Why We Still Don't Know Much About Housing Supply Elasticity

Abstract

This paper examines the implications of urban spatial models for estimating the long-run own-price elasticity of housing supply. It demonstrates theoretically that housing supply elasticity varies inversely with city size, the cost of structure inputs, and rural land price in both classical and neoclassical models. Notably, planning regulations and topographic features that reduce the share of land available for development do not effect supply elasticity, if they apply uniformly. The effect of transportation costs on supply elasticity is complex. Additionally, empirical estimates of supply elasticity depend on the location within the city where housing price changes are measured. These relations can confound direct empirical estimates of housing supply elasticity, but are less problematic for estimates from numerical simulation models or urban wage premiums.

Keywords: housing price, housing supply, land use regulation, standard urban model

JEL Classification: R14, R31