Estimating the demand and supply price-elasticity of housing floor space using a quasi-experiment VAT cut

Demand for housing floor space in a given location has rarely been estimated. Using data from the French cadaster and housing transaction records, we analyze the impact of a VAT drop from 20% to 5.5% on cumulated residential investments introduced under the 2006 French Urban Renewal Act in both the core of about 600 deprived areas and their surroundings. Our findings reveal that reduced VAT leads to a 2% increase in housing-stock surface area in treated zones without triggering an influx of people. Translated into investment terms, the gain represents about 2 years of housing investment in ten years. Estimates of the price elasticity of housing capital are lower in the surroundings (-0.24) than in the core of deprived areas (- 0.42), with full price transmission to the demand side in the latter and around 60% in the surroundings, where landlords and developers capture roughly equal shares of the rest. We also confirm previous studies in finding a low price elasticity of supply (0.35) for France. We estimate the net gain in total surplus to €13,6 Bn over the implementation period. Using data from the French cadaster and housing transaction records, we analyze the impact of the VAT drop from 20% to 5.5% on residential investment around 600 deprived areas. We find that the reduced VAT rate increases housing stock surface by 2%. In investment terms, this equals roughly two years of housing investment over a decade with a gain of total surplus of €13Bn. We estimate the price elasticity of housing capital at -0.24, with a 60% pass-through; landlords and developers each capture roughly half the remainder. We also confirm a low housing supply elasticity in France (0.35).