This article explores the role of supply constraints for house price growth and price dynamics. Simple demand-supply considerations suggest that house prices should respond more strongly to local housing demand shocks in places, in which regulatory restrictions and physical barriers to development are more binding, that is, the long run housing supply curve is more price inelastic. Empirical evidence supports this proposition. Labor demand- and credit supply-shocks cause house prices to respond more strongly in locations with tight long run barriers to development. Regulatory constraints are particularly important for explaining not only differential price growth but also differential cyclicality across locations. One apparent puzzle is that house price booms and busts occasionally occur in cities that allegedly have few long run barriers to development. One typical characteristic of such cycles is that, driven by significant overbuilding, the bust tends to be more pronounced than the preceding boom, leaving house prices often lower after the bust than before the start of the boom. Myopic developers and lenders in conjunction with short run construction lags or irrational exuberance (euphoria of investors) are two plausible explanations.

---

1 November 2019

---

Zeitschrift fur Immobilienokonomie, German Journal of Real Estate Research 5, pp.37-65, 2019

---

DOI: 10.1365/s41056-019-00033-0

https://link.springer.com/article/10.1365/s41056-019-00033-0

This Journal article is published under the centre's Urban programme.