The Geography Channel of House Price Appreciation
Charles A. Dice Center Working Paper No. 2018-17
45 Pages Posted: 23 Aug 2018
Date Written: August 17, 2018
We develop a theory whereby increased demand for living in housing-supply-inelastic regions raises aggregate house prices, and we show that this channel contributed significantly to the U.S. house price boom from 2000 to 2006. As an example of our framework, we show that a decline in manufacturing, an industry concentrated in elastic areas, raises national house prices. Our framework also predicts that changes in the price-rent ratio, from interest rates or other changes in the mortgage market, increase relative locational demand for high-rent areas, which are typically inelastic. Changes in locational demand therefore fill in a missing link between changes in aggregate credit conditions and aggregate house prices. We show evidence of this in the data.
Keywords: housing supply elasticity, migration, housing boom
JEL Classification: R23, E31, R31
Suggested Citation: Suggested Citation