New Housing Supply: Empirical and Theoretical Studies

Abstract

This paper reviews the literature on new housing supply. The paper starts by summarizing the results of the empirical studies on housing supply, showing that overall these studies reject the hypothesis of a perfectly elastic supply and reveal that housing supply is negatively related with financial costs, inflation and sales delay, while showing inconclusive results with respect to construction costs. In addition, we review a recent branch of the literature on housing supply that uses strategic interaction models. There is evidence that the housing market is not well described by the perfect competition model. Thus, there will be a deeper understanding of housing supply by considering theoretical models that take into account the strategic interaction between land developers and by using data where the unit of analysis is the land developer. Our review shows that the strategic interaction between land developers and experimental evidence on the effects of the price elasticity of supply in the housing market are still understudied and hence areas of potential for future research.

Keywords: Housing supply, price elasticity of supply, strategic interaction models

JEL Classification: R31, C72, L85