javier, 2015. "Elasticidad precio de la oferta inmobiliaria en el Gran Santiago
      [Housing supply elasticity in Greater Santiago]
      ," MPRA Paper 65012, University Library of Munich, Germany.
    15. Joseph Gyourko & Raven Molloy, 2014. "Regulation and Housing Supply," NBER Working Papers 20536, National Bureau of Economic Research, Inc.
    16. Benedetto Manganelli & Francesco Tajani, 2015. "Macroeconomic Variables and Real Estate in Italy and in the usa," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2015(3), pages 31-48.
    17. repec:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9586-8 is not listed on IDEAS
    18. Dieci, Roberto & Westerhoff, Frank, 2015. "Heterogeneous expectations, boom-bust housing cycles, and supply conditions: A nonlinear dynamics approach," BERG Working Paper Series 99, Bamberg University, Bamberg Economic Research Group.

    More about this item

    Keywords

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

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • G1 - Financial Economics - - General Financial Markets
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L7 - Industrial Organization - - Industry Studies: Primary Products and Construction
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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